But as a first-time founder trying to raise capital and achieve product-market fit, the question for me is not “Is NYC hot?” or even “Is NYC becoming a better startup hub?” so much as it is “Is NYC the best place to locate my startup?” And on that question, I’m not sure the answer is yes.
See, here’s the thing: As far as I can tell, startups face two main environmental challenges:
1) Raising Capital
2) Finding Talent
Here’s how NYC scores on this…
In reality, the capital markets in NYC are flooded with Wall Streeters turned venture capitalists. These are people who know how to analyse and pick in assets, not people who know how to build companies. These are people who do dumb shit like ask about pricing for a premium version of a genuinely novel product (in a category with no existing market) that hasn’t even launched yet…in the first meeting. #VCFAIL (Ok, there’s some exceptions, but not tons…)
And in this environment, the entrepreneur-investors stand out in sharp contrast to the platoons of walking checkbook geniuses that roam Manhattan. Yet the founder types are few and far between.
So what does this mean for the Founder/CEO trying to raise money in NYC? Well, from what I can tell, a few things…
a) Weak Angel Network
Good luck finding angels in NYC who understand early-stage tech investing. Technically, they’re out there…somewhere. But they’re fucking hard to find.
And let’s get real: Smart founders want angels, not VC’s! Angels are the ones who invest at the earliest, most risky stage. They’re the startup equivalent of breast milk. And NYC has a big fat shortage. (e.x. “NY Angels” is one of those pay-to-pitch schemes that Jason Calacanis is crusading against)
b) Only a few bullets
A corollary to the weakness of NYC’s angel network: There’s only a handful of top-tier folks in the neighbourhood and if you don’t get one of them excited, you’re SOL. This means you better wow ’em right out the gates. No learning on the job.
c) Harder to create competition around a deal***
As my peeps at Venture Hacks have so adamantly advised: Founders should ALWAYS try to create competition around a deal. The more competitors in a market, the easier it is to get the swarm mentality going. And of course, the converse is true as well: the smaller the number of players, the lower your chances of getting someone excited and tripping off the investor feeding frenzy.
This is especially true at the seed and angel stage, which remain stubbornly local as far as capital markets go.
Think of it like going to a party: the more women at the party, the more likely one of them likes you, the more likely it is you get laid. Lesson: Go to parties with more women…err, VCs.
d) Lower valuations
The logical outcome of this dynamic: lower valuations and shittier deal terms. Now, to be clear, I’M NOT SPEAKING FROM EXPERIENCE at this point. But it makes sense: If you’re a young startup with an unproven team targeting a big market, the good investors are investing as much in you as they are in the product/market/idea. If you have fewer sources of capital investing in this type of good (because so few of them made their money in tech, where this is normal), a simple economics model will tell you that the cost of capital will rise––ie lower valuations and shittier terms.
e) Slower deal cycles
So…if it’s harder to raise angel money and create competition around a sale of your startup’s equity (ie a “deal”), then it’s probably gonna take more time to raise money.
f) Competitive disadvantage
In startups and war, SPEED KILLS. And let’s get real: Raising money is a gigantic waste of fucking time. Each minute you spend hobnobbing with and strategising RE: investors is a minute you don’t spend on product or customer development. This is why at SpeakerText we’ve developed a hierarchy regarding our priorities as a company (actually, we just ripped it off from Johnson & Johnson): Customers > Employees > Society > Investors.
Essentially, raising capital is a gigantic-if-necessary waste of time. Having to spend more time on this task puts you at a strategic disadvantage versus your competition.
Good: NYC has gobs of technical talent from amazing schools. Many now unemployed.
Bad: NYC has gobs of technical talent from amazing schools that are used to being paid inordinately high wages and don’t value stock options.
a) Wall Street has been a huge talent suck for a long time.
If you’re a hotshot software engineer, the default dream varies depending where you go to college:
-West Coast: Work for Google.
-East Coast: Work for Lehman.
So what’s the problem? Google’s a lot more entrepreneurial, gobbles up and spits out a lot more founders than our dearest Goldman Sachs (birthplace of the CDS). The mythology is all wrong.
b) Wall Street Quants make A LOT of money.
This is a problem because founders make barely earn a living wage before they exit. While it might average out better in the end for startup Founders, the delta in wages is pretty hard to stomach. It requires a fundamental change in lifestyle for people of who take the leap. This is especially hard when there’s not a mythology of garage-to-riches built up in the engineers’ minds.
c) Silicon Valley has a bunch of Googlers who got rich from stock options. New York, not so much.
It’s about the existence of a mythology. In the Valley, there are lots of engineers who just do startups. They get it. They understand it. The huge payoff down the road is a very real prospect. It’s their thing.
While there are definitely engineers in NYC who are into the whole startup mythology, they tend to be outliers as opposed to the mainstream.
d) specialised technical talent is harder to find in NYC than the Valley (or Boston).
I hate Boston. Would never live there. So ignoring that city, where are you going to find, oh, let’s say Speech Engineers? Theoretically, you can find stragglers from the old Bell Labs days in New Jersey. But they’re not exactly easy to find. On the other hand, the Valley is teeming with peeps with specialised skill sets and advanced degrees who WANT to work for startups. So if you’re shoping for talent (as we are), it seems––yet again––that the Valley is a better place to shop.
New York is great if you’re Chris Dixon or Dennis Crowley or anyone else who’s already built a successful company and had a real exit under their belt. These people have their own angel and seed capital networks that transcend locality. And since they have no problem raising capital, they have no problem attracting top tier talent. Realistically, the amount of resources they have access to means they could be in any minor startub hub and make it work.
But if you’re a schmoe like me and you’ve got a big, world-changing dream, NYC is not the best place for you. The odds are already stacked against you. Being outside the Valley just stacks them higher.
Ok, so I don’t know if this conclusion is actually true, so I’m heading out the California on Monday to test it. Honestly, I hope I’m wrong, because I hate driving, hate the suburbs, and love urban living, but we’ll see.