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A Tale of Two Cities: Why Silicon Alley Isn't the Next Silicon Valley (Yet)

Job creation in New York City's tech industry has nearly returned to levels seen during the Dotcom bubble, but its tech startup scene still doesn't hold a candle to Silicon Valley.
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It's a tale of two cities, for sure. There's the high tech, venture capital that state officials see, and then there's the New York City (or Silicon Alley) viewed through the eyes of seasoned venture capital partners.

The first sees the Big Apple as a world that's primed and ready for more high tech investment. The other sees New York's tech scene as still maturing, particularly in key areas like developing a startup ecosystem, but one that simply doesn't rival the depth and breadth of Silicon Valley currently.

"NYC is a strong market for advertising technology, financial technology, some commerce, and a few other smaller segments, but it's not aligned with where most venture dollars are going these days," Dave Zilberman, a partner at Comcast Ventures who moved about eight months ago from New York to Silicon Valley says.

The areas attracting the big money? Among others, there's software as a service, cloud computing, network and computer security and enterprise computing, Zilberman says.

By contrast, this week, the office of State Comptroller Thomas Di Napoli released its study on the high tech industry for New York City.

As of the third quarter of 2013, the study reports that the city hosts 7,000 high tech companies and 100,000 high-tech jobs, nearly rivaling the tally during the height of the last tech boom in 2000 and an increase of 25,000 jobs compared to the third quarter 2010. Further, the tech industry is growing at a whopping 8 percent, a rate roughly four times faster than the rest of New York City.

According to the comptroller's report:

The high-tech industry’s young, creative workforce is attracted to New York City because of its culture, diversity, public transportation system and the opportunities it offers to live and work in the same community. World-class academic institutions and creative industries also draw people to New York City, providing new ideas and talent for the industry.

But venture capital numbers paint a less rosy picture. In 2013, venture capital firms invested $3 billion in 450 deals in New York, compared to $12 billion in 1,272 deals in Silicon Valley, according to the latest Money Tree report produced by PricewaterhouseCoopers and the National Venture Capital Association. That compares to $2 billion invested in 409 deals for New York and $11 billion in 1,236 deals in Silicon Valley in 2012.

Valley vs. Alley

Part of the difference is cultural: Silicon Valley has a stronger culture of risk-taking than New York City, says Zilberman. "It's simply a function of people with the right skill set and risk tolerance to work for a startup."

Upon closer inspection it would seem that the Comptroller's own stats back Zilberman's point. Most of the job growth in New York, about 56,000 jobs specifically, were for designing, managing, and operating computer systems. Digital media like Internet publishing and broadcasting, web search and related services accounted for 15 percent of jobs, and has more than tripled since the recovery. Software publishing accounted for 2 percent of jobs, but that amount more than doubled over the past four years.

In other words, the employment growth isn't happening in areas heavy on engineering and new product development--jobs more likely to lead to innovation and starting up.

"Innovation and creating great companies is all about the people--and Silicon Valley is special in that regard, because of the number of entrepreneurs, investors, engineers, and the culture that come together in a uniquely effective and creative way," says Ross Fubini, partner at Canaan Partners in Menlo Park, California.

Still, Canaan isn't counting New York down for the count. The company has invested tens of millions of dollars in at least a dozen companies in New York in recent years, including JOOR, an online fashion marketplace, Onefinestay.com an upscale lodging share site, and Shopkeep, an iPad point of sale services provider for small businesses. Additionally it opened an office in downtown Manhattan at the end of 2010.

"New York is just earlier in that cultural creation process," Fubini says. "It will keep expanding to become a major tech player in the future."

IMAGE: Corbis
Last updated: Apr 30, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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