LAST WEEK, the federal government announced that Cambridge will be one of three hubs for ARPA-H, a new research funding agency for the health care sector. This is great news for the region’s economy, but celebrations are glossing over some of the fundamental issues holding Boston back as a startup and innovation center.
To some, this argument may seem absurd. Boston is, depending on the ranking cited, the third- or fourth-biggest startup hub in the country, behind the San Francisco Bay Area, New York, and (sometimes) Los Angeles. Ahead of Washington, Chicago, Houston, and other rival cities, we are, overall, a success story.
However, I think there’s considerable opportunity left on the table. One of the greatest assets for an innovation hub is a university. They provide talented young employees to growing companies and the research from them can be spun out into commercial enterprises. Google, for example, began as a research project by two Stanford students.
It’s fair to wonder why the city with universities containing some of the smartest minds in the country isn’t already at number 1. We need to also worry whether our current position will be fleeting. Will the next startup to come from our universities move to California, as the Harvard-founded Facebook did to be part of that ecosystem, or will it move to one of the up-and-coming hubs in Austin, Charlotte, or Miami.
The problem is money.
Startups differ from other small businesses in that they have the potential to scale into massively valuable companies. While a delivery service could be a successful small business, an app that connects delivery workers to customers across the world could IPO at a $10 billion market cap, as Instacart recently did.
With the potential for scale comes a challenge. To build something that could get so large, you often have to spend considerable time and resources before it becomes profitable. This requires getting capital upfront. An extreme example is SpaceX, which needed to build a literal rocket before it could sell to a customer, or Commonwealth Fusion Systems, which has raised billions to develop the unproven technology of commercialized nuclear fusion energy before it could start selling to utilities.
Even at the lower end, where my own company sits, needing capital to build a product places a severe strain on would-be founders. We have to spend time finding and pitching to investors and venture capitalists, sometimes with only a slide deck and a story. And even if we are lucky enough to raise a round of funding, we try to make that cash stretch as far as it can go before looking for the next round.
As one can imagine, fundraising for startups touches on questions of privilege and inequality. According to McKinsey, Black founders received only 1 percent of total venture capital funding across the country, Latino founders, only 1.5 percent, and women-founding teams only 1.9 percent. The starkest illustration of this is in the common assumption in startup circles that founders will first raise a “friends and family round” — as if everyone knows people with tens of thousands of dollars to throw at an idea.
There are many in the Boston startup ecosystem working on issues of underrepresented founders and certainly more could be done on this front. But Massachusetts is failing particularly for founders who are even lucky enough to raise funds.
Building a successful startup often means frugality. The legendary startup advisor Paul Graham coined the term “ramen profitable.” It is a strategy of bare-bones living to allow minimal revenue to cover expenses and provide the founders more time to reach product-market fit.
That is simply much harder to do in Massachusetts, where housing and childcare costs raise the threshold for this level and hurt would-be founders’ ability to build savings that could give them a personal cushion when quitting their jobs to begin their startup journey.
This brings us back to the issue of ARPA-H.
Yes, it is fantastic that Boston is a biotech hub. It is hugely beneficial that we will be leading one of the most important industries of the next decade. But biotech is not based around ramen profitable businesses. Requirements for lab space, drug or device development, and lengthy approvals processes from regulators mean that venture funding is almost always needed.
Focusing too much on the success of venture-backed biotech can make us miss the obstacles we have placed in front of startups in other sectors, whose founders have personal living costs similar to the Bay Area or New York but without as easy access to those markets and investors, and who may be tempted to move to another city that could give them another few crucial months to develop their product.
Boston will likely always be a thriving startup hub. Our universities are too great not to let that happen, and I have no doubt that the investors and founders in our area will continue to work hard to improve it. But we could be a better place, and one more helpful especially to founders from underrepresented communities, if we focused on making it a more affordable state for people to build the next big thing.
Chris Oates is the founder of Legislata, a startup and platform for policy and legislative information. He is part of the grIP Venture Studio and is a lecturer at Boston University’s Pardee School of Global Studies.