New York: The Next Innovation Hub

4/25/11Follow @habibkairouz

New York has long been synonymous with Wall Street, Madison Avenue and the Garment District, flagship markets for the city’s economic lifeblood that attracts an endless and competitive pool of talent to fuel its growth. When it comes to technology and innovation on the other hand, most entrepreneurs and startup companies have historically turned their sights north and west – to Boston and Silicon Valley. New York is rapidly joining these ranks, enjoying a good amount of buzz as a new hotbed for entrepreneurism. How this came to be is an interesting exercise in the tipping point that combines the right people, ecosystem and economy for innovation to thrive.

In 2010, venture capitalists invested nearly $22 billion in new companies in the United States, according to the National Venture Capital Association. As expected, the largest share of that money—$8.5 billion—was poured into 961 deals in Silicon Valley. New England followed with 387 deals that took $2.5 billion. No. 3 on the list? New York, with nearly $1.9 billion in venture money invested in 350 deals.

How did this well of innovation spring up in New York? The elements have always been there, but they have needed the right climate to thrive and time to develop. A first glimmer came during the Internet boom in the late 1990s, when many people left their traditional careers to start companies with the hopes of reaping the financial benefits of the Internet craze. These entrepreneurs primarily came from typical New York businesses such as investment banking and consulting, as well as from business schools.

But these startups faced a major hurdle that did not exist in the Northeast and Silicon Valley. The talent pool necessary to make a startup succeed did not exist in New York—yet. New York’s wealth and success had come from traditional sectors, investment banking, media and advertising, where cash compensation was the standard. Employees were not accustomed to the notion of accepting stock options, and importantly, they had not seen their friends and neighbors reaping this kind of success from startups yet. Those with engineering backgrounds were hard to come by, and companies had a hard time relocating people who had the required backgrounds from the innovation hubs.

When the bubble burst, lots of startup companies were left hanging without the resources to secure the requisite follow-on capital to stay afloat during the tough years that followed. Many simply abandoned the notion of building a startup and returned to their original fields. There is a joke in New York about that time period: “B2B” meant “back to banking” and “B2C” meant “back to consulting.”

However, there were those who had the entrepreneurial DNA and stuck around. These entrepreneurs have been smart enough and resourceful enough to rebuild their success stories of the 1990s or pursue their next startup idea. Fast forward to now, and these are the people, along with many newcomers, who are driving the startup success we’re seeing in New York today. Some of the veteran New York entrepreneurs have moved on to their second or third successful ventures, in fact.

Consider these examples, just to name a few:

• Dave Morgan started Real Media in the 90s and TACODA in 2001 and is now on his third startup, Simulmedia

• Ben Wolin was an executive at Beliefnet during the bubble years before co-founding Everyday Health in 2002

• Michael Keriakos who spent time at iVillage and Beliefnet in the 90s, also co-founded Everyday Health in a tough funding environment

• Dennis Crowley, who founded Dodgeball (acquired by Google in 2005), is the co-founder of Foursquare

• Scott Kurnitt who founded About.com in the 90′s recently launched his new startup AdKeeper

(Disclosure: TACODA, iVillage and Everyday Health are Rho Ventures-backed companies.)

Success stories in New York have also fueled the excitement and the entrepreneurial drive. These include companies such as DoubleClick, iVillage, Gilt Groupe, Foursquare, Intralinks and Everyday Health.

The climate in New York today has brought together those critical elements that are fueling entrepreneurial success. Take the new media sector, for example. Traditional media companies such as Time Warner and Hearst and the heavy hitting advertising agencies on Madison Avenue provide an opportunity to recruit employees from traditional media companies that are already embracing new media. New York’s fashion industry also provides a great ecosystem for e-commerce startups. Large, old-line industry leading companies in those sectors are finally embracing and collaborating with startups despite the business model disruption those newcomers create.

While new media has been the primary sector to emerge, there are many others to exploit. Take the financial technology industry, for example. The primary customers for startups in this sector are headquartered in New York. The New York City Investment Fund, in partnership with Accenture, recently launched the FinTech Innovation Lab to help create new financial technology startups in the area. Chief Information Officers of the big investment companies and commercial banks participate in the lab, along with a group of VCs, to help advance cutting-edge technology from early-stage companies.

Yes, New York’s startup community is thriving and growing. However, we must also nurture it if we want it to continue growing. The biggest challenge today is engineering talent. This area is a work in progress, but many companies and associations are working with universities to bring that talent into the city.

The city itself is doing all it can to promote innovation. The New York City Economic Development Corporation, spearheaded by Mayor Michael Bloomberg, has been hosting events and bringing in both venture capitalists and entrepreneurs for ideas about how New York can nurture startups even more.

We are building up the support infrastructure for innovation to success in New York, and if you look at these successes and the excitement around young companies, I believe that New York will be adding “innovation” to its list of staple industries.

Habib Kairouz is a managing partner of Rho Capital Partners and Rho Ventures as well as a member of the Investment Committees of Rho Canada and Rho Fund Investors. Follow @habibkairouz

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  • Spencer Hall

    Three words: Rents, Taxes, Unions. It strains credulity to believe that any amount of “economic development” support can overcome those enormous disadvantages to engaging in productive activity in New York City. Far outside the city, rent ceases to be an issue, and it’s easier to avoid unions, but taxation is still a problem. Sure, NYC is exciting, but everything is harder–much harder–in the city. Although there certainly have been some successes, it’s hard to see why serious investors would target a place with so many barriers to entry. For example: engineering talent. It’s great that universities are trying to encourage engineers to stay in the city, but universities are not the fundamental obstacle! Who can afford it? Maybe if you’re 22, it’s OK to share a tiny apartment with three roommates, but once you start thinking about being an adult with family, unless you’re already rich, it’s just not practical to stay in the city.

    • realposter

      San Francisco, Silicon Valley, Boston are the places with more startups than NYC… and all 3 are expensive as well. Also – in terms of the overall economy – in spite of NYC being expensive… it has been outperforming the country as a whole.

  • http://www.thewif.org.uk Dr David Hill

    It needs more than the entrepreneurs to make a killing. It requires the ideas people and they are not usually entrepreneurs. This is what many VCs forget and do not use their money in the most wisely sense, some losing it altogether.

    Entrepreneurs have to realise that they should think together and holistically with other entrepreneurs to make the really big killing.

    For the problem is far greater when one looks at the ‘big’ picture of a nation. Indeed innovation is the only bar in town if a company or a nation wishes to exist economically in the long-term.

    The ‘BIG’ problem with the USA and western developed countries in general is that they have no inclusive innovation systems and integrated infrastructure in place. They also do not use the laws of probability and the numbers game. In this respect over 75% of all the inventions that have made the modern world what it is today emanated from the minds of ‘independent’ innovators and not within our universities or advanced corporate centres of research. The Asian economies are now seeing that the most important factor to create future economic dynamism is the ‘ideas’ people – those mainly outside the confines of higher education and corporate research. We in the West have a lot to learn here and where we do not comprehend what the history of S&T tells us. If we read more and understood where the very seeds of economic dynamism come from, we would lead the world again. Unfortunately we are fixed in the mindset of elitism which prevents us from understanding a different system of approach. If we stood back and observed we would see, if our thinking was out-of-the-box, that we should introduce the creative infrastructure for our people so that their world changing thoughts can be liberated. Unfortunately because this will never happen, we despatch ourselves to untold decline over the next quarter of a century as the economic might of the East takes control. The East knows very well indeed now that collective and integrated innovative systems are what really count and they are building them behind our very backs. We have to wake up to reality and what is on the horizon for us if we do not start thinking of the whole and not of the few. For in China’s case, the use of 1,400 million creative minds is far better than just using a mere 5% of their population. They are now building their holistic innovative infrastructure for the masses and we have to wake up to this reality. China’s President Hu has stated to the whole of his country that it will become the first ‘truly’ innovative nation in the 21st century. He says that every creative mind will be involved in this transition to control the global markets of tomorrow. Why cannot we see this and what it means to us in the West?

    Dr David Hill
    Executive Director
    World Innovation Foundation

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