Home What’s Holding Up the New York Tech Scene?

What’s Holding Up the New York Tech Scene?

Since moving to New York from London in 1990, I have become a firm convert to the idea that New York is the center of the universe. London, Paris, Berlin, Mumbai are all pretty great, but if you like cities, New York is it. So it has always been a source of frustration for me – and other New Yorkers – that our great city is such a slouch when it comes to high tech startups compared to boring suburbs like San Jose and Palo Alto, and even provincial towns such as Boston and Austin. Well, I finally figured out the problem. It’s called Wall Street.

Sure, Wall Street is what makes New York great, or at least rich. So why is it the problem? Two reasons. First, Wall Street absorbs too much of the talent. Second, Wall Street generates a short term “in a New York minute” mindset.

Before looking at the speed bumps, here are three reasons why New York should be the center of tech/media startup scene:

  1. New York is cool.
  2. New York has the clients.
  3. New York has the money.

Lets look at why these three things matter, and in particular, why they matter to the next phase of web technology.

New York Advantage #1 – cool. Do I need to be so uncool as to list all the reasons why New York is cool? It is cool in a way that Los Angeles, with its movies and music scene misses. It’s the edgy edge. London has it as well. Berlin has it. It’s a city thing. Sorry, San Jose and Palo Alto, suburbs are not cool. Provincial cities like Austin and Boston are also not cool. Why does this matter to web technology? Web 2.0 is a consumer wave. The web really is replacing, surrounding, augmenting and extending all traditional forms of entertainment. And to make it in entertainment, you have to be cool, or hot, or whatever is the cool or hot word. Cool is a sustainable competitive advantage. No person can be cool for very long, but a city can be cool for a long time. New York is as cool today as it was when Frank Sinatra was doing his thing or when the New York Dolls were inventing punk music. New York has that unique mix of media, fashion, and money that enables cool to thrive.

To see the difference, look at two contenders in what is possibly the hottest consumer web technology wave right now – live online video – Ustream.TV from the Valley and Mogulus.com from New York.

Ustream.TV seems to have the edge if you look at the numbers. But, it just looks so corporate. It lists all these stars that have channels and you cannot even click on them. The traditional big money institutional VCs are pitching at the already established online stars, such as Chris Pirillo. Yes I know it sounds absurd, outside of The Kingdom of Geek, to talk of Chris Pirillo as an established star. But in this very, very early phase of live video online, his niche audience of early adopters does matter. But, as Hollywood knows, stars are fickle, they move to whatever channel, studio, network or whatever that gives them the best deal, as they should.

The “network” matters. It has to have an identity. People have to make a decision about which URL to visit. Live video is a totally different medium from archive video, where YouTube reigns supreme. You “tune in” to a network that suits your style. Just like you hang out in MySpace or Facebook or Bebo or whatever depending on what suits your style. This is about making a fashion statement.

You can see the difference when you look at Mogulus.com, New York’s entry in the live video space. It has that rough, street feel – and all cool fashion comes from the street. But don’t confuse that with lack of design. This is a very carefully thought out, well executed design. They don’t say anything about their funding other than that it comes from “private investors.” I mean, who cares? It also has a sense of humor and personality.

So cool does matter and New York has it.

But somebody has to pay for cool and that brings us to New York Advantage #2 – clients. Specifically the big consumer advertising budgets, which in America means Finance, Fashion, and Pharma and all three are found in New York. OK, Pharma is across the tunnel into decidedly uncool New Jersey, but that’s a short hop for an entrepreneur and the Pharma guys want to make the trip to Manhattan (to catch a show and try the latest restaurant). Madison Avenue, in all its old and new guises, serves these big consumer advertising clients and Madison Avenue is in New York – but then you knew that right?

And finally – New York Advantage #3 – money. Or as the Grateful Dead put it – “New York has the ways and means.” Yes, startups flock to Sand Hill Road when they want the money. But guess where the Sand Hill Road crowd comes when they want money? Yes, New York, that’s right. This is the big money place. This is where you go through the likes of Goldman Sachs or Morgan Stanley to tap the biggest, deepest, most liquid equity markets in the world. This is where you find the guys who look after pension funds, who put the money into those Sand Hill Road funds. This – or maybe Greenwich, an hour away from Manhattan – is where the Hedge Funds trade the world.

The odd thing here, is that big money currently makes a bi-coastal round trip. It starts in New York, gets sent to Sand Hill Road, where the top tier VC funds distribute it to a few startups who, when they make it big, make the pilgrimage back to New York to meet with Goldman Sachs/Morgan Stanley who will give them their golden ticket, otherwise known as the IPO. Yes, I know that last part of the circuit has been unwired recently, but that will change. Wall Street just needs some Web 2.0 ventures that are pulling in profits.

This bi-coastal round trip may be about to change. The reason is that this wave is more about media and less about tech. We tend to bang those two words together now as tech is going consumer and is funded by advertising – which sounds like media. In the tech venture world, the Valley reigned supreme because the ecosystem was there. You built a chip that went into a computer that made it big because of the operating system and all the people who mattered in that ecosystem hung around in the same zip code.

In a more open standards, API-driven world, that physical proximity matters less. In a media world, where “let’s do lunch” is the social lubricant, proximity does still matter and New York (and Los Angeles) has that ecosystem – Ad Agencies, Fashion, Consumer Advertisers, Media.

So you get it? I love New York. So, just what’s the problem?

  1. Tech Talent. Wall Street sucks it in. The big Wall Street firms just pay too much. A nice Wall Street crash with lots of layoffs would solve that problem (unfortunately that may coincide with a Main Street recession, which stops the party for everybody for a while).
  2. Patient Capital. New York is a “hot money” town. New York investors just love liquidity. They worship it. “What’s your exit route?” means, “could I sell today?” So angel and VC options are weak compared to the Valley and even compared to say Boston or Austin. There are great and honorable exceptions. The New York VC with the most brand recognition and track record in web technology is almost certainly Union Square Ventures and they are New Yorkers through and through. But they are far from the only game in town. It is now possible to build a reasonable short-list of early stage VC firms in New York or very close by. But, this is still far from the Valley funding ecosystem. It’s not even close.

I believe that the New York venture capital situation is improving for the next wave of technology-driven media companies, though. You can see that when you look at Mogulus. They have raised $1.2m from angels. They don’t say who the angels are (New Yorkers like a bit of privacy) but I suspect that they are comfortable with a media venture in a way that they would not be with a tech venture. “TV?” “Yep, I get that.” Media of all types has always been funded out of New York. Now that the web is officially media, the web will get funded out of New York.

And on the talent front, Mogulus has an interesting one-liner at the bottom of their Corporate Facts:

Corporate Facts

  • Mogulus LLC is Based in New York
  • Founder and CEO – Max Haot
  • Funded by Private Angel Investors
  • Development Office Out of Bangalore, India

This is not about India, it is about the ability to build software using virtual teams. If that hot developer rejects your offer to join for $100k base because Morgan Stanley offered $140k plus cash bonuses, find the guy/gal in Boise, Idaho who thinks $100k is more than enough for a nice outdoorsy lifestyle, and your stock options give a shot at real money down the line. Yes, you may need a core team that’s local, but you need less people.

Of course, if you want to know “The Secret to Hiring Great Developers,” go to a Mogulus channel called “What’s Up Silicon Alley.” (Embedded below.)

What would really change the game would be if the NASDAQ IPO market opened up again for tech/media startups. It has been closed since Google came out. If ventures can get funded in New York all the way to profitability, the investment bankers can take over the next step, without any hand-over to the Valley. This is when the New York Hedge Funds and Private Equity players come in to fund from the venture phase through expansion to the stage where public market investors get interested. Then the Valley VC funds will set up offices in New York, just like they are doing in Israel, India, and China.

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