Silicon Alley

Why New York tech is still lagging

August 26, 2013: 5:00 AM ET

Tech is big in New York -- but the alley still ain't the valley. Here's our annual report card.

New York City Skyline At NightFORTUNE -- Last May when Yahoo (YHOO) CEO Marissa Mayer paid $1.1 billion in cash to buy Tumblr, New York techies cheered. Finally! A New York startup exits for more than a billion dollars! This hasn't happened since Doubleclick sold to Google in 2007. And it is one of the signs people look for in determining whether the tech scene is robust enough to rival Silicon Valley.

At least once a year, a New York journalist -- often someone at Fortune -- writes a story claiming that Silicon Alley has come of age and can finally compete with Silicon Valley. (It should be noted: I've never read a "Can Silicon Valley keep up with NY?" story.) Every year, New York's tech scene is hotter. It's been a decade since Google opened its New York offices across the street from Chelsea Market, and the company now houses 10% of its staff here including 1,500 engineers. Cornell NYC Tech's first group of students -- a seven-member "beta" class -- started their studies last January at the program's temporary offices -- in the Google (GOOG) building. And a growing crop of tech startups from Etsy and ZocDoc to Fab are finding there is enough talent, space, and local government support to stay in New York even as they grow.

But the New York tech scene still lacks some of the most crucial elements of a mature ecosystem. Exactly a year ago, I outlined the three factors holding New York back. Herewith, I offer a report card on our progress:

1. Money. Investors put $1.7 billion into NYC startups in 2012, a jump of 54% from five years ago, according to the MoneyTree report produced by PwC and the National Venture Capital Association. But most of that money still comes from the West Coast. New York City has a number of angel and early stage investors, but few larger tech funds.

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Thrillist CEO Ben Lerer, who flew to the Bay Area to raise $13 million last year for his dude media empire last year, says things have gotten a little better. Later-stage investment is still lacking in New York, he says, but there's more money for A rounds. Lerer, who is also an investor with seed stage venture fund Lerer Ventures, explains: "A few funds that built their brands on seed stage deals have raised larger funds now so they've shifted their dollars a little later-stage to put more money to work."

2. People. Most New York tech executives and investors still say New York needs more talent, but then, there's a talent shortage everywhere. What's clear is that the engineering investments Google, Facebook (FB), and other large tech companies have made in New York are paying off. A vibrant and growing community of developers is emerging. As important now, says Betaworks CEO John Borthwick, is "experienced people who can scale businesses."

Birchbox CEO Katia Beauchamp says recruiting is getting easier this year. Partly that's because her sample subscription service is becoming more established, but she also credits the evolution of the ecosystem of engineers in the city. And she highlights the positive aspects of operating within a smaller ecosystem. "You actually run into people and develop relationships," she says. "It feels like an intimate community."

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Meanwhile, New York's original tech heavyweight, Kevin Ryan, has been very involved in hiring for software company 10gen. He and cofounders Dwight Merriman and Eliot Horowitz invite candidates to work from either the New York or the Palo Alto office. In the last year, he says, more new hires have chosen to work from New York than San Francisco. Office space is cheaper, too, at the moment. In downtown Palo Alto, the company pays $75 per square foot; in Times Square, it's $60 per square foot.

3. Exits. Tumblr is the main event in New York this year. But it's not the only massive exit. Earlier this summer, 3-D printing company Stratasys (SSYS) purchased the Brooklyn-based 3-D desktop printing company Makerbot in a $403 million stock deal. And in May, Priceline (PCLN) completed its $1.8 billion dollar acquisition of the Norwalk, Conn.-based online travel booking company Kayak. (Norwalk, for all you skeptics with a narrow definition of NYC, is about an hour's drive from Manhattan -- roughly the same as the distance between San Francisco and Cupertino, Calif.)

Ken Lerer, another New York tech stalwart (and father of Ben), says the momentum is gaining. "I assume a very active next six months continuing into next year," he says. "It's like an epidemic -- once you get to a certain place it has a momentum of itself."

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The next year promises to be significant for the New York City tech community. One of tech's most powerful advocates, New York City Mayor Michael Bloomberg, will step down this fall after his third term, and a new mayor will be elected. Cornell NYC Tech will graduate its first class. Any of a dozen private tech companies may move closer to an initial public offering.

Could this be the year that the city births a tech giant of its own with the acquisitive power and the sheer ambition of Google? That will be the event that will finally merit Silicon Alley's comparisons to the valley.

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