While working in the technology and finance industries for 30 years, including eighteen years as a Wall Street technology equity research analyst, I have witnessed dozens of Silicon Valley start-ups go from the seed phase to successful exit. I characterize Silicon Valley as a “well oiled machine” in how it can consistently over multiple decades create, fund and successfully grow the most innovative companies in the technology industry. As a long time resident of the Greater New York City region, I am truly excited that over the past decade the NY start-up ecosystem has achieved enormous momentum and has the potential of also creating new innovative companies and perhaps even defining new subsectors of the technology and media industries.
Many have opined in the media on whether NY will ever catch up to Silicon Valley or if it is even relevant to compare the two start-up ecosystems. In this regard, I agree that it is not extremely relevant to compare the two regions given the maturity and decades of success of the Silicon Valley start-up ecosystem vs. the relatively young NY ecosystem of roughly only a decade. NY has a different culture and industry roots than Silicon Valley that will likely result in its own unique ecosystem evolution. For example, the historical entrenchment of industries in NY such as media, fashion and finance make talent in these industries more prevalent in NY than classical technology sectors in Silicon Valley such as semiconductors, enterprise software, data networking etc. These strong industry foundations in NY are evident in two of the few NY start-ups that have actually gone public in the past three years, namely Shutterstock (Media/Content Tech) and On Deck Capital (Financial Tech).
As someone who was educated in both NY and Silicon Valley and is now an angel investor, board member and advisor to companies in NY and California, I read with intrigue the “2014 U.S. Venture Capital Year in Review” by CB Insights as it relates to the topic of NY as a blossoming start-up ecosystem and how it metrically compares to other regions of the US. I wanted to highlight a few key metrics from this report that demonstrate both the momentum and scale of the NY start-up ecosystem, but also the coincident realization that this ecosystem is still relatively young and has more to prove to compete with Silicon Valley and other parts of the US in attracting the absolute best financiers, entrepreneurs, scientists/engineers, students and academics to the region.
Table: 2014 U.S. Venture Activity
|Number of VC Backed Deals (Growth Over 2013)||1,631 (13%)||346 (9%)||422 (7%)||3,617 (8%)|
|$B Amount of VC Backed Deals (Growth Over 2013)||26.8 (81%)||4.2 (37%)||4.5 (53%)||47.3 (62%)|
|VC backed IPOs (vs. 2013 figure)||45 (31)||18 (10)||5 (1)||101 (73)|
|VC backed M&A Exits (vs. 2013 figure)||265 (188)||70 (33)||59 (49)||637 (440)|
Source: CB Insights report “2014 U.S. Venture Capital Year In Review”, January 2015
The CB Insights report shows that NY was 2nd only to California in venture backed funding in 2014 both in terms of number of deals and total dollars funded as it surpassed Massachusetts in both these categories. This clearly reflects the enthusiasm, momentum and scale of the NY start-up ecosystem. However, NY continues to lag in terms of exits as it only generated 5 IPOs in 2014 (and only 1 in 2013) and its M&A exits in 2014 did not keep pace with California, Massachusetts or the US as a whole.
NY will need to improve its exit conversion rate in the next few years or it might be at risk of being viewed as the “gold-rush” region of the current technology and media era. I personally view the talent, innovation and entrepreneurial energy level in NY as too powerful for such a scenario to play out. Time will tell whether NY will follow its strong growth metrics in deals and funding values with also an improving performance of exits. While the numbers will ultimately speak for themselves, here are three important dynamics that I will also be following to measure the progression of the NY start-up ecosystem.
Minting Serial Entrepreneurs that VCs Will Follow: As exits grow in absolute numbers and valuations, it will be important for NY to establish its own set of serial entrepreneurs that stay local to the region, come up with the “next big thing” and can easily raise money from VCs given the returns they delivered to them in the past. This profitable cycle will also help drive the best VCs to put better talent in NY.
Fading of The “Trader” Mentality: Perhaps its because NY is the financial capital of the world, or perhaps its because the NY start-up ecosystem is still fairly young that I find many NY entrepreneurs (and NY start-up financiers) think primarily of a quicker M&A exit for their companies rather dreaming of building a company that can go public. While I stated earlier that I don’t think it is relevant to compare Silicon Valley to NY, this is one big difference between the two regions. Silicon Valley tends to dream relatively more of building big innovative and disruptive companies, while NY tends to dream of the quick exit or “trade”. Perhaps NY first needs to “mint” its serial entrepreneurs through M&A exits to create the stage for more far reaching company goals. Having more public companies I think would make NY even more attractive to the best talent in the nation to come here to work. Achieving an IPO with a valuation of multiple tens of billions of dollars would be a momentous event for the region and also allowing for a NY based consolidator.
Fostering Entrepreneurship At Local Universities: NY has a solid list of universities. These universities historically, however, have not had a culture that has fostered entrepreneurship. This is changing quite rapidly but will need to continue. As a member of the Columbia Engineering Entrepreneurship Advisory Board, I have witnessed how one such university is making such strides and it is a pleasure to be a part of the progress. NY still has more to go in this area including being supportive of professors that want to be more actively engaged with start-ups and being more creative and less bureaucratic in intellectual property ownership rules when dealing with campus-based start-ups.