Feature: Life Outside of Boston –

At the risk of understatement, one could say the venture capital industry in general has changed over the past few years. So, what does that mean for the Northeast VC environment?

The infrastructure for entrepreneurs has matured and evolved throughout the Northeast. The area is second behind Northern California in terms of VC activity.

“Success breeds success,” says Joe Casey, general partner at Venrock Associates in Cambridge, Mass. Previous successful entrepreneurs in areas like Silicon Valley and Boston have built local environments that feed current-day peers. Casey says the example set by those groups builds a mindset that leads other people to take the great leap of faith from normal life into the unknown.

Structurally, successful start-ups attract the attention of the financial community, which yearns to revisit previous successes. A developing community of entrepreneurs will also attract the associated service professionals like attorneys, accountants and recruiters and consultants.

The Boston area has led the activity in the Northeast, but other parts of the region have also built their infrastructure and have been growing entrepreneurs from new sources.

Although more companies in Massachusetts received funding in 2000, New York state is gaining on its eastern neighbor, according to numbers from Venture Economics. Through the third quarter, 488 Massachusetts companies were funded compared with 366 in New York.

“The New York [City] market has gone through a big swing,” says Dave Edwards, partner at Charles River Partners in Boston. “It was not really a technology center at all a few years ago.”

While there has been a seven-fold increase in the number of technology companies across America that received funding between 1990 and 2000, New York state has experienced a 20-fold increase.

“Most businesses that have emerged were content or commerce focused,” Edwards says.

Edwin Goodman, partner at Milestone Venture Partners in New York, says the phenomenon was a natural occurrence. “New York is the media center of the world,” Goodman says. “Because of the Internet and its link to information, content providers started here, and others [entrepreneurs] grew around them.”

New York’s publishing, broadcasting and advertising professionals were best suited to fill the content needs of the new medium. In fact, the New York City area code (212) was the third most common phone prefix among content-related companies funded by VCs in 2000.

As the content sector supposedly unravels, that puts an end to New York’s role in the IT sector, right?

Not so fast says Edwards.

“The issue is redirecting the talent to business models more acceptable to the financial community,” Edwards says.

He says he foresees two potential outcomes for displaced entrepreneurs. He thinks some of them will return to their past lives, but others who have gained the entrepreneur’s spirit will adapt to a new business model and continue to feed the city’s VC community.

Across the Hudson River, New Jersey’s VC environment has benefitted from the home-grown talent at the heirs to Bell Telephone.

John Kolchmeyer says his peers thought he was crazy in September 1997 when he left Lucent Technologies after 19 years with the company to co-found Tachion Networks in West Long Branch, N.J.

“Since then, people have been leaving in droves,” says Kolchmeyer, now vice president of hardware engineering. He says one of the Tachion founders got the idea to make the leap after watching a documentary on PBS about Bill Gates, the founders of Apple Computer Inc. and other West Coast entrepreneurs.

He says unlike California or Boston, New Jersey did not have many smaller communications companies, and if someone wanted to stay in the area, their employment options were limited. That environment in New Jersey has changed in the past few years with a growing number of start-ups, particularly in the second half of 2000.

“At first, people said it was too risky, when we approached them [about joining Tachion],” Kolchmeyer says. “Now, they tell us we’re too big. They want to go to a real start-up’.”

Mark DeNino, a partner at TL Ventures in Philadelphia, says the New Jersey communications corridor is an area that is rich in technical talent.

“Places like Lucent aren’t what they used to be in terms of security,” DeNino says.

Companies like Lucent, AT&T Corp. or IBM Corp. that had been once very good at retaining talent seem to have recently lost their luster. Kolchmeyer and others point to Lucent’s weak stock options package. Acquisitions and changes in the corporate culture have encouraged some to leave, as has the success of other entrepreneurs.

“In the end, Boston is the key market,” says Charles River’s Edwards. Boston has a long history of entrepreneurial spirit, and a market that has largely mirrored Northern California.

For example, the competition between the biotechnology market in Massachusetts and Northern California is so close that a clear winner cannot be defined, says Stephen Mulloney, director of communications at the Massachusetts Biotechnology Council.

The Boston VC market, strong in communications, health-care and Internet-related fields, is boosted by like-minded universities and research institutions that fuel the area with ideas, support and budding entrepreneurs.

DeNino says Philadelphia is also developing a strong health and biotech practice that has been fueled by the university community, area hospitals and the pharmaceutical industry.

DeNino says universities feel they have no choice other than getting involved in the entrepreneurial field. Financially, their investments in venture funds have boosted their endowment funds in recent years, and supporting their professors’ side projects helps them retain their key employees.

Overall, the bullish nature of the VC market in recent years has allowed firms to support entrepreneurs outside former comfort zones, and now that VCs have so much capital to invest, and a hub for services in Boston, a healthy entrepreneurial culture should remain. That in turn should keep the Northeast a strong source of deal flow for today’s well-capitalized VCs.