4 NYC startups, 3 Valley Firms = a New New York
It’s official: New York City is an Internet product town.
When Silicon Alley emerged in the mid-90s the idea that top tier West Coast venture firms would invest in New York City companies was as likely as Michael Arrington cracking a smile.
While Andressen Horowitz, which joined Union Square Ventures in funding Foursquare, has decades before they can catch up to the Sequoia or Kleiner Perkins track records, most internet pros would give them blue-chip status. Ditto for Vinod Khosla (See Khosla invests in Hunch, and ZocDoC) who is an ex-KP partner and was already a tech hall of famer in the 90s. Now word comes that Accel has joined Insight in SquareSpace.
During the Web 1.0 era, enormous investing lead to very little long-term value creation. Only Doubleclick lived to be a multi-billion dollar acquisition and that was after it was taken private at a fraction of its share price. iVillage managed to get a $600mm exit after trading for below cash through the early part of this century, but by comparison to the great Internet companies’ market caps, that’s a pittance. In any event, NBC probably overpaid. There were others (Tacoda and 24/7 come to mind), but for the most part venture investing in New York was futile and many, many first-time entrepreneurs left the industry.
The iconic internet companies that remain, Amazon (Kleiner), Ebay (Benchmark), Yahoo (Sequoia), Google (Sequoia and Kleiner) were funded and created on the West Coast. For a long time, under the genius leadership of Bob Pittman who was a kind of Jim Clarke of the media industry, AOL thrived, but then it too failed to see the emergence of the Web as the platform of choice and, eventually, was crushed by a combination of Yahoo, Google, and cable companies. Even the second tier of internet Hall of Famers — Facebook (Accel, Greylock), MySpace (Richard Rosenblatt), and YouTube (Sequoia) were California-based.
Historically, the West Coast VCs simply didn’t fund East Coast companies. Those were the rules. When the dotcom bubble burst, NYC was written off as terrible place to do business because Wall Street would always have the best engineering talent, Manhattan was too expensive, and (my favorite) the city life itself was too much of a distraction.
But then something happened about 6 or 7 years ago. The west coast style of investing started finding New York City based champions. It started with Fred Wilson reinventing his career at a fast and furious pace at USV. With Brad Burnham, he launched a small fund and immediately broke through with the sale of Delicious to Yahoo. Then they invested very early in Twitter, Zynga, Etsy, Tumblr, Boxee and now Foursquare. Meanwhile, John Borthwick and Andy Weissman were cooking up Betaworks to reestablish the incubator as a viable business model and they immediately hit it with Summize. John was early to tout the twitter ecosystem and they partnered up with RRE, who until Betaworks was considered reasonably old school. No longer. All of these firms are product-first investors. They chase the large user base.
That is a prominent investing thesis in Silicon Valley and, soon, the DNA started to cross-pollinate. Betaworks found kindred spirits in Jeff Clavier, AlphaTech, and Chris Sacca. Caterina Fake ended up in New York.
But the biggest change was the arrival of the first generation of Internet kids who wanted to be entrepreneurs. Sam Lessin (Drop.io), David Karp (Tumblr), Dennis Crowley (FourSquare), Michael Galpert (Aviary), Nate Westheimer (AnyClip), Andrew Kortina (Venmo), and the Blip.tv crew decided to live in New York.
It was unusual. Even Mark Zuckerberg had moved to Silicon Valley. This crop of entrepreneurs obsess about product. They don’t know what companies are going public and have not rushed to hire people before their IPO.
The 1.0 crowd focused on business models and public markets. We did stupid things like build cool offices, hire expensive PR firms, and try to drum up short-term revenue gimmicks. Ours was a prospectus-oriented strategy — designed for investment bankers, not the Internet consumer. That is how bubbles are created. When it became about the money, Silicon Alley, Silicon Valley (and the larger internet industry) was temporarily derailed. The most egregious sign of this banker-first mentality was Enron. Their implosion lead regulators to make changes.
Ironically, an unintended consequence of Sarbanes-Oxley was that it shut down the public markets to startups. Internet entrepreneurs stopped thinking about getting rich quickly. Instead, they built popular, useful, scaleable products.
Look, there have been no liquidity events for Boxee, GiltGroup, Tumblr, FourSquare or Bit.ly. Only time will tell if any of these companies can enter the Internet Hall of Fame. But New York has changed. It’s a product town.
Just ask the rock star vcs: Vinod, Mark, and Jim Breyer.
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