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Working in tech PR in New York City during the booming-then-crashing late 1990s/early 2000s, one definitely experienced a strong sense of place. “Silicon Alley – Then and Now” describes a unique and influential New York-based start-up economy powered by the cultural and financial cross currents between the worlds of technology, media, and advertising.
This article will examine from a sociological perspective (rather than a technology-based or financial-based one) the tech startup environment in NYC today, as contrasted with the era of the late 1990s. To that end, we spoke with Bob Johnston, who leads the New York Venture Capital Association (NYVCA), which serves as a united voice for New York’s venture capital and entrepreneurial ecosystem.
The Exit Strategy
David Hochman: The most commonly desired liquidity event for the Silicon Alley startups of the late 90s was an IPO. What would you say the most common exit today is? And why?
Bob Johnston: Great question. I guess I’d start by breaking down commonly desired exits into the most common exits versus the most desired exits. The two most common exits in the NYC start-up world taking place in the last few years are 1) private acquisition and 2) Acqui-hire –which is, ‘hey we want your people’, and we’ll give you a steady paycheck, which we’re seeing especially with earlier stage startups. The acqui-hire might involve stock and the promise of a steady income, and that’s different than the more commonly desired outcome, but also better than going under.
As far as most desired exits these days, we are seeing a solid trend over the past 6-12 months where later-stage startups are preparing for IPOs. There is some resistance towards that sentiment on the part of their board members {if not necessarily the founders} who were down on the public markets for a period. Ultimately, it depends on who one talks to – the founders, or one of the investors….or one of the board members. The economics of a venture fund can be mysterious and depends on where they are in the life cycle of the fund. For example, if they’ve got four years to do their investing and they’re on year 3, they’ll likely be a lot more conservative in that final year of investing but may want to have a really powerful exit.
The founders always have a dream of a BIG sale. Whereas back in the late ‘90s, it was all about the IPO – to the point where if an exit involved a private sale, it was not perceived to be a massive success.
David Hochman: So from where you sit, you see the typical NYC startup founders of today still always have that dream of IPO or “Big Sale” liquidity event – just like their late ‘90s predecessors?
Bob Johnston: Definitely. And there are a few I’ve seen as well that merge and grow so it’s kind of ‘growth through merger.’ We’ve seen a handful of those deals, and we may in fact see them a lot more because there has been so much activity around seed-stage fundings recently.
Location Matters
Dave Hochman: Silicon Alley’ in the ‘90s was the Flatiron neighborhood, maybe some parts of TriBeCa as well, and now its really the entire city, with thriving tech startups in every borough, if not every neighborhood in every borough. I want to know what your perspective is on what really enabled this to happen, and why is that better (or not)?
Bob Johnston: The spreading out of “Silicon Alley” signifies the growth and maturity of the tech industry, so that’s a good thing. The tech industry was super young here in the late ‘90s, and now it’s 15 years later. Sure, there were a bunch of those years in between then and now there was sort of a lull, but there were cycles and people learning. I don’t think the entrepreneurs are smarter than they were 15 years ago but I do think learning important lessons – watching others, watching friends start businesses, reading, learning, studying – you’re going to get better.
Most of the bedrock industries in the city from healthcare, financial services, media, retail, fashion, and so on, all have a ‘tech layer,’ which is an entrepreneurial layer on top of the those established traditional industries. And it’s that tech layer in each of those bedrock industries that’s vibrant and drawing talent from the established companies all across the city and launching these great tech startups. So to answer your question, definitely better, because even if there is a bursting bubble or something, those industries are completely solid. Particularly the startups within those industries- totally solid. The bottom won’t fall out because there is a different kind of maturity and there is some really good thinking around structuring your investments and structuring your talent.
What’s Next?
Dave Hochman: Do you want to mention any specific industry sectors that characterize the current crop of NYC tech startups? You mentioned several; can you highlight two or three?
Bob Johnston: Clearly adtech, there are a TON of local companies in that space. Fashion is really interesting. What I would look for in the next year or two is an increase in investments in devices, therapeutics, mobile – related to digital health and bio. I think that health and bio is an underserved sector in NYC. Investors are actively looking to plant money in healthcare startups around here. I think less so in adtech over the next several years. I don’t think I would want to be a founder trying to get out of the gate right now in adtech. There are pockets of adtech that are going to get funded if they have something interesting. But it’s pretty hard to get properly funded. How much more innovation can we do on the ad unit? It’s basically a race to the bottom.
Lessons Learned
Dave Hochman: What are the big lessons, you think, that the current crop of founders have actually learned?
Bob Johnston: I think the big lesson is to put risk where it ought to be. If you think about the risk equation, one can mitigate risks upfront, and then have a better long-term shot at success. I don’t think that the notion of mitigating risk was top-of-mind in the late ‘90s. I think in the late ‘90s it was ‘growth, growth, growth.’ How many eyeballs you got? Whereas by contrast, today’s entrepreneurs are very focused on mitigating risk right out of the gate. The other side of that coin is obtaining proper growth and setting expectations with your investors. These days, it’s okay to have a frank conversation with your investors on growth. It doesn’t have to be ‘hockey stick’ growth but it needs to be on a glide path to really good growth
Dave Hochman: Why can’t or won’t this situation end up like Silicon Alley 1.0 i.e. crashing on the rocks? You pretty much answered this already, but if there is anything you want to add….
Bob Johnston: Yes, like I said earlier, today’s founders aren’t necessarily smarter or dumber than they were years ago — I just think enough time has gone by which has given them the ability to study others. So, when they start, they really have thought through how to make money and how to build an organization, which is a much more pragmatic way of doing it. Maybe they’re more pragmatic and less visionary. You need to have a vision if you’re an entrepreneur, but the NYC tech startups today are pretty pragmatic when it comes to the nuts and bolts of running the business. That was sort of less so in the late ‘90s.
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