Route 128 revisited

Two concentric concrete-and-asphalt arcs radiate outward from Boston. A three-digit signpost marks each. The one nearer to the city says "128" and is often used as shorthand for the entire corridor. The outer one reads "495." Together, these two highways demarcate the East Coast's largest technology patch and one of the world's most notable engines of science-based growth.

The semicircle-like arcs are appropriate. The area's long history is stamped with a series of economic cycles: Industries that rise and fall, technologies that power up only to stall and tumble back to earth. Everyone knows about the triumphs of areas such as Silicon Valley and Route 128, and over the past decades, many regions, both in the U.S. and around the world, have labored to replicate them; a few have even been successful. But the subject of 128, and its history, also suggests how difficult and complex it is to retain that kind of growth and prosperity in tech economies, not only in the face of a savage recession but because of the inherent tendencies of technology itself.

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Certain structures in Massachusetts embody this long history of economic development. They have weathered the times, while generations of businesses and industries have come and gone. They carry names like The Shoe in Beverly and Boott Cotton Mills in Lowell.

Maynard, Mass., is an old mill town about seven miles southwest of Concord and Walden Pond and midway between Route 128 and Interstate 495. The town's most prominent structure is simply called The Mill. The formidable array of factory buildings hugs the banks of the Assabet River. For a hundred years, beginning in the mid-19th century, the building housed first the Assabet Manufacturing Co. and later the American Woolen Co., both of which made woolen carpets, sweaters and yarn. American Woolen at one time was the country's most important supplier of material for military uniforms. A century later, Digital Equipment Corp. bought the complex and centered its growing mini-computer empire within its brick walls, employing thousands.

Both technologies became obsolete. None of the companies survived. Their passing signaled tough times and regional decline. Many of those still active in the area have all-too-vivid memories of the demise of DEC, of fellow Massachusetts mini-computer companies Data General Corp. and Wang Laboratories Inc., and of the sector in general. The early 1990s "were bleak," says Craig Randall, a former software engineer and now a Ph.D. candidate at Bentley University in Waltham, Mass. "I told my wife: Not only am I leaving Data General, but we're leaving Massachusetts."

Randall returned and prospered. So, too, did the Route 128 corridor, which built a diversified technology base in part on the remains of a failed computer architecture.

The Mill is now called Clock Tower Place, after the large, hand-wound clock that dominates the 13-building complex. Its 100-plus tenants include Monster Worldwide Inc., which operates online help-wanted company Monster.com; a computer games studio founded by recently retired Boston Red Sox pitcher Curt Schilling; and the venerable musical instrument maker Powell Flutes Inc.

Erik Heels heads Clock Tower Law Group. He moved his trademarks- and patents-based legal practice into the complex during the 2001 recession. At the time, dot-coms dominated the venue. "The week that I moved in, StartUp.com moved out. Perhaps I should have taken that as an omen," he writes in an e-mail exchange. These days, he continues, "I don't see one kind of technology being dominant. There's a good mix here now."

According to Joseph Mullin, the public affairs director of Clock Tower Place, the complex is 90% to 95% occupied. "We had two situations where the health of the region was dependent on the health of one company and look what happened. By having more than 100 tenants, five or 10 of these may contract or go under, but there are five or 10 that can take their place," says Mullin. "We're better off with a diverse tenancy. So far, that's worked. We have not been hard hit" by the economic downturn.

"It has an amazing ability to reinvent itself," says John Egan III, a Boston-based partner at Goodwin Procter LLP who co-chairs the firm's technology group. He could be talking about The Mill or about the 128 corridor in general.

SiCortex Inc. is a high-­performance, low-energy computer maker that occupies part of the old mill's second floor. The company started up in 2004. Its first computer shipped last year. Since then, more than 70 machines have been sold, at prices ranging from $25,000 to just under $2 million. One of its biggest customers is the U.S. government. "We're the only computer company here. We're the only one left," says Christopher Stone, president and CEO. Stone is also a refugee from Data General and was vice chairman of Novell Inc., the information technology management software company based in nearby Waltham. Stone weighs the advantages of where he is now and what he's doing. "It's a great place to be. All the talent's here," he says. Of course, "this was designed to make wool sweaters, not computers. You can still smell the lanolin on a hot day."

Stone's company has raised $67 million in venture funds in two rounds. "The good news is we're generating revenue," he says, declining to specify how much. "If I had a startup with no revenue, I'd be looking to jump out the window."

That kind of reality check is commonplace in conversations with many different companies around the greater Route 128 corridor, as well as their financial backers and legal advisers, not to say academics and politicians.

Given the financial meltdown and today's perilous times, it's no surprise that those in the area are once more grappling with weighty questions about economic health, both present and future. The stakes are high for the entire New England region. While education, healthcare and, to a lesser degree, financial services help fuel Boston's economy and manufacturing pockets exist throughout New England, technology remains core to the region's well-­being. Basic research may be coming out of laboratories in Cambridge, which also continues to support a number of biotechnology companies, but it's Boston's western (and to a lesser extent northern) suburbs that provide the bulk of economic generation.

So far, the corridor has weathered the storm. But there are troubling signs. "The economy here has held up pretty well," says Scott Latham, a management professor at Bentley and another refugee from the software industry. But he warns: "Small businesses are just going to run out of money. They have strong management and are now doing OK, but they're very anxious. A lot of innovative companies are going to die on the vine."

Unemployment in Middlesex County, which encompasses much of the corridor, stood at 6.4% in January. That's a 2.4 percentage-point increase over a year earlier, but is far lower than comparable figures in Silicon Valley. Nor does the area suffer from the crisis that has infected Wall Street, not to say Detroit. "We're better off than New York," says Clinton Harris, the managing partner at Grove Street Advisors LLC, an investment advisory group that specializes in private equity. "Silicon Valley is a lot less diversified than we are."

"The Boston economy is less hit than others," adds Jim Matheson, a partner at Cambridge-based venture capital firm Flagship Ventures. "That's a function of innovation, research, development and deployment, education, the relationship between public and private. ... The venture market is working hard but working."

There's little unanimity, however, about what lies ahead for the region. Moods range from pessimistic to sanguine. "Route 128. It's a brand, but that's about it," declares Dana Callow, managing partner of Boston Millennia Partners and a longtime Boston-area venture capitalist. "You build where costs are lower."

"This corridor is going to outperform. We're going to feel less pain than the rest of the country," counters Harris, who is based just off Route 128 in Wellesley, Mass. "This town seems to bounce back faster than other places."

While many views on the health and future prosperity of the corridor may diverge, a few conclusions can be drawn from the experience of 128. The most obvious is that the greater Route 128 corridor continues to benefit from proximity to America's biggest and most prestigious concentration of universities. The Massachusetts Institute of Technology leads the pack but is by no means the only game in town. New technologies, scientific breakthroughs and the scientists and engineers to mine them come spilling out of Boston and Cambridge in an almost constant stream.

"It's a huge, huge advantage," says Gary Magnant, CEO of Sage Science Inc., a startup in Beverly, Mass., toward the northeastern edge of Route 128. Sage Science will begin producing research instrumentation for life sciences next year. "That community think tank, that collective, is as strong here in Boston as it ever was."

The area's technologically based economy is increasingly diversified. Like Clock Tower Place, the Route 128 corridor no longer depends on just information technology. Nor does it put all its hope into biotechnology, for which the corridor also became known. "There's a talent-pool depth and diversity," says Mouli Ramani, vice president business development for Lilliputian Systems Inc., which is developing new battery technology. "I wouldn't bet against it."

Continued prosperity is increasingly tied to hybrid or convergent technologies that make use of multiple technologies in various applications. "I think that this [technology] engine is alive and well and will do a lot over the next few years because of convergence," says Martha Farmer, who heads North Shore InnoVentures, a technology incubator scheduled to open its doors in July in The Shoe, an old shoe-machinery factory in Beverly that now boasts perhaps 200 technology companies, 35 in life sciences alone. "When you bring these technologies together, there can be a major-league leap."

One especially promising area is in environmental and clean energy-related technologies, variously referred to as greentech or cleantech. Much hype surrounds the state's role in this emerging high-tech sector, but both startups and their financial backers believe the area is primed for development.

"The biggest driver is education, specifically MIT. Surrounding that is a culture of entrepreneurs and a ring of VCs," says Chuck McDermott, a Boston-based partner at RockPort Capital Partners. "If you have that, you have cleantech."

"Massachusetts is a wonderful place to run this kind of company," adds Mitch Tyson, chief executive of Advanced Electron Beams Inc., whose industrial process cuts energy by 80% over traditional methods. "We have a workforce that appreciates the environment. A lot of people [in many different technologies] now want to work in clean technology."

Despite boasting the biggest concentration of venture capital outside northern California, Massachusetts and its high-tech establishment are beginning to feel a funding pinch that could turn ugly. Right now, VCs are focused on existing portfolios. If the recession continues into next year or if the recovery turns out to be anemic and lengthy, even some startups with funding could be jettisoned by their venture fund backers. "The so-called Valley of Death gets larger and deeper," says Farmer, who spent years working in hemoglobin pharmacology. "Venture capitalists are getting more and more conservative. Everybody's risk-averse. It's going to be really tough for a while."

"Getting investment the last year and a half has been tough. Funding is tight," says Russell Cyr, co-founder and chief marketing officer for Lowell-based BitWave Semiconductor Inc., which has developed a universal programmable transceiver for cell phones. Production started in December. The company has raised "a bit more than $40 million," says Cyr. "We would like to be better capitalized. It is what it is."

"The exit situation is ugly" for the firm's technology companies and venture capital group, says Greg Moore, a Boston-based partner at Ropes & Gray LLP. Initial public offerings remain pretty much dead in the water, and even buyouts are anemic. While this isn't unique to the greater Boston area, it exacerbates funding issues and capital requirements. "This credit-driven recession hit so many parts of the economy, it's pushed out exit opportunities 12 to 24 months. That's a big bill to pay," says Peter Shannon, a partner at Atlas Venture, based in Waltham. "If this was something in just one sector, venture funds could respond, but it's coming all at once. ... Companies need to find creative ways to operate with less capital."

Cracks are beginning to show. Almost daily, there are reports of high-tech companies downsizing or calling it quits. Vacancy signs appear more frequently. New, speculative office buildings have trouble attracting tenants. "My peers, Ph.D.s who are never out of work, now they're out of work and will take whatever job they can," says Magnant. "Some companies got sold. Jobs left. Startups failed."

In the past year or so, Inotek Pharmaceuticals Corp. shifted gears from oncology to ophthalmology, moved from research to drug development, downsized from more than 100 to 30 and relocated from a large facility in The Shoe to much more modest digs along Lexington's Hayden Avenue, one of the major arteries for biotechnology.

"During this transformation, we have three years' cash. It gave us a safety net and time," says James Ham III, the company's CFO. "We have enough cash to take us through next year. ... We feel we have a strong compound. If we're successful, there's money out there."

Ham was recruited last year from drugmaker NitroMed Inc., located next door to Inotek. Last month, NitroMed sold the rights to its one drug and went out of business.

The ability to build large, standalone corporations remains a nagging issue. Numerous conversations seem to inevitably turn to why the Route 128 corridor just can't seem to spawn homegrown titans and why once local companies reach a certain size, they're almost inevitably acquired by more dominant companies elsewhere, especially in California. Boston Millennia's Callow says his firm has invested in nine companies that gained at least a $1 billion market cap. Only two remain. The rest were acquired.

"That's the story of the last 20 years," says Ropes & Gray's Moore. "I can't tell you how many Boston-area companies I've sold to West Coast companies."

"We need larger companies. It's the shade-tree phenomenon, nurturing others," says Goodwin Procter's Egan. "We need them to become large and relevant and not to sell out."

That underscores an even bigger issue. Those companies whose technologies come to dominate will not only prosper, but help their location prosper as well. On that score, the Boston area hasn't fared that well.

People around Boston are still smarting over the fact that Facebook was developed at Harvard University and moved out West for commercial development. "There's less an instinct for consumer marketing and consumer branding than on the West Coast," says Jon Karlen, a partner at Boston-based Flybridge Capital Partners.

"The East Coast has lost every platform and technology standards battle with the West Coast since the mid-1980s," says Bentley's Latham. "As a result, you don't see any large, dominant IT organizations on the East Coast."

The single major exception to this trend, the management professor believes, is EMC Corp., the information technology giant in Hopkinton, Mass., near Interstate 495 southwest of Boston. But Latham and others speculate EMC could be a target for a takeover, notably from IBM Corp.

As they survey the local scene from a booth in an Outback restaurant in Lowell, Latham and Randall trade concerns about this kind of corporate migration. They point to the Sun Microsystems Inc.'s laboratories, a state-of-the-art campus that was recently constructed on a hill in Burlington. They fear that once Oracle Corp. completes its $7.4 billion acquisition of Sun, the campus will close.

A corollary to a lack of corporate dominance is the lack of manufacturing heft in the region. Take Konarka, for example, a model for clean-energy technology. The company developed a plastics- and carbon-based photovoltaic solar panel in the old Boott Cotton Mills on the Merrimack River in the oldest part of Lowell. It has raised $150 million in venture and private equity funds. But Konarka went to the old Polaroid Corp. X-ray plant in New Bedford, Mass., for its commercial production, which launched in March.

Magnant talks of his experience with companies that were acquired and then moved, one to New Hampshire, two to California. "Historically, Massachusetts does a really good job of creating [companies]," says Magnant. "Then they're sold, and the manufacturing goes out of the state."

Kathy McMenimen is a longtime city councilor in Waltham and an even longer-term resident. Waltham, she says, is Route 128's "belt buckle" and was at one time home to 10 major technology manufacturers including Raytheon Co. and Polaroid. Now? Gone, she says. Either they're out of business or the factories are elsewhere. Medical devices company Thermo Electron Corp., for example, merged with Fisher Scientific International Inc. in late 2006. Thermo Fisher Scientific Inc.'s headquarters remain in Waltham, but its nearest production facility is in Milford, Mass., 32 miles southwest. China now hosts five Thermo Fisher plants.

"Manufacturing companies provided work opportunities at a variety of levels for a variety of people," says McMenimen. "The demographics have changed dramatically. I don't see that same middle-income level that I saw when I moved here 40 years ago."

Yet people want desperately to remain in the neighborhood. And that's perhaps the most upbeat conclusion that can be drawn. Executives from a dozen different technology companies extoll the desirability of the region. "People put down roots. They have a life," says Alex Vasilevsky, who co-founded Virtual Computer Inc., which is developing personal computer management software through what is called virtualization. Peter Marconi, the company's vice president of engineering, chimes in: "In California, it's who's got more money, who's got three Ferraris instead of two. It drives me crazy."

The attraction of this swath of New England is easy enough to understand, even during often-harsh winters. The corridor isn't the endless string of faceless industrial parks, shapeless office buildings and cookie-cutter housing subdivisions that typify Silicon Valley. Rather, there are pockets of office complexes surrounded by terrain that is bucolic and often heavily wooded. Residents marvel about an ability to live in environments that range from forested mountains to rugged seashore, from storybook village to thriving city.

If Route 128 -- now co-branded I-95 along one stretch -- and I-495 are like bicycle half-rims, then some other arteries such as Routes 2 and 3 and I-93 are like spokes. The result: a catchment area that extends from the shore northeast of Boston into New Hampshire and west to rolling farmlands. "Within a 45-minute drive you can live in any environment," says BitWave Semiconductor's Cyr.

"We're in a corridor that traverses many residential communities," says Howard Berke, Konarka's executive director and co-founder. "I can attract talent from Boston and Cambridge to come up, New Hampshire to come down. It takes me 35 minutes all on country roads to get here."

The transition from rarefied science startup and alpha-type venture capital to the folksy outdoors can be immediate and jarring. In Waltham, a cluster of ultramodern buildings on a site that formerly housed Polaroid's research headquarters hugs a hillside overlooking the Cambridge Reservoir. A few hundred feet away, the road narrows. Three deer dart across the road into the woods.

Virtual Computer, for example, is housed in a faux colonial office building just behind the Bamboo restaurant in Westford. Vasilevsky and fellow co-founder Dan McCall are computer industry veterans teamed together by their venture backers. They discovered they both lived perhaps a mile apart in the postcard-perfect town, with its lakes and its apple orchards. That explains why they put the company where it is. "It's very seductive to live here," says Vasilevsky.

But the location isn't just a draw for the company's owners. "The average experience of an engineer here is 20 years. Maybe 90% have less than a 10-minute ride," says McCall. A group of eight engineers is clustered around a white-board wall with yellow Post-its, representing tasks and problems for the day. "If we were in Cambridge, we wouldn't get anyone who's here."

That may be true, but there's definitely evidence that the recession has made hiring easier for just about anyone. "We had one job posting. We got 100 resumés in the first two days," says McCall. "There's a whole deep bench of talent in this area."

Lilliputian Systems is about 20 miles due east in a far less picturesque industrial park. The company sits in a building formerly occupied by IntelliSense Corp., a boom-to-bust story in which Corning Inc. acquired the software design company in 2000 for $750 million of Corning stock, only to shut down the division three years later; the previous owners then reacquired the remnants.

Two MIT graduate students founded Lilliputian Systems seven years ago after inventing a kind of perforated silicon chip. The chip produces electricity with minute amounts of electrolytes as a catalyst. The company hopes its far more environmentally friendly technology can eventually rival the lithium ion batteries now used as a power source for consumer electronics. Commercial production is scheduled for the third quarter of 2010.

So far, the company has raised $90 million in venture funding. It closed on a $28 million Series D round in February. "This was the hardest round ever," says Ramani, who has raised 12 rounds for various companies in his career. "No one is being rewarded for taking any risk. They're being rewarded for not risking one dollar."

Ramani conducts a tour of the facility: "Here, we make silicon wafers, the kind you would have seen at Intel." He points out what he calls "people in bunny suits." "Here's a room that could be Dow Chemical. This is the person in charge of our glass lab."

Ramani adds: "It's a multidisciplinary solution. There would have been two or three different startup companies in the old days."

Just down the road is Advanced Electron Beams, a decade-old company that its venture backers -- Atlas, RockPort and General Catalyst Partners -- believe should be a poster child for green technology with multiple applications. The electron beam emitter made by the company goes into machinery used in everything from sterilization of plastics to removal of solvents. Nestlé SA is a customer. So, too, is a German manufacturer that sells to Johnson & Johnson.

Electron beam machinery has been around for a half-century, CEO Tyson explains. What his company achieved is stunning miniaturization that dramatically reduces both energy and water usage. Instead of a traditional machine 10 feet by 20 feet, AEB produces an emitter that is 10 inches by 20 inches and is working on one that is only three inches in diameter. "We're the laptop. The old ones are like mainframes."

After Tyson ticks off the various uses of the product, he lists the variety of technology specialists required to run his 40-person company: chemical engineers, biomedical engineers, physicists, materials scientists, software engineers, mechanical engineers. Even those working on the factory floor, he says, must be "technically literate. They're on the verge of being technicians."

AEB, whose revenue totaled $5 million last year, has raised about $36 million in two rounds. It is now trying to nail down a third round of $15 million; a term sheet is coming, Tyson says. The company's three existing VCs are all Boston area-based. So, too, is the prospective fourth venture firm.

BitWave's offices occupy one small part of what is now called Cross Point Towers, a mammoth 1.2 million-square-foot fortress-like complex that's shaped like the letter W. It was built for $60 million in the mid-'70s as a monument to An Wang and his dream of computerized word processors and mini-computers.

After the company went bankrupt in 1992, the building was foreclosed and sold at auction for $525,000 in 1994. Four years later, a joint venture paid about $100 million for the property. Another consortium offered $180 million in late 2007 before internal dissent and lack of financing tripped them up and aborted the sale early last year.

As of March, it was 88% occupied. Tenants complain that if they don't arrive early, it's hard to find parking within the shadow of the building.

Michael Best, an emeritus management professor at the University of Massachusetts, Lowell, explains the turns of fortune this way: "The parking lot was full. The parking lot was empty. The parking lot was full."

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