NYC tech catching up to Silicon Valley, while Seattle flails. Here’s why.

The startup world is an interesting place. As cities around the US work to establish their own Silicon XYZ, the variables required to build a vibrant ecosystem are constantly under debate. I recently had conversations with two NYC-based tech people that caused me to reconsider one of the accepted rules of how startup ecosystems develop and thrive.

A bit of background on US startup ecosystems

Some fun stats to get started. First, according to the Global Startup Ecosystem Report from Compass, the top ten US startup cities last year were:

  1. Silicon Valley
  2. New York
  3. Los Angeles
  4. Boston
  5. Chicago
  6. Seattle
  7. Austin
  8. Atlanta
  9. Denver / Boulder
  10. Philadelphia

Unsurprisingly (despite all recent kerfuffle and cries of ‘the SV sky is falling), we have Silicon Valley at the top of the list. Over the past two years, the SV ecosystem has captured nearly 50% of the value of all startup exits within the top 20 startup ecosystems globally — as much as every other ecosystem combined.

As for New York, it’s doing well — really well. Previously in 5th place, it’s now recognized as the second most successful startup ecosystem in the US. It’s an impressive jump, considering it’s now ranked higher than historically strong Boston and Seattle.

One thing to note — NYC has a smaller number of late-stage startups and mature tech companies with hundreds of employees. It’s a potential reason why NYC’s big success stories (like Etsy or Shutterstock, each with a market cap just below $2 billion) are lagging behind the success stories of Boston, Chicago, Seattle, and L.A.

So… how has NYC been able to push ahead? And what counter-intuitive events have potentially been missed when we think about the bits required to build a strong startup ecosystem?

Winners cycling back in

I chatted with Peter Boyce recently about the rise of the east coast startup ecosystem. For context, Peter is currently at General Catalyst Partners. With $3.6B under management, the 16-year old firm is headquartered just outside of NYC in Cambridge. Peter previously co-founded Rough Draft Ventures, Harvard College Venture Partners, and HackHarvard. He has also spent some time at New York-based startups, including Skillshare and co-founded a finance-focused startup. He knows the NYC and east coast venture and startup ecosystem well, from both sides of the table.

In our podcast interview, Peter notes that there’s an impressive new cohort of startups on the east coast. They’re building their companies in a slightly different, NYC-first kind of way:

“I think we’ve been lucky to see, within our own portfolio at General Catalyst, the role that Oscar Health, Warby Parker, and our portfolio company, Cadre, which is a B2B marketplace for commercial real estate … These are three companies that are building new startup-enabled and technology-empowered companies embedded in the same ecosystem where a lot of those leading companies are. I think that’s a really refreshing, interesting opportunity for the style of company that can be built here in New York.”
Peter Boyce

I’ve chatted with several other east coast founders about how the east coast is still developing the same ‘pay it forward’ culture and norms that pervade the valley and lend to its success. Meaning, you need people locally who’ve had relevant experiences they can share as the next generation of people build companies. People often frame this dynamic as successful founders, shepherding the younger, less experienced founders through the ups and downs of building a company. You need people at the top to create this chain of information and trust.

Peter brought up another important characteristic of a successful startup ecosystem. There needs to be people in the ecosystem who’ve had an exit and can participate and support the new companies financially.

“That is the part that’s changing now. We have companies that were started five or seven years ago that were successful and they were either acquired or some other kind of transaction, but they created a new cohort of interesting, young person that can be an angel investor, can be a founder again. I’m really encouraged by that.
We need more of it. I’d say one of the things that San Francisco has is decades of this legacy. I think New York and Boston are accelerating in a lot of this with the all the work that’s been built up there in the past, call it five years. Let’s call it five to seven years. I think that’s a part of it.”

But as Peter mentions, this is all just getting started. NYC hasn’t really had that big push of people out into the ecosystem. There’s only been a handful of IPOs or major exits — in 2015, the only tech IPO that happened in the city was Etsy (granted, it was also the worst year for tech IPOs since 2009). There’s talk of Buzzfeed, DigitalOcean, SquareSpace, Warby Parker, and a handful of other NYC-based tech companies going public sometime this year.

What else has been happening in NYC that’s caused the ecosystem to become such a strong contender? A place where now (versus a few short years ago) startups don’t even have to make the journey across the country to get funding or hire, and can build their HQ right in NYC?

The power of failure

I recently spoke with Catherine Pao too, a product manager at Blue Apron. Prior to Blue Apron, Catherine worked in product marketing at a couple NYC-based startups: Fab and DigitalOcean. As you may know, Fab — once a billion dollar company with almost 700 employees — went bust in 2015.

Catherine Pao

During our chat on the podcast, Catherine spoke a lot about Fab — what they did right, what they did wrong, and how she’s been able to apply so many of her lessons at Blue Apron. The chance to have worked in such an environment — a massively funded unicorn with a growth-minded culture and the freedom to experiment — has given Catherine an experience that’s unique and highly valuable in the startup world.

And she was one of many. What struck me as most interesting is that she now works with six other folks from Fab. Catherine said:

“For me, the silver lining of everything that happened was really this amazing diaspora of a lot of Fab employees going to work at other companies all around the city. I actually joined Blue Apron because I was basically brought in by someone I used to work with at Fab. There are six of us from Fab at Blue Apron now. Some of my favorite people including our current head of products (who was the marketing product manager that I worked really close with at Fab). I think that part of Fab’s story is always lost.”

It seems that the implosion of the NYC-based ecommerce unicorn benefitted many other companies across the east coast startup ecosystem. It put people back into the ecosystem who then built new companies and helped scale other growing startups. People who were previously at Fab have gone on to build some of NYC’s hottest startups from theSkimm to General Assembly to ClassPass. This has a huge impact, even when they’re coming from a company with less than stellar performance for investors.

Is that what’s happening in NYC? Is the fact that NYC hasn’t had a ton of breakout IPOs one of the important yet elusive reasons why startups and tech companies there are flourishing?

It’s interesting to think about, considering it feels averse to the often cited ‘we need many successful exits to build a strong ecosystem!’ perspective that many of us believe to be near the top of the list of required variables

I’d even argue that companies that have been struggling in NYC — you might put Foursquare or Gilt in that category at the moment — probably won’t get as much credit for helping NYC tech versus whatever successful, IPO companies emerge in the next couple years. But if you do a quick search, employees from both of these companies are now in senior roles at NYC breakouts Buzzfeed, InVision, Betterment, and DigitalOcean.

Even one tiny example of a $7M funded startup, Turntable.fm, shows similar results and impact. Ex-Turntable.fm folks are now continuing to build amazing companies in NYC, working at Giphy, Spotify, SeatGeek, and Vimeo.

It’s funny how the ‘failure is good’ maxim seems to pervade any and all aspects of working in tech and startups. It seems to even apply at an ecosystem scale.

So … What’s wrong in Seattle?

Looking back at the US ecosystem ranking, I mentioned Seattle dropped four points in 2015, with New York, Boston, and Chicago all reporting stronger ecosystems… What’s wrong? Why hasn’t the home of Microsoft, Amazon, Expedia, and Real Networks been able to lay the foundation for the next generation of startups? How has NYC beat them at a game where they clearly had a head start?

Seattle has a higher concentration of software developers than any other tech region within the US. It’s part of the reason why so many Silicon Valley-based companies set up engineering offices in the city. So why aren’t these talented developers leaving their cushy jobs to start their own tech companies?

Big tech co outposts in Seattle

Maybe they’ve ‘been there, done that’, and are enjoying a stable job. Maybe they know they can demand a competitive salary and don’t want to risk losing that. One thing is for sure: while there are a lot of developers in Seattle, they’re probably a very different type of developer than those working at the startups in SV and NYC. People who enjoy working at earlier stage startups are not the same as those that join a tech company that’s big enough to have a secondary engineering office (i.e. Salesforce, Yahoo!, Facebook, Google).

It could be that — like New York — Seattle needs more failures. And more failures requires more risk.

Risk is one thing that Seattle seems to lack. I’ve noticed a couple of trends when talking to tech and startup people about Seattle. The first is that it’s hard to raise money beyond a seed/Series A in Seattle on terms that are competitive with SV. Even according to the Compass report — “Seattle’s weak spot is funding. While it is sufficient to fund a major share of promising early stage startups, a lack of big VC funds causes a noticeable gap of later-stage investments — a key reason why the Seattle ecosystem is not among the global elite in 2015.”

Seattle’s investors may be more risk averse than those in other cities. Some Seattle investors also operate under the idea that young founders might not be the best people to run their own company. The idea of bringing in ‘adult supervision’ is one that was pervasive in the minds of Seattle’s investors, at least up until a few years ago.

I’m not sure what the answer is, but I think some of these factors are probably contributing to Seattle’s decline as a world-class city for tech and startups. Even if things have changed in the past couple years (which, from what I’m hearing from people based there, it sounds like it is), the long-term cycles required to build a strong ecosystem mean that we can’t expect Seattle’s tech ecosystem to get anywhere near the heights that NYC has achieved, at least for the next few years.