In late July, New York City mayor Michael Bloomberg introduced a new initiative to renew focus on the city’s startup scene. Saying he wants New York to reclaim its title as “the technology capital of the United States – and the world,” he announced the city will be providing some serious funding toward any institution or organization that creates a top-shelf science and engineering school on Roosevelt Island, Governor’s Island, or the Brooklyn Navy Yard.
Bloomberg wants to steal some of the west coast’s thunder, as well he should: The Silicon Valley venture capital environment could not be hotter right now – for better or worse. We’ve all heard concerns about the influx of wildly overvalued startups and the tech bubble they’re creating. Whatever the warning signs, no one can blame Bloomberg for wanting to revitalize the city’s tech startup environment. Digital innovation is the economic future, and can secure the interest and investments of some very important people. But can investing in academia keep New York City’s best and brightest from straying to the Bay Area?
A quick history of Silicon Alley
The 90s were good to New York City, when Web innovation spurred a handful of successful startups. Companies like Razorfish, Agency.com, About.com (then known as The Mining Company), and DoubleClick attracted a good deal of attention. Media companies were also taking to the Internet like flies to honey, and the craze continued. All while the dot-com crash was looming in the future.
Yao-Hui Huang, cofounder and managing director of the New York-based VC firm The Hatchery, remembers those days well. “There was a lot of waste and overvaluation. Anyone who said the word ‘dot-com’ got money,” Huang says. And then things came apart at the seams. “It wiped it out,” she recalls of the crash’s affect on the budding startup scene. “Now there’s more discipline, more real business plans, revenue models.”
New York’s challenges
There are a few generalizations about New York startups. First, they have the reputation of being “media-focused,” whereas those out west are “technology-focused.” This is where Bloomberg’s initiative comes in. Most of the big startups coming out of New York have a strong social bent, such as Foursquare, Etsy, and Meetup. The Big Apple’s traditional strengths and characteristics are different than those of Silicon Valley: It’s more about advertising, finance, and retail. These have transitioned into some very notable startup companies. At the same time, the general perception remains that New York is not a blossoming tech scene.
This leads to a whole other discussion about whether companies that leverage social are as valuable as other companies that leverage technological (Web-based or otherwise) innovations. That can be judged on profit, or user engagement, or saturation.
Whatever the case, the perceived lack of engineering talent in New York leads to another hangup for its startup scene: Because Silicon Valley has a larger technology-based crowd, a lot of the startups that begin in New York quickly find their way west. This creates a nasty cycle for New York: Startups want to be around other startups, which want to be around other startups. So whether or not the alleged lack of developer talent is true, the myth has been enough to drive companies to Silicon Valley because the culture isn’t as welcoming.
Launchsquad co-founder Jason Mandell says the New York attitude is what sends startups west. “To me the biggest difference is an appetite for risk,” he says. “The investment community on the east coast is more conservative, they aren’t as willing to take a big swing at a startup. And that trickles down through the entire ecosystem. Investors are the igniters of growth, and you can’t build a startup without capital.”
That raises the question: Is it possible to manufacture a startup ecosystem? Or is that something that needs to develop on its own? Caterina Fake, who co-founded Flickr and Hunch, doesn’t think so. “I’m skeptical that a science and engineering campus is what New York needs to become a technology powerhouse. Boston has not succeeded with that strategy,” she wrote in a guest column for The New York Times. She argues that an entrepreneurial environment can’t be taught in a classroom setting, it’s learned via apprenticeship.
Mandell agrees. “Until there are a lot of people who are in decision-making positions and working at VC firms or as angel investors and have the similar mentality as in Silicon Valley, you won’t see the same kind of system,” he says.
The startup exodus
It’s a tale as old as time: East coast startup (usually in New York or Boston) does the grunt work, gets stable, gains notoriety, and just before it gets big, moves west. Robert Scoble argues, via Quora, that the reason is obvious: “Because the ecosystem here is far stronger than anywhere else in the world, and the chances of success go up quite a few times if you are located within driving distance of San Francisco.”
While that explanation is incredibly biased, there are more than a few notable examples that prove his point – the most infamous of which is Facebook. We all know the Facebook fairly tale – yes, largely thanks to The Social Network. Despite the film’s accuracy shortcomings, it got a few things right: Zuckerberg and company began Facebook in Boston, and once the site was on the cusp of becoming a phenomenon, it moved to California. And there was more than just a change of scenery to thank. Peter Thiel’s investment and short-lived leadership from Sean Parker escalated Facebook’s development. “People who want to go west, from a values standpoint, are going to be more interested in change, progress, trying something new, taking risk. This is where Apple is, where Google is, eBay, Oracle, Yahoo, Where HP began. It’s where the action is, perceptively,” Mandell says.
Being the Internet titan Facebook is, many a startup is understandably lured to follow its lead west. Facebook would likely have been just as successful in Boston, but the pull of the west is part of what catapulted the company.
Take Foursquare as a case study. Mandell calls the geo-social’s 2009 SXSW launch “one of the best in many, many years for a new tech company.” He tells us about the excitement over its explosion at the Austin conference: People loved it, usage skyrocketed; it was monumental. Later that year in New York, it raised an initial round of $1.35 million. That might sound like a lot, but it’s not – especially for a company that had made such a groundbreaking debut. “If they had been in California, it would have been five times that,” he says. “Investors [out west] would have been eager and recognized it was a potentially big opportunity with a small window.” He also speculates Foursquare would be a year ahead of where it stands today.
Hope for NYC
So why did Silicon Valley earn its engineering and technology reputation? Well, there are a lot of reasons why, but in part it has strong academic roots (namely Stanford University) that fostered the startup community. Stanford’s influence on the Valley likely played a large part in Bloomberg’s plan to create a similar academic stronghold in New York City.
In addition to its history and technological reputation, there are other factors industry experts say contribute to Silicon Valley’s startup lure, weather included.
But there’s talk about Silicon Valley’s star fading. Silicon Valley was about building electronics and the foundation for the Internet. Now, startups are getting rich off building applications to use the Internet. The tech vs. media myth might not be that – but it doesn’t necessarily mean New York can’t steal the startup spotlight. Hardware is important, yes, but at the moment social software is in huge demand.
Huang points out that the technical elite aren’t necessarily in the highest demand right now. “Everything’s more about application of technology. You don’t have to build everything from scratch anymore,” she says. “It’s more about sales and marketing these days, and New York has tons of that.”
And then there’s the city’s position as a financial hub and business savvy. “As the Internet continues to grow, it’s very important to make revenue and make money, and there’s no better place than New York. The world headquarters density and the business diversity is incredible,” Huang continues. Better yet, there are resources. “There’s a lot of money here. Funding a company at the early stage is important, and there’s tons of money here. It’s more old school; these guys don’t have websites – you have to network, meet face-to-face, build a reputation. But the money is here.”
The reaction to Bloomberg’s initiative, and the idea that New York could reclaim some startup prestige, has been hesitant but hopeful. “It will be changed over time,” Mandell says. “When more VCs and angel investment firms and entrepreneurs in New York become more experienced and learn from success and mistakes, they’ll realize they need to modify their thinking, and that will trickle down through the ecosystem.”
He also admits that the risk-taker attitude of Silicon Valley can also act as a con, and New York’s conservative financial ideals as a boon. The highs out west might be higher, but that means the lows are lower. “Everyone jumps on the bandwagon, and there’s so much excitement it feeds off of itself and it’s an uncontrollable energy, and this becomes economically unhealthy.” This translates to less volatile down periods in New York.
Huang also argues that New York has location on its side. “There’s been this movement of companies and investors toward New York. The trajectory that we have is not going to stop. The media is changing, and there’s a change in content. Where is media? It’s here. So there’s need for innovation in this space, and it’s happening here in New York,” she says. “Whenever there’s a shift from an old way to a new way, that’s going to muster up a lot of new thinking and activity and companies.”