Startups Rise From Wreckage of NYC’s Financial System
By Eliot Van Buskirk
The financial giants of New York City may have crashed spectacularly after betting the world’s economy on worthless home mortgages, but the city is now bursting with technology startups, who just a short year ago wouldn’t have been considered worth risk or attention from the money men.
For years, technology startups have been oddly rare in the epicenter of the nation’s financial and media industries — despite what Sinatra taught us all about making it in New York.
That’s in no small part because financial firms have hoarded the coders and paid them handsomely to write get-rich-quick-get-poor-quicker formulas that tanked the American economy. And while New York certainly has its fair share of massive investment groups, they tend to invest in large institutions, rather than in startups that just need a few hundred thousand to get off the ground.
Toss in New Yorkers’ jaded views of big, new ideas, and you have a decent explanation of why Silicon Valley is in California, not NYC.
“West Coast startups have the wind at their back,” said entrepreneur-in-residence at First Round Capital Charlie O’Donnell. “Here, you’re just another vendor.”
However, O’Donnell and others we spoke with say the New York startup scene has been growing steadily for the past couple of years, and that investors are beginning to take notice.
“New York City has been a strong startup scene for much longer than just the last few months — but now people are paying more attention,” said O’Donnell. “First Round Capital, for example, has a dozen portfolio companies in New York, but we made more news when we said we were opening an NYC office than we ever did when we actually made all these investments. Also, some of the entrepreneurs who have been ‘head down,’ building great businesses, are now able to take a breath for the first time in years … so there’s more visible participation from them in the community.”
A major contributing factor in New York’s startup renaissance has been the sub-prime mortgage crisis that surfaced in 2007 and still haunts New York’s financial sector. Hedge fund managers, investment bankers, and others in the financial sector have seen wages cut and jobs disappear, making the city friendlier to small tech companies trying to get off the ground.
“When you’re doing a tech media startup, the first year or two you’re not really making serious revenue,” said Greg Galant, the CEO of Sawhorse Media and podcaster behind VentureVoice. “The main cost for a startup now isn’t servers — it’s compensating employees and having to be competitive with the market, especially against the finance industry and the more established media industry.”
Finance is too busy licking its wounds to recruit engineering talent, and rents have decreased, or at least stopped increasing, since the crash — two factors that work in startups’ favor.
“Two years ago, it was kind of brutal convincing engineers to work for you when they could be making well into six figures elsewhere, and even people who were passionate about working for you have their rents go up 20 percent per year — it was tough,” says Galant. “But now, in terms of product and even business development, just to have these pressures lessened outweighs the other negatives from the bad economy.”
In 2006, only 30 or so people attended the monthly NY Tech Meetup. Now, the events now regularly max out with 500 or more attendees. And while this trickle of Silicon Alley startups hasn’t turned into a Silicon Valley-level flood yet, the network effect could help them grow faster.
“You have these network effects where Spark Capital and Polaris from Boston, First Round Capital in Philly, and a bunch of others are flying to New York because they’re investing in companies in New York,” said Galant. “Once they make one investment, they have to keep coming back for board meetings, which makes them more apt to do additional investments.”
Ironically, considering New York’s stature as the world’s financial center, early round investors in New York startups largely come from other cities, although First Round recently joined Union Square Ventures, DFJ Gotham and RRE Ventures on the list of NY-based venture capitalists investing in small startups. When really large New York firms invest in technology, according to Galant, they tend to choose larger companies on the West Coast.
To encourage fledgling startups, various New York-affiliated organizations launched the NYC Seed fund earlier this year, which has so far injected investments of $200,000 or less into five companies based in the city.
Some local entrepreneurs and their early employees are themselves refugees from the financial sector. Before founding the New York-based UpSkil, a job retraining site for accountants and the like, Faraz Qureshi was a project manager and consultant for “large investment banks, a credit card firm, and a property and casualty firm.” Now, he’s building a business around teaching laid-off or underemployed workers new skills using webcasts tutorials from experts (he teaches the accounting class himself).
We ran into Qureshi at a recent networking event for startups, where we also met the founders of the following Big Apple-based companies:
• Aviary, like a more advanced version of Picnik or Snipshot, allows people to edit images, audio files and other media online. “A lot of students and small businesses that don’t want to splurge on Photoshop but still want to create flyers or banners” have been using the site, according to co-founder Michael Galpert. Its freemium business model leverages privacy: You can use Aviary for free as much as you want, but unless you pay for a private account, the rest of the community will be able to access your creations too.
• EkoVenture has signed up 450 of the estimated 40,000 (updated) “experiential travel” operators around the world to create a network of trusted destinations (many but not all of which are eco-friendly - updated) where tourists can travel without worrying about being scammed. Out of the over 700 operators that applied for inclusion, about 35 percent of them were rejected.
• Ganxy proposes that readers pay a small fee in order to read full-length articles online, offering them a full refund if they didn’t like the story. The problem with paying small payments for individual pieces of content, says founder Alekx Jakulin, is that “you still have this risk — you still worry, is it going to be worth it? We have this functionality that lets you get your money back if you didn’t like the article.”
• GiveReal, which started as a Facebook group and is partially funded by Facebook co-founder Eduardo Saverin, allows people to give each other gifts at “nearly a million merchants” across the country over the internet, including bars, restaurants, bookstores, spas and clothing stores. “The way we were able to build such a big network is by piggybacking on existing credit card networks,” said co-founder Adam Ludwig, who worked at McKinsey Consulting for two years before founding the company in 2007.
• Ivy Exec, like an even more velvet-roped version of Ladders.com, lists jobs for “top-tier professionals,” according to founder Elena Bajic, who doesn’t want the site to grow too much or too fast. “They join because they don’t want to belong to these huge job sites — people are looking for a community of their peers.” She says employers are inundated with “hundreds or thousands of applicants for jobs they post online,” so some are gravitating toward this smaller network, the majority of whom she says have an MBA from a top-20 school.
• Klickable.tv lets video creators and distributors designate certain objects in their videos as, well, “clickable,” so that viewers can interact with or find out more about the elements displayed. One advantage to the approach, according to Klickable CEO Roger Wu, is that people tend to watch videos multiple times if they can click on elements.
• NiteFly allows nightclub owners and restaurant owners to offer special deals to patrons who would query the system from a mobile phone for a micropayment of 5 cents. “There are any number of nights when I’m willing to spend 50 or 100 bucks on going out, and I can’t find the exact place that I want to be,” said founder Evan Rose, who said he probably would have gone into finance rather than founded a company, had the market not crashed.
• ProperCloth offers handmade dress shirts to your exact measurements and design specifications, with voting enabled so that the crowd can surface the best designs. Founder Seph Skeritt, who was probably the best-dressed guy in the room, pointed out that by eliminating retail overhead, the company is able to offer customized bespoke clothing for similar prices to what high-end off-the-rack stores charge ($100 and up in most cases).
• MeetingWave is like a real-time video version of Linked In, that allows people to find or hold public meetings with other professionals about a given topic. “You post an invite and describe who you want to network with and when you’re available, and you go out and meet with people in your industry,” explained MeetingWave founder Jon E. Boyd, adding that the meetings can also take place in person.
• LetMeGo, a long-tail entry into the travel space, allows the owners of any mom-and-pop hotel, bed and breakfast or vacation rental to bid on reverse auctions offered by consumers — like a non-corporate version of Priceline, which founder Alex TorreNegra said does not allow small businesses to bid on its customers’ lodging requests because it buys blocks of rooms from large chains.
• Unigo’s Jonathan Goldman, who we didn’t meet but who was at the event, announced a deal on Monday with the Wall Street Journal to distribute the publication’s content to users of its network of student-written university reviews. According to NPR, the site, founded just over a year ago, already has “50 times the college content of any book or website that already exists.”
• UpSkil offers video tutorials to retrain workers in accounting and other skills. A classic example, said founder Faraz Qureshi, would be a secretary learning to balance the books for a boss who can no longer afford a full-time accountant.
Photo: Kyle McDane/Flickr
Posted from Wired.com
Posted: November 6, 2009