Fighting the Froth and Fluff: New York Tech Investors See Strengths in Digital Media Startups, Challenges in “Me-Tooism”
Venture capitalists and early-stage investors in New York may occasionally pull on their Wellington boots to wade through the muck of startups flooding the market, but they are not grumbling about it. The trick is sifting through the me-too entrepreneurs that develop ideas along the lines of Foursquare, which raised $50 million last Friday, and GroupMe to find the gems that can become viable companies.
Startups sprout in New York City faster than bamboo which raises a question: Are real businesses being built here? Some observers are keeping watch for a potential tech bubble, particularly with heavyweights such as Facebook expected to go public in the future, increasing the need for rigorous litmus tests among startup proposals.
Organizations geared at helping startups get noticed by angels, venture capitalists, and seed funders are fast at work in the city. The NY Entrepreneurs Business Network, for example, hosts events for startups to pitch their ideas for critiques by investors. David Teten, partner with New York’s ff Venture Capital, helped evaluate a batch of pitches on June 23 at the offices of law firm Chadbourne & Parke. The ideas included The Hotlist, a social recommendation engine which offers users tips on where to carouse with their friends, and ScanBiz Mobile Solutions, developer of the ScanBizCards app for scanning business cards.
Teten says though similarities do arise among local startups seeking funding, they may be worth hearing out. “We’re certainly a little bit more wary of mobile location check-in play number 5,002 because the odds that it’s going to be one of the big winners when everyone else is chasing it are shrinking,” he says. “We’ll still look at it though.”
Entrepreneurs should vet multiple business ideas before marrying themselves to a single concept, according to Teten, who is also the founder of data and analytics company Navon Partners. He says his research shows that investors review a median of 80 deals before closing on one. “The average entrepreneur considers maybe two or three,” he says. “That’s a mistake.”
Others in the New York investment community see potential among local startups in spite of the copycats. Peggy Wallace, managing director with Golden Seeds, an angel investor group, says sorting through the also-rans is a widespread challenge. “I think there is a lot of ‘me-tooism’ in Silicon Valley and here,” she says.
Wallace says New York’s traditional media industry offers a strong foundation for local startups in digital media to grow. Having more startups to examine can in fact be a positive, she says, giving investors a plethora of options to consider. “It’s a little frothy out there; there’s more to sift through,” Wallace says. New York startups face some constraints, she says, such as finding professionals with certain in-demand skills. “I think we are struggling with having a deep enough pool of developers here in the city,” she says.
New York’s growing pains are to be expected as its startup community develops. Habib Kairouz, managing partner with Rho Capital Partners and Rho Ventures, says startups in New York can be as innovative as their Silicon Valley brethren though they do not emerge at the same volume. “We’re talking about a 10-year-old ecosystem [in New York] versus a 40-year-old ecosystem,” he says.
However, Kairouz says the low barriers of entry for creating apps have allowed entrepreneurs to enter the market more readily, which makes him question whether they are making niche products or ideas that can support a larger company: “Are they apps that get tens of thousands of users and a couple million dollars in revenue, which would be very nice ancillary income for an engineer who wrote the app in his basement, or are they real businesses that could turn into something very big?”
In spite of the West Coast’s reputation, Kairouz says the East Coast generates its own big ideas. “I hear a lot of criticism that ‘you don’t have a Facebook or a Google in New York’,” he says. “Facebook was started in Boston and dragged into Silicon Valley.”
The early stage investment pool in New York, Teten says, is relatively new and driven by successful companies in digital media. “Certain entrepreneurs who made money in those sectors are comfortable investing in that,” he says. “Some of the other sectors have not had that virtuous cycle begin yet, but hopefully they will over time.”
Startups in other tech sectors have more difficulty raising funds locally, Teten says. “From a New York perspective there’s very limited capital available for hard technology—objects you can touch—for the food industry, for the retail industry,” he says. However, Teten says there is money to be made in the retail sector. “One of the best stocks you could invest in over the past 40 years is Walmart,” he says.
Teten added that the cyclical nature of the venture capital industry means disenchantment with the technology sector will strike eventually. He expects the real bubble to be realized perhaps after companies such as Facebook and Zynga go public. “I don’t know where we are in the cycle,” he says. “We have the advantage of having a portfolio that will benefit from the bubble when it comes.”
Meanwhile, Kairouz says his firm learned lessons from the rollercoaster ride of the mid-to-late 1990s. “We were successful with a few startups and took blows on quite a few when the bubble burst.” Kairouz says those successful investments included iVillage and DoubleClick though not without facing some difficulty. “They were two companies that were rising stars of the digital media space in New York,” he says. Kairouz says his firm took iVillage public and rode with its peaks as an attractive stock and its lows when advertising on the site did not generate expected returns. “We stuck with the company, turned it around, and sold it to NBC.”
New York’s tech scene continues to mature and is leveraging its strengths to make its name in the startup game. Kairouz says the depth of traditional media companies on Madison Avenue helped solidify the ecosystem for local digital media startups. “I don’t think there is any doubt that the digital media sector at the entrepreneurial level is here to stay in New York,” he says.