Why the heck are entrepreneurs wasting their time in New York?

That was the question that was floating through my head in early June, after I attended a panel focused on the differences between the New York and Silicon Valley startup ecosystems. I spoke to a partner at Bessemer (we’ll call him Bob) who was on the panel, and he succinctly summarized what I had understood was the message: if you’re an entrepreneur, you should only pick New York for personal reasons. Your chances of success, both in terms of growth and raising funding, are exponentially higher out West.

This was slightly painful to hear, because I’m someone who grew up in New York, who believes in the potential of the tech world here, and who interns at a VC firm in New York. There’s definitely something special here.  The same “thing” that makes NY the world’s capital for industries ranging from Fashion to Banking – that “thing” that leaves an indelible impression on those who are lucky enough to visit the concrete jungle, and who never forget it – that “thing” has to be relevant to startups.

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But the data was on Bob’s side. New York might be the fastest growing startup ecosystem, but that growth is totally irrelevant to an entrepreneur who needs funding now. And now, Silicon Valley’s Venture Capital activity absolutely dominates New York’s. Over the last 10 years, there have been 613 exits in the Bay Area, compared to 98 out of New York (assuming more than $500,000 of invested capital), according to CB Insights. That’s not even close. Since 2009, Silicon Valley VCs have pumped $128 billion into more than 12,000 deals, with an average deal size of $11.5 million and a median of $3.5 million. That’s a lot. NY’s got a small fraction of that: $23.9 billion invested in around 4,000 deals, with an average deal size of about $7 million and a median of $2 million. The Valley crushes New York, not only in volume (expected), but also in deal size.

In fact, even as other startup scenes (New York, Seattle, Boston) grow and mature, venture activity is actually becoming more concentrated out West. According to Professor Scott Shane, data from the NVCA from 2010-2015 shows that “from 2010 to 2014, 38% of deals and 43% of dollars went to businesses in the Valley.” That’s compared to only 23% and 28% in the late 1980s. And over that time, the VC industry in the U.S. has exploded – from 1985 to 2014, the number of active VC firms grew from 294 to 803, according to the data Shane cites. Now, in 2016, CB Insights puts 609 of those firms in the Valley area. The message is clear – if you’re looking to raise capital, your best chance is out West. It’s no surprise that AngelList counts 7,400 startups in Silicon Valley, and only 2,600 in New York.

But if there’s anything that the funding slowdown in Q1 2016 and the emergence of Indie.vc has reminded us, it’s that there’s more to a successful company than raising a lot of equity. And this is where New York comes in; while it might be harder to raise capital in the northeast, there are two key, undeniable benefits that entrepreneurs should consider before turning down New York: sales, and exits.

Sales

So you’re a hot new social app that just raised a larger-than-expected Series A. It’s time to start ramping up user acquisition and show that traction that you promised your Silicon Valley VCs. If this is your situation, then out West is the place for you. It’s home to all of the best social networks and tech companies. You want corporate partnerships? You got ‘em. Digital Marketers and Growth Hackers? They’re there. Business Development? Easy. The Silicon Valley talent pool for tech is second to none. To put some data to the narrative: According to Craig David, Silicon Valley employed more than 300,000 people in the tech sector in 2014. New York only employed 115,000. But the key statistic is, what part of the total employment in the city is comprised of tech? In the Valley it’s more than 25%, while in NY it’s barely 3%. In other words, 97% of people who work in NY don’t work in tech – but even though that makes it much, much harder to find talent, it’s also a strategic benefit.

The pitch for sales in NY is simple: If you’re a startup trying to sell in the fashion, fintech, real estate, publishing, or retail spaces, New York is absolutely second to none. New York is the center of innovation for these industries; it’s where the biggest fish swim. It’s where you can network, meet, and talk to the executives you want. The value of being within a subway ride of JP Morgan’s headquarters, for a fintech example, is invaluable. Take it from Fayez Mohamood, CEO of Bluecore, who was interviewed by The Observer about sales to big clients in NY: “When it comes to getting to meet them, getting face time and understanding their pinpoints, this is the best place to be.” Another CEO told the paper that NY is “the center of the universe for advertising, finance, and e-commerce. Everything we need is here.” And in enterprise sales and partnerships, the value of actual in-person time cannot be understated. In a TechCrunch interview, a New York startup CEO conveyed the argument succinctly: “We beat competitors every day because we’re in the room while they’re on WebEx.”

To summarize in one line: In NY, you’ll have a much easier time selling to big name clients in powerful industries than you would in the Bay Area. And these kinds of partnerships and big sales leads are invaluable to companies. When you’re showing traction to a VC, having a big name client that evokes the image of the bustling, powerful New York scene can often be the difference.

Exits

Everyone knows that NY is the world’s industry center. It’s not hard to accept that it’s a key advantage to be there if you want to secure big ticket clients and partnerships. But the second advantage of NY is much stealthier, and it has everything to do with the difference in VC culture between NY and the Valley: exits. In short, NY companies on average exit at higher multiples than equivalent companies out West.

First, some background. As part of a mentorship program for a student organization I’m part of, last year I met with an analyst at Insight Venture Partners (we’ll call him Rob) for what would be my first talk with a venture/private equity professional (first of many, many talks). We got into Insight’s investment philosophy, and he drew a stark contrast between how Silicon Valley VCs do things and how New York VCs do things. Out West, investment is all about vision, passion, and growth. It’s about whether this will be the next company to change the world and to make your life fundamentally different. It’s about the next Facebook, the next Google. Capital is spent much more loosely, and that’s why the valuations are so much higher. The picture becomes clear when considering how things are done on the East Coast.

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New York Venture Capital, in Rob’s vision, is practical, conservative, and realistic, words that aren’t often attached to VC firms at all. In New York, we care about making money: how we’ll exit the business, what the price is, and what the follow-on landscape will look like. We’re much more down to earth than our colleagues out West. And this is something I’ve already begun to see in my short time at the VC firm I’m interning at. We’ve turned down multiple deals that we thought would grow into nice-sized companies because we thought the price was too high, or there was no potential for a realistic exit. It’s not that VCs out West don’t operate this way – of course these things matter to them. But perhaps they’re secondary.

Rob was convinced that the New York way is the better way, moral questions about the purpose of investing aside. And the exit data backs him up: Pitchbook’s analysis shows that New York companies exit at higher multiples on average than their comrades in the Valley. Over the past 10 years, 77% of exits for venture-backed companies in New York took place at a 3x-10x multiple, while only 72% of the startups in the Bay Area did so. New York doesn’t have the highest percentage of large multiple exits (that honor belongs to Chicago, at 81%), but it has a higher percentage than the Bay Area. And lest you think that a 5% difference isn’t significant enough, recall that since 2009, Bay Area VC firms have invested roughly $128 billion in 12,000 deals. Let’s assume that only ⅙ of those deals are for unique companies (i.e. not follow-ons); that puts the total new funding at around $21.3 billion for 2,000 startups, or about $10.7 million invested per startup. Conservatively putting all non-3x-10x exits at 2x, and all 3x-10x exits at 5x, a 5% jump in the number of 3x-10x exits for Silicon Valley companies would translate to an extra $3.2 billion in exit value over that period. If you move the average 3x-10x multiple to 7x, that almost doubles.

So if you’re an entrepreneur looking to start in New York, this is good. Chances are you’ll be able to sell a successful business at a higher multiple than you could out West.

Different cities should foster different ecosystems

So what do we have so far? Finding talent and VC money is much easier out West. Selling in key industries and exiting at bigger multiples is easier in New York. Where does that leave you, the entrepreneur?

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I think the answer is simple, but also profound. The different natures of the New York and Bay Area locales should create different types of startup ecosystems. Purely tech startups that need only developers and users, and that might be more capital intensive, should live out West. Startups that are sales focused in the fintech, fashion, healthcare, or real estate verticals, where business may be less focused on user acquisition and more on large partnerships and sales, should live out East. This is a vision for a specialized startup world – one where diversity, as always, is important, but one where the types of startups on both coasts differ greatly. Imagine a world where if you’re a company of type x, then you obviously choose to set up shop in city x, because that’s where your best chance for success is. Cities in the U.S. each have unique offerings that are relevant to particular types of businesses; it’s about time they start getting paired efficiently.

Justin Gage is a rising Junior at NYU’s Stern School of Business, where he’s majoring in Finance and Data Science. He’s the National Director of Consulting for TAMID Group, a student organization on 30 college campuses that develops student business skills through hands-on interaction with the Israeli economy. This summer, he’s working at Cornerstone Venture Partners, an early stage VC firm that invests in software companies, with sights on VC right after college (even if all the VCs he speaks to tell him it’s impossible). He loves fashion, design, and all things tech.