Not so long ago, as 2012 turned into 2013--back when the Harlem Shake was a thing and Jennifer Lawrence was about to trip at the Oscars--New York City only knew of unicorns from tales of the West. While Silicon Valley was already super startup-exuberant and starting to fret about another bubble, New York was still trying to stand up tall and talk a big game. Its startups were scrappy and optimistic. But plenty of them were still feeling pressure to move to the Bay Area.

Then, in May 2013, Yahoo swooped in and acquired Tumblr--a quintessentially New York startup, in that it combined tech, media, and culture--for $1.1 billion. It was the city's first venture-backed startup company to be acquired for more than a billion dollars.

Still, in 2014, Fortune called for New York City to stop bragging about being a tech hub, saying that, when it comes to company performance and exits, it has more in common with Chicago or Atlanta than San Francisco. Salting the wound, Fortune went on to note that Chicago's Groupon "continues to be worth around four times what Yahoo paid for Tumblr." Touché

More than a year later, it's time for a reassessment.

Today, New York City is home to Warby Parker, Blue Apron, and Buzzfeed. There's FanDuel, OscarHealth, and ZocDoc. Each is valued at more than $1 billion. And in 2014 and 2015, two more New York City-born companies--OnDeck Capital and Etsy--went public at valuations of greater than $1 billion.

"It's the best it's ever been," says Eric Hippeau, a partner at Lerer-Hippeau Ventures, a seed-stage venture fund based in New York's SoHo neighborhood. These are just some of the dozen unicorns in New York--a full 75 percent more than there were in 2014--and there are several more on deck poised to cross the 10-figure threshold, according to a report by CB Insights. (They are Betterment, Casper, Digital Ocean, Flatiron Health, Greenhouse, Harry's, Stack Exchange, Squarespace, and Taboola.)

Even a dozen companies hitting this big valuation milestone isn't enough to define a city's small-business culture. But it contributes to momentum and the general vibes investors are feeling--which seems and indeed is ephemeral, but which remains important to the flow of venture capital.

Today, the state of New York's tech startup economy is stronger than ever, as Hippeau says. But what would a vibrant ecosystem be without some withering underbrush? In 2015, New York tech darling Quirky curled up and died. Earlier that year, Fab.com became the Apple's first big tombstone in buzzy tech, having burned through more than $300 million before being acquired for a truly measly sum. Already in '16, the flash-sale site Gilt Groupe, an early leader of New York's unicorn pack, sold for a glum $250 million. (That's less that what the company took in from its funders.)  One King's Lane, a furnishings flash-sale site, had similar trouble finding profitability, and is now rumored to be attempting a fire sale--also for less than its total investment.

Growing Up, Growing Out

Let's clear this up now: New York's tech startup scene is, by most estimates, less than 30 percent the size of San Francisco's. NYC is no SV, and it's a mistake to assume it ever will be. 

Nonetheless, what New York does have is growing--fast--and it is setting up to create some serious wealth in the next few years.

"There are a fair number of companies in the three-to-four year exit pipeline," says investor Charlie O'Donnell, who founded and runs Brooklyn Bridge Ventures. He calls out MongoDB and an investment of his, Canary, a home-security hardware upstart, as well as Warby Parker and Blue Apron, as already-healthy-size booming startups with probable exits in the near future.

These days, he says, there are few reasons for a startup founder to move to the Bay Area to find success. "If you're an entrepreneur, and you're thinking you want to build a crazy, world-changing company, I would ask that person, 'Can you recruit, can you fundraise, and can you access your customers?' Most people can say 'yes' to those in New York."

Despite lackluster reports of last year's total U.S. venture-capital funding, investments by venture capitalists in the city increased by 82 percent in the past year, according to the Partnership for New York City, a business-development group. In addition to growth in fintech and health, it points to biotech, advanced manufacturing, and enterprise software as growing industries ripe for startups. 

The media industry had some big wins this year, too. Lerer Ventures--an investment fund run by Hippeau and Ken Lerer, the former co-founder of The Huffington Post, and Ben Lerer, the co-founder and CEO of Thrillist media--closed a $113 million fund to back promising startups. Many of the fund's investments are in media--an area other VCs have been hesitant to touch, but which, in the era of New York-based Buzzfeed, Vice, and Business Insider, is looking more promising. Speaking of Business Insider, it was acquired late last year by an old-media giant out of Europe, Axel Springer. The deal valued the online publisher at an impressive $442 million. 

And New York City's startup scene physically is spreading out from its former neighborhood hub of Union Square. More fast-growing companies and co-working spaces are planting roots far downtown, around the financial district and the area surrounding One World Trade Center. They include plenty of fintech companies, of course--but also the fashion- and media-oriented Refinery 29 and Of a Kind. Even a coding school named for New York tech's longtime stronghold--The Flatiron School--has found a home far downtown near Wall Street. 

O'Donnell says he's seeing startups increasingly spread to Brooklyn and New Jersey, as well. He notes that Jet.com is in Hoboken, and Audible just moved to Newark, New Jersey--where the audiobook company is even opening up a co-working space to encourage more startups to join it. "Funding goes a little further in New Jersey," O'Donnell says. "Sure, there's a little Jersey stigma--it's where we go to watch our football games--but the truth is, if you have a good business, the talent will come to you."

Matt Napolitano, the New York City market manager for Hired.com, has noticed a new mini-tech hub near a perhaps even more counterintuitive place for startups: Times Square. There's a Snapchat office, Yahoo, and MongoDB.

Then there's Brooklyn. Dumbo is now home to a significant creative-agency hub and a cluster of music-industry upstarts as well. The cornerstones of the hundreds-of-companies-deep  startup scene there are now-public marketplace Etsy and the agency Huge. Some adventurous startups are hoping to become the centerpiece of future hubs: Genius and Farmigo have new offices in Gowanus; Livestream has a new home in a massive warehouse in Bushwick.

What Exactly Happened Here?

A few changes to the broader ecosystem have supported the development of so many tech upstarts over the past decade. For starters, real estate was a very different business in Manhattan 20 years ago. Back in the mid-'90s, Dave Morgan was founding an ad-tech company called Real Media. Finding a home for his company was tough, because real estate companies worked only on massive, 10- or 20-year leases against predictable, profitable businesses. "That basically meant you did illegal sublets or rented space out in, like, a rug merchant's space," he says. "Today, you have landlords who understand and brokers willing to work with founders. And you have incubators and co-working spaces." There are more than 200 of the latter in New York City today.

New York City is also now home to lots of engineering talent--though it needs even more, according to Allan Grant, one of the founders of tech-talent matching service Hired. He says his company's data shows that New York City engineers are paid less than those in San Francisco, when the cost of living is considered. But his data also shows that of the 14 cities Hired operates in, New York City is "toward the top of the list" of cities engineers report they want to live in.

But Grant and others assert that the New York presence of more established tech companies, such as Facebook, Google, and Twitter, reinforces the local tech culture--and makes it easier for developers to stay on the East Coast. "It's going to continue to draw that top talent, as you have the big company offices and the unicorns," Grant says.

One thing happening in New York City now that's long been a familiar San Francisco phenomenon, according to O'Donnell: "You are starting to see multiple-time-startup-employees turned entrepreneur," he says. "You are seeing more people with startup backgrounds."

And then there's the big, big factor in lifting early-stage companies from floating an idea to a scalable concept: venture capital funders. We're coming on 20 years of venture capital firms existing in Manhattan. "It's no longer seen as you have to go to the West Coast to fundraise. There's some preference to going to the local angels and super-angels and VCs. It's a mature startup ecosystem now," says Grant of Hired. But others point out that there are many more early-stage investors in New York than firms willing to go big with massive mid-to-late stage investments, the way many Sand Hill Road firms are known to.

"We have folks like Union Square [Ventures, a prominent New York City-based seed-stage investor], who are great to put the first $2 million or $4 million in," says Morgan, the serial entrepreneur who founded Real Media, and who today is founder and CEO of Simulmedia. "But the ones who put $20 million or $50 million in are ones who force the company to go public--and we don't usually have that."

Looking Out for the Really Big One

"People from the West Coast say we don't have a Google or a Facebook. And that's true," Hippeau says. "I assume that we will see that sometime in the future." Still, he points out, "that's not the only way to define a healthy tech ecosystem." There have been 27 exits over $500 million since 2001--which is just 31 percent of the number that happened in all of Silicon Valley. But it's also 59 percent more than all of Massachusetts.

New York City's tech sector has expanded by 29 percent in the past five years but still generates only 4 percent of the city's total economic output, according to the Partnership for New York City. But if there's one thing recruiters, venture capitalists, and startup founders are all excited about, it's the approach of the new high-tech  Cornell campus on Roosevelt Island, which will open in stages, starting in 2017.  Already, some programs are being run out of Google's Manhattan office--and they're already educating developers and programmers in the most in-demand fields.

New York is already home to so many "learn to code" startups--including Flatiron School and Codecademy--and elementary schools have been adding coding to the curriculum for years now. Just as those kids, for whom coding is a second language, grow up, so does the whole tech ecosystem in New York. 

Published on: Jan 22, 2016