Venture Capital and NYC

The tagline of this blog is “musings of a VC in NYC”.

In my first post, I wrote:

I am a VC. Have been for 17 years. I help people start and build technology companies. I do it in NYC, which isn’t the easiest place to build technology companies, but its getting better. I love my work.

So its pretty clear that my work and where I do it are pretty entwined in my mind.

Yesterday, I was one of about 40 VCs who came to a breakfast hosted by Andy Alper, head of the NYC Economic Development Corporation, and Henry Kravis, who in addition to being one of the founding partners of KKR is also the Chairman of the Partnership for New York City and the New York City Investment Fund.

The idea behind the breakfast was to get out the word that NYC is a great place to start companies and that more money needs to be invested into the companies that get started in NY. Henry got the ball rolling with some nice remarks and then turned it over to Andy who made the case with a fine speech.

I am all for more venture capital in NYC. I’ve made a bunch of investments in this city and the firms I’ve been involved with over the years have made many more. It’s a fine place to start a company and grow a company. There are certain kinds of companies that its very hard to start and grow here, like semiconductor and hardware businesses, but I don’t generally invest in those kinds of businesses anyway. In fact, the NY tri-state area has produced better returns for me over the years than any other location in the country. I am not saying that it would do that for everyone, but it’s done that for me.

Andy and Henry’s main beef was the fact that NYC is home to a larger amount of venture capital funds (as a percentage of total venture dollars under management) than venture funded companies (as a percentage of all venture funded companies). To put it more simply, the guys in NYC with the money aren’t investing it in NYC. To further drive it home, Andy pointed out that 80% of the venture money that comes into NYC companies is from firms that operate outside of NYC.

Those are damning figures. But they are misleading for several reasons. First, there are many large private equity firms who are headquartered in NYC but have offices all over the country (and world). Firms like JP Morgan Partners, Warburg Pincus, Morgan Stanley, and even pure venture firms like Venrock, are headquartered in NYC (and thus are listed as NYC firms) but do most of their venture capital activity through offices and people spread around the country and world. It’s no surprise that the money listed as “managed in NYC” isn’t all being invested in NYC.

Second, and probably more importantly, NY has never been an easy place to do early stage investing. See my quote above. I know, I’ve been doing it for 18 years now. The venture business has mostly been about finding and investing in the commercialization of science into revolutionary new products. And that activity has been centered in Silicon Valley and Boston for the past 30 years. Even if there were some of these “core tech” companies here in NYC, the VCs tend to be where the majority of the action is, particularly the early stage VCs.

That started to change in the mid-90s. First, technology VC is moving from turning science into products (core tech investing) to turning technology into businesses (applied tech investing). That’s a trend that started 10 years ago but is now gaining steam across the technology and venture capital industries. In the emerging new world of technology, being located in Silicon Valley and Boston is less of an advantage and we are seeing more early stage venture capitalists locating themselves in places like NYC, Washington DC, Atlanta, Chicago, Denver, Seattle, and a host of other business centers that have not been on the venture capital map until recently.

The other change is that we have a pretty strong early stage venture community developing in NYC. There were 40 VCs in the room yesterday. 10 years ago, it would have been half that number or less. These firms are all small by Boston and Silicon Valley standards and don’t have the brands and track records that the older firms do. But many of them do good work and will grow and develop into firms that can stand toe to toe with the older established players.

So, my comments to Andy and Henry as I was leaving were “thanks for putting this together” because we need all the community building we can get, and “be patient, it takes time” because its not going to happen overnight.