The NYC tech scene is exploding

The pace of innovation in the New York area is very impressive right now. Some of the top entrepenuers in the country are building and scaling companies in the NY ecosystem – Ron Conway, yesterday in an email to me (published with his permission)

With the announcement of Roger Ehrenberg’s new fund – IA Venture Strategies – NYC now has another top-tier seed fund.  I’ve had the pleasure of investing with Roger a number of times. He’s not only a great investor but also a huge help to the companies he invests in. It’s great that he’s going to be even more active and I hope to work with him a lot more in the future.

The NYC tech scene is exploding. There are tons of interesting startups. I’m an investor in a bunch and started one (Hunch) so won’t even try to enumerate them as any list will be extremely biased (other people have tried). I will say that one interesting thing happening is the types of startups are diversifying beyond media (HuffPo, Gawker) to more “California-style” startups (Foursquare, Boxee, Hunch).

In terms of investors, NYC now has a number of seed investors / micro-VCs:  IA Capital Partners, Betaworks, and Founder Collective (FC – which I am part of – has made 7 seed investments in NYC since we started last year).  The god of seed investing, Ron Conway, who I quote up top, has recently decided to become extremely active in NYC. One of the nice things about having small funds is we don’t need to invest millions of dollar per round so we all frequently invest together.

NYC also has mid sized funds like Union Square (in my opinion and a lot of people in the industry they have surpassed Sequoia as the best VC in the country).  We also have First Round, who very smartly hired the excellent Charlie (“Chris”) O’Donnell as their NYC guy.

Then we have the big VCs who have also been increasing their activity in NYC.  Locally, we have Bessemer (Skype, LinkedIn, Yelp) and RRE.  Boston firms that are very active and positive influences here include: Polaris (Dog Patch Labs), Spark, Matrix, General Catalyst, and Flybridge. Finally, some excellent California firms like True Ventures have made NYC their second home.

The one thing we really need to complete the ecosystem is a couple of runaway succesesses. As California has seen with Paypal, Google, Facebook etc, the big successes spawn all sorts of interesting new startups when employees leave and start new companies. They also set an example for younger entrepreneurs who, say, start a social networking site at Harvard and then decide to move.

Presenting Founder Collective

As readers of this blog know, I’m a huge fan of the startup and venture capital world but also a sometimes critic of how the venture capital industry works. For a long time I’ve wanted to do more than talk about this and actually start a new kind of venture firm, designed the right way from the ground up.

Last year two friends of mine who are both very successful, serial entrepreneurs — Eric Paley and Dave Frankel — were brainstorming ideas for what to do next when the thought occurred: why not make their next startup a new kind of venture firm, the kind we had wished existed back when we started our first companies?

So this is what we, along with a bunch of other serial entrepreneurs, decided to do. We call our new firm Founder Collective. Joining us are Mark Gerson (founder of Gerson Lehrman Group), Zach Klein (co-founder of Vimeo/Connected Ventures), Bill Trenchard (co-founder of LiveOps), and Micah Rosenbloom (co-founder of Brontes). We expect to add more founders over time.

We think of ourselves as part of a new wave venture firms led by Y Combinator, First Round, Maples, Ron Conway/Baseline, and Betaworks, among others, that have adapted to a world where venture capital is abundant but authentic seed capital and, more importantly, mentorship from experienced entrepreneurs, is scarce. We have many similarities to these firms and also some differences:

1) We have a small fund – approximately $40M – and intend to keep it that way. This means seed investments are our entire business — they are not options on future financings. Hence our interests and the founders’ interests are aligned. This also means we are happy with smaller exits if that’s what the entrepreneur wants to do.

2) Each person involved in Founder Collective is an entrepreneur, most of them currently running startups full time (my full-time job is CEO/co-founder of Hunch).

3) We believe the best people to predict the future — and create it — are fellow entrepreneurs, not former bankers drawing graphs and developing abstract theses.

4) We try to be respectful. We’ve all sat in countless meetings where VCs show up late, email while you are presenting, and generally act arrogant and dismissive. We try really hard not to be like that.

5) We’ll make investments anywhere in the world but tend to favor our home turf – New York City and Cambridge, MA. New York is a hotbed for online media and advertising startups. In Cambridge, there is a constant flow of ideas coming out of places like MIT that just need a little capital and guidance.

We realize the word “Collective” sounds a bit radical, even socialist. This is deliberate. While we have an actual fund — we are not just a group of angel investors — we also have a unique structure where active entrepreneurs lead investments, work hard to help their investments succeed, and share in the profits when they do.

Think of it as peer-to-peer venture capital.

New York City is poised for a tech revival

One thing that was puzzling about the “web 2.0 boom” from 2003-2008 was how irrelevant the East Coast, and particular New York City, was compared to the first dot-com boom.  There were a few big hits – Right Media comes to mind – and a big near miss – Facebook – which started in Boston but moved to the West Coast.

I was mostly checked out of the internet scene in the 90s (in perpetual grad school), but from everything I’ve read and heard, New York City and the East Coast in general was much more competitive with the West Coast.  One interesting supporting data point: Matrix Partners in Boston had the best return of any VC fund in the 90s (an astounding 516% IRR).

I think it’s fairly easy to explain what happened to Boston in the 2000′s.   In the 90′s much of the action was around infrastructure and enterprise software – and Boston (led by MIT) tends to be very infrastructure and enterprise oriented.   I am told Boston is still relevant in biotech and cleantech, and perhaps infrastructure and enterprise IT will have a resurgence, although even those areas seem to now be dominated by the West Coast.

But the question that has puzzled me is:  why did New York City lag behind the West Coast this decade so much more than last decade?  Especially since the internet in the 2000′s has been more than ever about consumers, media, and advertising – traditional New York City strengths?

I think the only explanation is that the finance bubble of 2003-2008 was a giant talent suck on the East Coast.  The people I knew graduating out of top engineering or business programs on the East Cast were all trying to work at hedge funds or big banks or else felt like fish out of water and moved west.   Money was flowing so freely in the finance world that there was no way the risk/reward trade off of startups could compete.  Eventually it just became downright idiosyncratic to be a startup person on the East Coast.  The Larry and Sergey of the East Coast were probably inventing high frequency trading algorithms at Goldman Sachs.

But this is why New York City now seems poised for a technology startup boom. The finance bubble has burst and the industry will hopefully return to its historical norm, about half its bubble size.  The traditional advertising and media businesses are in disarray.  The people who work in them will no doubt find new applications for their talents.

There is also a nice ecosystem developing in New York City.  Union Square Ventures is one of the best VC’s in the country, with early stage investments in companies like Twitter and Etsy (that were followed on by top West Coast VCs at significant markups).   Bessemer is an old firm that has a managed to stay relevant with investments in Yelp, Skype, and LinkedIn among others.  There is also a new wave of scrappy Boston firms spending a lot of time in New York City – specifically Spark, General Catalyst, Flybridge, and Bain Ventures.  First Round Capital out of Philadelphia is extremely active in early stage investing in New York.  There are a bunch of veteran entrepreneurs actively investing in and mentoring seed stage startups.  Google has a big office here and many people seem to be leaving to go start companies.

But most importantly, the engine of the startup economy, young engineers, will be returning to doing something besides shuffling money around.  As Obama said:

…Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s. It just won’t be half of our economy. And that means that more talent, more resources will be going to other sectors of the economy. And I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design…

That’s why I don’t just want to see more college graduates; I also want to specifically see more math and science graduates, I specifically want to see more folks in engineering. I think part of the postbubble economy that I’m describing is one in which we are restoring a balance between making things and providing services…

New York City has many of the same strengths as Silicon Valley – merit-driven capitalism, the embrace of newcomers and particularly immigrants, and a consistent willingness to reinvent itself.   Silicon Valley will always be the mecca of technology, but now that people here are getting back to, as Obama says, making things, New York City has a shot at becoming relevant again in the tech world.

Notes from brown bag lunch at Betaworks

Lately it feels like a full-blown startup revival is taking place in NYC and betaworks is very much at the center of it.  So I was grateful to be included in a lunch discussion group they held at their offices yesterday.

Some things I left the discussion thinking about:

– In a discussion of the “real time” web (you can’t go to betaworks and not discuss the real-time web!) Anil Dash made the distinction between the value of real time as in the information being recent and the value of real time as in having a shared experience. The distinction strikes me as critical.  Speaking strictly from personal experience, most of the value I get from real time services like Twitter & Facebook falls in the latter category.  Reading my friends’ tweets helps me keep connected with them, the same way bumping into them on the street and exchanging small talk does.  The content isn’t as important as they connection shared and presence felt.

I think Anil’s distinction also explains why Twitter search is sometimes a strange experience.  Besides the (presumably fixable) problems of spam and relevancy ranking, you see a lot of tweets that are fragments of friends bantering.  There’s no context.  The major exception is when a news event happens, since then the related tweets are generally reactions to that event, so the event plus a single tweet provides the full context.

Caterina Fake discussed a few principles for designing successful user generated sites.

Among them:  make sure the minimum unit of work required of user contributions is very small (ideally, something that takes just a few seconds).  You can change something on Wikipedia in seconds, but writing a Google Knol page can take hours.   At Hunch, we think of one of our main product design innovations was to take something inherently large and complex (decision trees) and reduce the minimum unit of work to something small (submitting a result or question).

Another principle we discussed was what we at Hunch call the read-write ratio.  For every page created in Wikipedia (a “write”), there are thousands of millions of instances of people reading that page (“reads”).  The same holds true for YouTube (writes=uploads), Yahoo Answers (writes=questions & answers).  One goal in designing user generated systems is to get a high read-write ratio (for example, by avoiding duplicate writes).

Anyways, it seemed people enjoyed the discussion, since, as Anil pointed out, they weren’t doing much fiddling with their iPhones.