Why New York City Will Never Be a Startup Haven
If you look at leading startup cities around the world, it’s easy to see that Manhattan lacks many key foundation stones for a world-beating startup scene
Though the New York Times recently reported that New York City is trying to boost its position as a startup destination -- it never will be and may be wasting its time trying.
Before launching into the reasons for this conclusion, what does it take to turn a city into a vibrant startup scene?
The answer, as I wrote in the MIT Entrepreneurship Review, is that the city needs to create and nurture a vibrant Startup Common.
That's a modern adaptation of an idea from rural economics. In old England, farmers brought their animals to graze in a field at the center of their village. If farmers' animals ate too much, the Common would wither and the community would scatter, yielding the Tragedy of the Common. But if each farmer's animals limited their consumption and the farmers added fertilizer and seed, the Common and the surrounding town would thrive.
The Startup Common consists of six elements that get strengthened in each generation of start-up successes and failures. Unfunded start-ups tap the Startup Common for capital, people, and advice, although a small percentage are funded.
Before explaining what Manhattan needs before it can become a leading startup destination let's look at these six elements and how each plays out in Silicon Valley.
If you are wondering what a pillar company is -- think about companies like Google or Facebook that help startups get off the ground in three ways:
1.They serve as early-adopter customers;
2.They provide capital, from seed to exit; and
3.supply talented executives, engineers, and sales people.
Universities are among the world's best sources of intellectual property and talent. Silicon Valley hosts Stanford, U. Cal. Berkeley, and Santa Clara University.
Y Combinator, the start-up boot camp, also adds value by helping an early-stage company to get its first paying customer in four months and get a chance to pitch to influential Angel investors.
From pillar companies, universities, and talent from around the world, Silicon Valley has an ample, if expensive, pool of start-up CEOs and other C-level executives, functional vice presidents, and engineers, sales people, and marketers.
"When someone's been working at Google or Facebook and they want to start a company, they don't want to leave and move their whole family -- so they start where they are. Similarly, it's less risky for someone to start or join a startup in Silicon Valley because if it fails, they don't have to pick up the family and move to join another start-up because they're all co-located, you don't need to move the family and buy a new house," explained Chuck Eesley, Assistant Professor and Morgenthaler Faculty Fellow at Stanford.
Startups need different kinds of capital at different stages -- bootstrapping, founder financing, friends and family money, Angel, venture capital, etc. Silicon Valley has deep pools of all these kinds of capital.
Experienced investors and executives mentor companies and talented professionals. At the corporate level, such mentoring includes help with strategic vision, acquisitions, raising capital, performance monitoring, organization design, culture, hiring and firing, product development, and getting customers and partners.
Last, but probably most important, are the region's values. While different cities cling to many different sets of values -- what makes the difference between the values of a winning Startup Common and the rest is a long investment horizon and a big appetite for risk.
Each time a Silicon Valley investors makes a bet, he or she is eager to earn 10 times more than they did the previous time.
There are many who have made $100 million and as they reinvest, they are seeking to make bets that will turn that pot into $1 billion. Similarly, those who have made $1 billion are looking for a $10 billion score.
This brings us to the big Apple.
The good news is that there is plenty of capital flowing -- $1.4 billion went to its startups raised in the first quarter of 2016 making it the third biggest startup region in the country -- but it was dwarfed by Silicon Valley which shoveled a whopping $4.9 billion into its startups, according to PWCMoneyTree.
To be sure, Manhattan has the potential for Pillar Companies -- but in reality it is hard to find any local public companies that nurture startups.
The only exceptions to that are outside of tech -- in the worlds of fashion, media, and banking there are plenty of people who leave big companies and start new ones.
But for the most part, they don't get a huge amount of help from their former employers.
Another missing element is Universities and Human Capital. Obviously, there are plenty of great schools in Manhattan including Columbia and NYU and lots of talented people.
But New York City is not a global magnet for technology talent -- it lags behind Palo Alto and Cambridge when in those departments.
Moreover, since it hosts so few successful home-grown technology companies with successful IPOs, that there are very few successful serial entrepreneurs on which to place venture bets.
To be fair, there have been a few modest successes in the last decade. In 2007, Google bought online ad-serving network DoubleClick for $3.1 billion; in 2014 Yahoo paid $1.1 billion for Tumblr; and in 2015 vintage goods marketplace Etsy went public -- but has since lost 70% of its value to a modest $940 million market capitalization.
Tech:NYC is soon to announce its existence according to the Times. Julie Samuels, its executive director, will try to shape city, state and federal policies on issues like taxes, schools and affordable housing to make the Big Apple more hospitable for startups.
But given Manhattan's sky high rents, it is hard to conceive of how a typical Manhattan startup could keep most of its cash from going to pay the landlord.
Ultimately Manhattan's values don't fit what it takes to create a great startup scene -- people in the Big Apple like quick kills -- and there are plenty of hedge fund and real estate billionaires there who have prospered by pursuing those values.
I see no reason why Manhattan should defeat Palo Alto or Cambridge in the war for tech talent.