Is New York the New Model for Startup Cities?

Its rise has been remarkable. But should aspiring tech hubs really emulate the Big Apple?

Image Reuters/Carlo Allegri
More than 1,000 job seekers and and dozens of startups attended the NYC Startup Job Fair in April 2014. (Reuters/Carlo Allegri )

New York’s rise as a startup hub is a well-known (I’ve written about it a number of times). The Big Apple has gone from a place that had virtually no high-tech startups to one that hosts a sector attracting more than $3 billion per year, less than the San Francisco Bay Area but ahead of Boston and all other U.S. tech hubs.

But what are the key factors that have enabled its rise? And what kinds of lessons can New York provide for aspiring urban startup hubs?

Those are the questions at the heart of a new report [PDF] from the entrepreneurial non-profit Endeavor Global, “The Power of Entrepreneur Networks: How New York City Became the Role Model for Other Urban Tech Hubs.” The report traces the evolution New York's startup hub ecosystem, compiling data from various industry and government sources. To do that, it maps the city’s startup network of founders, venture capitalists, spinoff companies and support organizations based on interviews with more than 650 people involved in the city’s startup scene.

New York’s startup sector has seen explosive growth over the past decade, as the report makes plain. Venture capital funding for tech companies grew by 240 percent overall between 2003 and 2013; during that time, a whopping 85 percent of the sector’s current companies and 86 percent of its current jobs were created. NYC’s comparative growth has been even more astounding. In terms of venture capital dollars invested, New York grew at a 13.3 percent annual rate over the course of the decade. Meanwhile, Silicon Valley grew at 6.4 percent; Massachusetts grew at -1.7 percent.

The study documents the power of successful startups that serve as hubs and propagators of the city’s evolving startup ecosystem. Three companies in particular have played crucial roles in its development: DoubleClick, the hugely influential Internet advertising company that Google purchased in 2008 for $3.1 billion; Buddy Media, the social media marketing platform that sold for $800 million in 2012; and advertising firm AppNexus, which currently has a valuation in the billions. Doubleclick has been particularly important to the ecosystem: Two of the founders of DoubleClick, Dwight Merriman and Kevin Ryan, have launched seven other companies, while a third, Kevin O’Connor, created his own venture capital fund. All told, Endeavor finds that DoubleClick employees have played a role in founding 26 follow-on startups, including Right Media, which was acquired by Yahoo! in 2007 for $850 million.

The report provides detailed maps of how the three top companies have spurred and influenced the creation of some 400 subsequent startups in the city. Check out the map of DoubleClick below.

(Endeavor)

Successful startups like these shape the evolution of the broader startup ecosystem by providing examples of what success looks like, but also directly infusing cash. They provide role models and a sense that “it can be done,” so others can emulate. They also provide a group of experienced people with the skills to build companies and mentor others. Not to mention, their economic success creates the funds required to invest in future business. The report notes that there were 27 “exits” for more than $500 million—either by IPO or merger and acquisition—over the past decade. More than 3,500 New York City tech angel investments have been made by more than 2,000 angels, including 860 city entrepreneurs themselves. And their impacts and effects radiate widely, as the report points out:

New York City is now home to several groups of founders and former employees – sometimes referred to as “mafias” – who have left a single successful company and founded many more. These mafias demonstrate that over time, the strongest companies have an impact that spills across an entire city, generating jobs, revenues and new companies.

Check out the graph below, which charts the remarkable growth across a network of “cumulative connections” among NYC startups over the past decade or so. These connections have jumped 46 fold in just 10 years, rising from fewer than 50 in 2003 to more than 2,000 by 2013.

(Endeavor)

The report also dispels several other well-entrenched myths about tech startups. The first: that startup founders are wunderkids straight out of The Social Network. As the chart below shows, the average age of New York City founders between 2003 and 2013 was 31, Endeavor finds. And while there are many who are 22 to 26 years old, there are roughly 500* or so between the ages of 32 to 42, and quite a few who are 43 and over. The predominant founder is not straight out of school, but someone who has had considerable industry experience and a network of connections they have developed over time.

(Endeavor)

The report also finds startup founders to be a mix of what they're terming “poets and quants.” As the chart below details, just slightly more than a third (35 percent) of NYC tech startup founders have science, technology, engineering or math (STEM) degrees. Two-thirds (65 percent) come from non-STEM fields, including economics, finance, political science, even philosophy. And of the 42 percent of founders who went to graduate school, two-thirds have degrees outside science and engineering, including business, law and other non-technical master’s degrees.

(Endeavor)

New York’s startup ecology reflects the city’s long-held reputation as a magnet for ambitious and people talented. More than eight in 10 founders went to high school someplace else, and a whopping 90 percent went to college in other places. Just 3.7 percent went to Columbia and 3.6 percent to NYU. Clearly, the city’s startup success is based on importing and attracting talent from across the United States and around the world.

***

Perhaps the report’s most provocative claim is that New York City provides a better model for other aspiring startups hubs than even Silicon Valley.  

New York City’s tech sector is a much better role model for other cities. The city’s tech sector has emerged in just two decades, with many of its new companies using infrastructure and industries like advertising media and fashion as platforms for growth. This approach allowed the city to set aside the unlikely chance that it will birth the next computer chip, and instead focus on making its media companies social and its advertising companies digital. By looking at its own strengths, New York City has overcome the constraints facing post-industrial cities worldwide to accumulate the talent and capital at the core of its thriving urban tech sector.

That New York is the most reproducible tech hub in the country is a bold claim on several levels. For one, New York is a unique place. It is one of the largest, most diverse, and arguably most economically powerful cities on the planet. Aside from perhaps London, it is hard to think of any other city with these kinds of assets. And of course, the Bay Area remains the world’s leading center for tech startups by a large margin, attracting roughly $13.5 billion dollars in venture funding, four times the level of New York. As AnnaLee Saxenian shows in her book Regional Advantage, the Bay Area's tech scene has managed to evolve, adapt and stay dominant over four or five decades, gaining considerable ground over its historic competitor: greater Boston and its surrounding Route 128 high tech suburbs. San Francisco’s urban neighborhoods have since become the region’s leading source of startups and venture capital investment, showing that the Bay Area can still adapt by embracing the urban environs that the new breed of tech entrepreneurs prefer.

New York’s rise as a startup center has been nothing short of astonishing—there’s much to learn from the city’s success. But its boosters would do well to remember that it’s still very much the new kid on the block compared to Silicon Valley.

*This article has been corrected to indicate that there are roughly 500 NYC tech founders between the ages of 32 to 42, not 50.

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