Big Players and Big Deals Needed to Help Solidify New York’s Tech Scene
Although New York basks in the Giants’ second Super Bowl victory in four years over the New England Patriots, the city’s startup scene still has hard work ahead if it expects to seriously compete with the more mature tech hubs such as Boston. With Facebook due to open engineering offices in New York this year the city is gaining more and more street cred on the bigger technology landscape.
However the presence of Facebook in the city, along with other major players such as Google, also increases the competition for talent vital to startups growing in this neophyte market. If New York wants to keep its momentum alive, it needs to establish a symbiotic environment where the big and little guys can thrive.
New York-based angel investor Jerry Neumann has witnessed the technology boom both as an engineer as well as a money guy. Prior to becoming an investor, Neumann worked for such companies as IBM, Deloitte, and Prodigy. These days, Neumann backs companies such as New York’s Yieldbot, 33Across, and PlaceIQ, and he is an advisor to startups such as data analytics provider Sociocast.
Neumann spoke at January’s Digital Media Center event held in Times Square. Xconomy caught up with Neumann recently to talk about the influence big technology companies have on innovation in New York, the truth about the social, local, and mobile (“SoLoMo”) movement, and the delicate nature of the local tech startup community.
Xconomy: Can big companies generate innovative ideas the same way risk-taking startups do?
Jerry Neumann: Whenever you really try to innovate, there is someone who doesn’t want you to change what is happening. The politics of innovating are difficult.
There’s sustaining innovation, which is about people making their product better. In other words, if I’m making widgets, I change something to make widgets for five percent cheaper than I was. That kind of innovation happens inside big companies primarily.
If somebody shows up at my door and says they can do what Google does for 10 percent cheaper, I would not back that. Doing something slightly better is not enough to overcome the incumbent. I don’t invest in better, I invest in different. If you build a better mousetrap then the large mousetrap manufacturer will copy your innovation and out-produce you.
Most innovation happens inside existing companies like Wal-Mart and IBM by the sheer amount of dollar value, but it’s not the kind of innovation people in the entrepreneurial sector talk about. We’re talking about disruptive innovation, the kinds of things big companies can’t copy. Those are the things where you create a lot of value really quickly if it works.
The Huffington Post was doing content aggregation as opposed to original content production, for the most part. Within six years they had as many people reading their outlet as The New York Times. The New York Times could not compete with that because they would have to lay off all their journalists and most of their editorial staff and completely revamp. They would be getting rid of what made them special. That kind of innovation doesn’t happen inside big companies because it can’t.
When somebody says “It would be better if we cannibalized ourselves than let somebody else cannibalize us,” there is always somebody else who says, “No thanks, that’s my revenue you’re talking about and I’m not letting that happen.” If someone in The New York Times said let’s build our own Huffington Post, the people who get revenue from the current New York Times would say no. Since that person is in charge of most of the revenue in the company they have more political power than this insurgent.
X: Does bureaucracy get in the way of innovation at larger companies?
JN: It’s not bureaucracy so much. You can have these two people standing in front of the CEO, and one promises to build something to bring in $300 million. The other person says building that $300 million thing will cost $1 billion in revenue elsewhere.
Usually the guy in charge of all the revenue somehow starves the other side of its resources. It’s typical of corporate politics aimed at the one who has no power. That kind of innovation is really hard to do inside existing companies.
There are not a lot of companies that do sustaining innovation from the outside. It happens, but they tend to be less noticeable because they are not rocket ship-like growth stories.
X: Does the growing presence of big companies such as Google, Facebook, and AOL in New York help solidify the local startup technology scene?
JN: Not so much today. It makes it harder today. Startups today, as opposed to one year ago, are having a much harder time finding, hiring, and being able to pay for engineers. If you raise $500,000 in a seed round and Google is hiring engineers for $200,000, then you just can’t do much. A few years ago engineers would join companies for a lot less, for a piece of equity.
New York had a bit of a boom four years ago when engineers didn’t want to go to work for Wall Street. That freed up a lot of talent to work on startups. Things are tightening up again but the good thing is the economy is cyclical. When things get hard again and Google decides they can’t actually pay engineers that amount of money, then you’ll have a ton of engineers in New York City who are interested in working for startups again. It creates a huge pool of talent the startup community can draw on at some point in the future. It’s definitely a plus to have the big companies here. It’s a little painful to pay the price right now.
X: Is the current buzz surrounding the convergence of SoLoMo technology a real trend or just a way to repackage and rebrand technology we’ve already seen?
JN: I think at the moment it’s more talk than reality. It’s not mainstream yet. It’s useful to remember that most people still don’t use Twitter. They may have an account but they don’t actually use it. It’s an interesting concept. I’m a believer that someday social, local, mobile is going to be an extremely important part of the economy. I don’t think it is yet or that it has proven that it will be.
Mobile is clearly a huge force now. It wasn’t 10 years ago. People now use their smartphones for everything as their information device. The local piece is pretty obvious; if you’re searching for something on your phone, you are probably more interested in stuff that is nearby. The social piece makes sense but it’s still early. It’s hard to see how the world doesn’t go in that direction. I have no idea who or what is going to be the killer app in that sector.
We’re in that grinding it phase. If you look in the advertising world, there’s not enough hyper-local inventory. Part of the reason is because there are not enough people buying hyper-local ads. They aren’t buying those ads because there’s no hyper-local inventory.
In between, we have these entrepreneurs pushing and pulling and at some they’ll reach that critical mass. That’s the phase we’re in. If you want to do local and social, you have to enable your apps and infrastructure to transmit that information from the phone. There’s work that has to be done but people aren’t going to do that until they think the rewards are definitely there.
X: Has the New York technology scene matured from its infancy?
JN: It’s early. When you look at other places that have had sustainable technology economies, there’s usually been one company that was big. A lot of people who worked there knew each other; they left and started other companies. There’s a tree effect. Look at Silicon Valley and Fairchild Semiconductor and all the companies that grew out of that.
In New York we’ve had a few of those. We’ve had DoubleClick; we’ve had a few companies that have gotten big enough to have a bunch of people who left and started their own companies. The best place to learn how to start a company is working at a startup. Now we’re seeing that second wave of companies since then who have been acquired, the Admelds of the world. Some of those people will want to start their own companies and it spawns a bunch more.
We’ve only had two, maybe three iterations of that. We need a couple more before we have a large enough tech scene that is sustainable. Right now it’s a little fragile. It’s expensive to live in New York. It’s hard to pay people enough to live on if they are startup entrepreneurs here, which is also true of Silicon Valley. New York needs to be careful and supportive to keep this growing.