New York – The Next Silicon Valley?

In my previous post, I wrote that statistics show that New York currently is the second largest market in the US for venture-capital financing transactions. Proverbial front-runner, California, continues to lead the nation, but New York has now surpassed Massachusetts, long the number two state, as the destination-of-choice for venture capital investment dollars. This is big news for New York City and the state, which have not been considered hotbeds of startup or entrepreneurial activity, until now. In the quarter ended September 30, 2011, New York-based companies raised over $800 million in 86 venture-capital deals. By contrast, Massachusetts-based companies raised just over $700 million in 83 transactions. Nationally, a total of 790 US-based companies raised $7.9 billion. Of great interest, and hopefully an indicator of good things to come, last quarter was the fourth straight quarter of venture investment growth.

New York’s success has not been accidental. For more than a decade, entrepreneurs, investors, universities, lawyers and accountants have been hard at work, focused on building a startup ecosystem here in New York City. Venture capital firms long focused on Silicon Valley (California) and the Route 128 Corridor (Massachusetts) have been opening New York offices and new venture funds have been established here, each attracted largely by Internet startups with disruptive technologies. In addition, incubators and accelerators have taken root. Last year, New York had just one accelerator, now there are nine. Universities also have played an increasingly important role. Like Stanford in Palo Alto and Harvard and MIT in the Boston area, local colleges and universities have begun to recognize the benefits of entrepreneurship and are contributing significantly to the local startup and venture communities.

The growth is a reality, but we need to determine if it is sustainable and an indication of a long-term trend. For as exciting as the growth is for New York, it has come largely from a narrow base of companies with a heavy industry concentration in consumer-oriented Internet and technology startups. In fact, over 70% of the completed deals this year have been with Internet or technology companies; add the deals in the closely related industries of mobile and telecommunications technologies and the concentration is nearly 80%, revealing New York’s lopsided reliance on technology. That trend continued last quarter, as evidenced by the Q3 2011′s venture capital numbers, with 78% of financing dollars and 85% of deals in New York going to tech-focused industries. By comparison, Massachusetts demonstrates a far more diverse orientation with only 21% of financing dollars and 47% of deals going to tech companies in the same period. Massachusetts, unlike New York, also has attracted companies, and, by extension, the investors, with focus in healthcare, computer hardware, software, services and energy.

We are right to be excited about and have pride in the growing base of startup and emerging growth companies attracted to New York. Sustaining the growth, however, likely requires the community to build on the Internet and technology boom, leveraging that success to create a far more diverse community of entrepreneurial startups. We may have unseated Massachusetts as the second largest venture capital market, but California far and away dominates the landscape, with over $3.8 billion invested in 315 deals last quarter, or 40% of the total venture investment dollars in the nation.  New Yorkers still have a lot of catching up to do.

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