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Is there money for tech in NYC? Yes, but...

It's pretty lopsided, with a lot more Series A rounds getting funded than later stage rounds

Financial trends and news by Faith Merino
November 29, 2012 | Comments
Short URL: http://vator.tv/n/2c0e

New York City’s tech startup community is something of an enigma to me.  The NYC Metro area mirrors Silicon Valley in virtually every way: they’re both highly populous, are the sites of huge concentrations of wealth, have a density of universities and research organizations, and more—and yet New York’s tech scene isn’t half as robust as the Valley’s.

To be fair, a few notable names come to mind when I think about NYC startups, like Etsy, Foursquare, Gilt, Gawker Media, and Fab, among others.  But there are no tech titans—no Googles, or Microsofts, or Amazons.  And that’s what I don’t really understand.  New York City is one of the wealthiest cities in the world.  There are some pretty deep pockets—so why doesn’t it have any super mega Internet companies? 

Could it be because New York is simply too cool for tech?  Maybe that was the case 10 or 15 years ago, when people still used fax machines.  But today, tech is so deeply interwoven into everyday life that NYC—and other major cities—have to start nurturing its tech community if it’s going to keep its other industries, like fashion, finance, and advertising, going strong.

(Note: Vator is holding its second-ever Vator Splash NY in Manhattan on Dec. 5. We'll hear from top NY angels/investors on just what's happening in the NY startup scene. Register here. Thanks to our Champagne sponsors RRE Ventures and KPMG for helping to make this event happen.) 

So it makes sense that New York’s venture capital scene is working overtime to catch up. 

IT Investments

In the first nine months of 2012, venture capital firms invested $288 million in NYC-based IT companies across 73 deals, according to data from Dow Jones VentureSource. 

It’s not likely that New York City startups will receive as much funding this year as they did last year, but that mirrors the general trend across the country.

VC investments across the country were down in the third quarter, with 820 deals raising a total of $6.9 billion.  That’s a 32% decrease in capital invested compared to Q3 2011.  The U.S. IT industry has stayed strong, however, with IT companies across the country raising $2.3 billion across 290 deals in the third quarter—a decline of only 2% in capital, but an increase of 3% in deal flow.

But…

While the IT sector has remained strong across the country, New York City’s IT sector dropped pretty dramatically in the third quarter.  IT startups in NYC raised a total of $73 million in venture financing in Q3, which is down some 53% from the same quarter last year, when IT startups raised $156 million.

Last year, IT companies in New York City raised a total of $416.95 million, which is down from $473.7 million in 2010.

Does this mean that venture funding in NYC tech companies is on the decline?  Hardly.  It’s more like the tech community finding its sea legs.

New York-based VC firms Greycroft Partners and Lerer Ventures—both focused on early-stage investments—have raised funds this year.  Lerer Ventures, which invests in seed stage companies, filed an SEC form to raise a $30 million round, while Greycroft announced earlier this week that it has closed a $175 million round.

“There is a lot of momentum within the digital ecosystem broadly, including seed funds, VCs and of course, startups.  At the growth stage, we do often see the need for west coast capital sources, although that is certainly improving as more and more funds are investing in New York,” said Greycroft Partners senior associate Ellie Wheeler.

Indeed, startups at the growth stage don’t have as much to work with.  So far in 2012, later stage companies across all industries have raised a grand total of $810 million across 61 deals in New York City.  By comparison, later stage companies in the San Francisco Bay Area have raised roughly $5.2 billion across 262 rounds, according to Dow Jones VentureSource.

First rounds versus later rounds

New York City is much better at the Seed and Series A rounds than it is at the later stage and growth rounds.  So far this year, New York City VCs have funneled money into twice as many Series A rounds as later stage rounds—120 to 61, respectively.  The Bay Area, by comparison, has invested in 301 Series A rounds and 262 later stage rounds.

Among consumer Web startups, the disparity was even greater in New York City, with VCs pumping money into 40 early stage deals and only 15 growth stage deals, according to data from NVCA.

That doesn’t mean that tech startups should avoid putting down roots in New York City if they ever want to raise financing at the growth stage.

The truth is that New York City does have a lot to offer a tech startup.  As Ellie Wheeler pointed out to me, NYC is a pretty happenin’ place (not her words) that’s powering multiple industries, not just technology.  So while it might not have as many engineers as Silicon Valley, you won’t be hard pressed to find experts in fashion, media, advertising, and financial services to round out your team.

And, of course, all of the major brands, advertisers, and retailers are headquartered in New York.

But what if you want/need money?

Let’s say you are concerned about getting funded in NYC—especially if you end up getting bigger than you thought.  You will need money, and you will be bummed out if you can’t find any.  Never fear—you just need to know where to go.  Some of the most active VCs investing in New York City startups aren’t even based in NYC.  In fact, three of the top 10 most active IT VCs in New York City are actually based in Silicon Valley.

So far this year, First Round capital has led the most rounds at 17, followed by Lerer Ventures and RRE Ventures with nine rounds each, and DreamIt Ventures, Great Oaks Venture Capital, and TechStars with seven rounds each, according to NVCA.

Some notable California-based investors rounding out the top 10 include O’Reilly Alphatech Ventures, SV Angel, and 500 Startups.

But the most capital flowing into NYC IT startups does, indeed, come from west coast VCs, with NEA in the lead with $52.6 million, followed by NYC-based RRE with $39, and Menlo Park-based Andreessen Horowitz with $31.7 million.

Startups might also find that they have a solid niche in New York City.

“Generally speaking there is strength in Web and mobile content, e-commerce, consumer Internet, adtech, and marketing services/SaaS businesses,” said Wheeler, adding: “There are far more B2B startups in New York than it gets credit for, and some of our most successful companies are New York-based B2B or enterprise businesses, including Buddy Media, Merchantry, and Ceros, just to name a few.”

While software drove the bulk of U.S. IT investments in the third quarter, in New York City, its main driver was e-commerce, which raised $129 million in Q3.

Boiling it down

There is money in New York City and you can raise financing, even at the growth stage.  If anything, given New York City’s robust economy, the diversity of industries in the area, and the city’s rich talent pool of educated young professionals, it could, in theory, become a second Silicon Valley.  You know…just without all the hoodies and sandals.

(Note: Vator is holding its second-ever Vator Splash NY in Manhattan on Dec. 5. We'll hear from top NY angels/investors on just what's happening in the NY startup scene. Register here. Thanks to our Champagne sponsors RRE Ventures and KPMG for helping to make this event happen.) 

Image source: Cheezburger.com


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