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Summary:

New York is the capital of media, advertising, and finance, but historically Silicon Valley and Boston have overshadowed New York’s efforts to encourage and fund technology entrepreneurs. In the past two years, this has changed, especially when it comes to media-related ventures.

New York is the capital of media, advertising, and finance, but historically Silicon Valley and Boston have overshadowed the city’s efforts to encourage and fund technology entrepreneurs.  In the past two years, however, that’s changed — big time — especially when it comes to media-related ventures.

Since early 2008, at least several dozen web-based startups have made New York a hub of web innovation.  Startups like Boxee, Bit.ly, Foursquare, Daylife and numerous others have established New York City’s prominence as a nurturing environment for early-stage activity. Some seek to solve problems that are unique to an urban environment (Foursquare), or provide solutions that accelerate the disruption of incumbent New York media, including ad optimization (Quattro, Quantcast, Tremor Media. Others are participating in general startup trends, such as location-based activity (Outside.in, HotList), while still others are exploring entirely new forms of content and navigation (Boxee, Worldwide Biggies, Next New Networks, Someecards).

Why is the renewed activity in New York different from the last boom, of 2000-02?  Several things have converged to suggest that New York is becoming a larger — and more permanent — center of web innovation and entrepreneurship. The talent pool of software engineers, designers, and programmers has expanded significantly in Lower Manhattan and Brooklyn, a clustering of human capital that provides a pool of employees to staff startups. Meanwhile, opportunities for innovation in New York have surged as well. Disruption in the cable, television, newspaper, book, advertising, magazine, ad agency, ad network, music and finance industries accelerated during the 2008-09 economic collapse.  And web entrepreneurs are building products and services that provide consumers with better, faster, more convenient solutions than existing one, notably those provided by declining traditional media.

The scale of such an opportunity is defined by the revenue at risk.  Traditional media’s $100 billion-plus in annual revenue is vulnerable to smart web solutions, and the next several years will see a continuation of that shift.  For example, download sales of music, which began ramping up in 2003 and represented 40 percent of U.S. recorded music sales in 2009, are expected to account for 80 percent of such sales by 2014.

To be sure, there are startups in Los Angeles and Silicon Valley that see similar opportunities.  But the exodus of employees from the traditional media businesses in New York has provided a cadre of smart, experienced old media talent — which when combined with smart, new media engineering talent, is catalyzing business opportunities. And there is a growing community of successful serial entrepreneurs — among them Kevin Ryan, David Morgan, Chris Dixon, John Borthwick and David Rosenblatt — to provide the angel funds and mentoring that is so critical to creating a sustainable startup economy.

(Related GigaOM Pro Research: Developers, Meet Your Hungry New Market: The News)

Supply vs. Demand for New York-based Venture Capital

San Francisco-based angel investor Ron Conway allocated one-third of his 2009 investment funds to New York-area startups, centered primarily around urban social networking, real-time web services and content navigation.  Meanwhile Betaworks, a New York-based firm (for which I am an adviser) that combines techniques from seed-stage venture investing and agile software development, has invested in and nurtured a dozen New York-based startups — including URL-shortener Bit.ly — since launching some 18 months ago.

New York has fewer than 10 venture capital firms focused on the convergence of media and technology.  The best known, Union Square Venture Capital, has a policy to largely limit its investments to New York-area firms so that it can remain close to management and help guide each investment’s direction.  The other notable media-focused New York-based funds include RRE, Betaworks, Founder Collective (recently closed a $25 million fund), Greycroft (currently raising a new $125 million fund), Venrock, Bessemer, and Insight Venture Partners. Coming in from Philadelphia or Boston are First Round, ETF, Polaris, Spark and General Catalyst. First Round recently hired a New York partner to represent its interests in the city, and Polaris opened a seed camp in lower Manhattan.

The number of media-related startups have also increased in San Francisco and Boston since 2008. Indeed, New York’s emergence as a center of startup activity is not at the expense of activity in those two cities; rather, it reflects a change in business opportunities in New York, often unique to a dense urban environment, and in the maturity of web innovation generally.

Fertile Ground

Media-focused venture startups in New York attack the periphery of the incumbent media businesses with disruptive ideas often formed by executives formerly employed in those businesses, targeting innovation around their products and services. Or they fulfill consumer needs with new, web-unique products and services. Much of the media-centric innovation has focused on marketing/advertising platforms, publishing platforms and services, social networking among consumers and navigation/access to content. Examples include:

Marketing/Advertising Platforms: Tacoda (provider of ad-targeting services), Quattro (mobile ad network), Targetspot (Internet radio ad network), Scanscout (video ad network); Tremor Media (video ad network), BBE (video ad network), Oddcast (user-personalized viral marketing) and Simulmedia (improving effectiveness of TV promotions).

Online Publishing Platforms/Services/Brands: Daylife (publishing of contextually driven content matches), Associated Content (content selection based on search topic popularity, based in NY and Denver), Daily Beast (celebrity news), Huffington Post (news etc., based in NY and LA) and College Humor (comedy).

Social Networking Platforms/Services: Bit.ly (URL-shortener), Outside.in (hyperlocal information), Foursquare (location-based social networking) Tumblr (microblogging), Hot Potato (entertainment) and Meetup (facilitates local groups).

Content Navigation: Boxee (media organizer application), Adaptive Blue (socially-oriented content recommendations), Feedtrace (content popularity exposed with real-time web tools) and Fanfeedr (real-time sports data).

Talent Pool

Two things have broadened the talent pool of web-savvy entrepreneurs in New York in the past three years. First, software design advances and innovation in programming languages have made available user-friendly web authoring software tools, so that creative talent can code successfully without needing to know more complex scripting. This has broadened the field of startup talent beyond hardcore computer science engineers and allowed for more diverse backgrounds in business, design, marketing and conventional media.

Second, the pool of software engineering talent in New York has expanded.  Google’s New York headquarters employs more than 2,000 people on West 14th Street, and AOL’s employs about a quarter of that number on Union Square. NYU’s Tisch School of Interactive Telecommunications has seeded New York startups with design, engineering and computer science talent, and programming talent has come over from Wall Street.

Clustering

Silicon Valley and Israel emerged as centers of early-stage entrepreneurship in part due to an effect called “clustering,” in which a density of collaborative thinking reinforced willingness to take risks, provided an iterative refinement of ideas and catalyzed innovation.

Three centers of web innovation have since emerged in New York as we: Lower Manhattan is home to two centers, and Brooklyn to one.  An area bounded by the Flatiron building to the east and the Meat Packing district to the west benefits from relatively low rents, the presence of repurposed warehouses and Google, and includes Betaworks, Union Square Venture Capitol, Pinch Media, Medianet, Quantcast and many others.

The lower Broadway corridor, which runs from Union Square to Canal Street, and east to Hudson Square, also has seen a large influx of startups whose 10-40 employee staffs are ideal for the smaller footprint lofts and warehouses in the area, which includes AOL’s New York headquarters. Located here are NYU’s Tisch School of Interactive Telecommunications, Daylife, Quattro, Lime Wire, Open Road and others. And Brooklyn’s Williamsburg and Dumbo sections also are home to many startups (Boxee, Outside.in, Drop.io, and others).

The concentration of activity in a dense urban environment has facilitated networking, community, idea exchange and casual interaction. For example, NY Video, an ad-hoc organization of 3,000 New York-based web video professionals, meets monthly to showcase and discuss emerging trends in the industry.  Each month local startups, content producers and media companies demo their latest products in front of 400 or so peers.

Opportunities and Exits

Some larger macro trends have also helped inject life in NYC’s startup scene. Capital requirements and risk, formerly barriers to digital media startups, have been reduced.  Talented entrepreneurs now have access to open-source platforms, outsourced software engineering, and sharply reduced costs for bandwidth and infrastructure. Innovative web products and services require relatively small amounts of capital investment to reach business proof points.

In the near term, the exit market will consist of mergers with other early-stage companies, or sale to larger media companies, many of which are headquartered in New York.  IPO exits will also be available when that market returns. Because New York web startups often target the vulnerabilities of large media companies, they often find themselves being acquired by their predecessors. Acquirers of web media startups are also often customers/clients/partners with which the startup has an established commercial relationship.

Between 2007 and 2009, the combined industries of television, radio, book and magazine publishing; cable; commerce; recorded music; advertising agencies and general media spent over $3 billion to acquire more than 50 early- and middle-stage companies. Acquirers included CBS (5), IAC (4), News Corp (7+), Hearst (5+), Comcast  (6), NBC (4+), Viacom (2), Publicis (1), WPP (4) and Walt Disney (10).  A second tier of media companies in the New York area, while less visible than the major corporations, has also been actively pursuing acquisitions.  Acceleration of the disruption of existing media’s more than $100 billion in revenue is likely to support a robust exit market in the next 3-5 years.  Obviously, New York companies buy innovative startups regardless of location, and attractive New York startups will be targets for any acquirer.  But the density of activity in New York provides important real-time intelligence to potential buyers.

The Bottom Line

New York venture activity will be an important and permanent part of the rapid evolution of the U.S. media landscape.  Venture capital funds in Silicon Valley, Boston, and elsewhere that want to be in the New York venture deal flow, and to closely manage their New York assets, should consider establishing a New York presence.

Paul Vidich, an adviser at Betaworks, also sits on the boards of ScanScount, MediaNet, and ReverbNation.

Image courtesy of Flickr user berk2804

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  1. In regards to the pool of talent that downturn of wall street has also caused many people to rethink the glory of the finance business and look at alternative opportunities, such as entrepreneurship.

    I would say about half of the NY companies we see have at least one founder with wall street experience, looking to make the move.

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