Why NYC startups are winning the engagement race, and other Silicon Alley trends to watch

Hadley Harris is a general partner at ENIAC Ventures and Chief Business Development Officer at Thumb.

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As a NYC based investor, it’s been pretty incredible to watch New York’s startup scene grow into a dynamic tech playground over the past few years. Even though Silicon Valley will continue to be the start up mecca for years to come, VCs, large tech companies and the technology press have recognized New York’s blossoming tech scene and quickly scrambled to get feet on the street. In fact, there has been so much action lately that the New York City Mayor’s Office created the Made in NY Map to showcase the growing tech community.

Based on investments alone, New York has seen a growth of 32 percent in VC deals from 2007 to 2011. New York’s tech scene has skyrocketed in the past 5 years, with tech related jobs increasing 28.7 percent since 2007. Tech publications have followed startups and investors in suit; VentureBeat opened its New York office in October and TechCrunch opened up NYC office hours last May as the startup scene continued to flourish.

As New York continues to carve out its place in the startup world, it’s interesting to take a look at how it has distinguished itself from Silicon Valley — its challenges and advantages, and how its companies differ from those of West Coast origin.

Funding is one area with significant differences. The ratio of investors to startups in New York’s ecosystem is relatively skewed, which brings about some limitations. While seed stage investment has grown over the last few years, there are still not enough mid-stage venture investors to fund NYC’s tech startups. From Q2 2011 to Q2 2012, the percentage of NY seed stage investments increased from 25 percent to 31 percent. In contrast, Series B investments shrunk from 25% to a mere 14%. New York startups grabbed $2.8 billion in funding last year, but this pales in comparison to the over 1,200 SV companies that raked in $12 billion.

As an active investor on both coasts, I’ve seen this imbalance play out in the valuations that startups garner from investors.  I’d estimate that the same company would get about a 25 percent higher valuation if it is based in the Bay Area as opposed to NYC. As the next wave of successful seed stage companies progress to raising series A and B rounds, look for more mid stage investment activity in NYC.  We’ve already seen investors such as Accel, First Round, NEA, Matrix and Bain Capital Ventures open offices here to address the city’s growing venture market.  As New York’s startup battlefield continues to grow, I expect to see even more investors and companies gravitate towards NYC.

Silicon Alley’s expansion is also rooted in certain characteristics particular to New York. As a long-established center of industries such as finance, fashion, advertising and media, New York has amassed a large pool of extremely talented people from those industries. While the Bay Area also has a high concentration of talent, New York’s broader talent mix has given those companies a particular edge and core philosophies. This is one of the main reasons why large West Coast tech companies such as Google, Twitter and Facebook have opened significant offices here — to take advantage of this talent pool.

It’s also the melding of these industries with technology that makes the NYC tech scene special.  Take fashion and commerce startups such as Gilt, Etsy, Warby Parker and Birchbox, or adtech companies such as TapAd, LocalResponse, OnSwipe andAppNexus. Fashion and advertising have long been booming in New York, but in the past few years they have branched into the tech space, creating several successful companies at those industry intersections. As startups arise in New York, many of those brilliant people are joining emerging companies and strengthening them with influence from these creative industries.

A third difference between companies sprouting out of New York and those from the Valley is in the focus on growth over engagement, especially in social startups. Silicon Valley-based companies are often more concerned with quickly scaling huge user bases rather than staying true to the company’s core values and building a real business. For example, in 2012, Bay Area social companies such as Socialcam, Zynga and Google with Google+ have touted huge user bases, but haven’t been able to back metrics like users or views up with anything that resembles strong engagement.

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There is a trend amongst Silicon Valley companies of stopping at nothing to grow user numbers, which isn’t always best for the company. In New York however, we’ve watched companies such as Thumb and Tumblr rock the engagement charts. Thumb has amassed a loyal and engaged following, with users spending over 5 hours per month sharing and requesting opinions, while Tumblr users spend an average of 89 minutes on the service’s website each month. This number might be lower than Thumbs, but it is still significant considering that Thumb is second only to Facebook in terms of monthly user engagement per monthly average user.

Much of this success can be attributed to these companies staying laser-focused on their missions – focusing on engagement with an eye towards monetization. Even Silicon Valley-based investors are starting to take notice — recently, Andreessen Horowitz came out against so-called “bullshit metrics” such as page views, and emphasized the importance of user engagement instead. With companies in NYC leading this movement, it will be interesting to watch as Silicon Alley continues to rise in the ranks in 2013. As we move into the new year, I think it’s a safe bet that startups in Silicon Valley will take a cue from NYC and start to focus more on engagement and building a brand that resonates with its users, over strictly honing in on user numbers.

Hadley Harris, a Founding General Partner at ENIAC Ventures, has been actively working at the intersection of business and technology for more than 13 years. He is a noted expert in user acquisition, monetization and seed stage investing. In addition to serving as General Partner at ENIAC, Hadley is the Chief Business Development Officer at Thumb.

Photo: Devindra Hardawar/VentureBeat

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