New Blood: Innonate Takes Over The NYTM

Yesterday the NY Tech Meetup elected Innonate (Nate Westheimer) to be its new organizer.  There is no doubt that the NY region is lucky to have Nate offer to contribute so much of his time to our collective cause.  As many know he has been an active part of our community both as an entrepreneur and a contributor to both one of the City's most prominent incubation spaces and to our national political process. 

While none of us can affect change in isolation, I am optimistic that Nate's fresh ideas will inspire many in our community to contribute more than they already do.  I suspect that he will not have to look far for any help that he needs - many of us are be ready to support him along the way.

I also wanted to highlight how important it was to see so many people express a willingness to give their time to take a leadership role in this group. The people who came forward are truly very special. 

Many of us play roles in the venture ecosystem that are part of a bigger machine, one that drives toward a better standard of living, a cleaner earth and the creation of more transparent information.  Whether entrepreneur, employee or financier we play a role in creating a better legacy; we move society forward.  Most of us, however, do so with aligned incentives; we get to do well by doing good. 

Many of the people who ran to be the organizer organizer of the NY Tech Meetup transcend that standard; they invest their time without a clear path to personal financial reward.  What is most inspiring is that the people on this list (and many others in our community) are motivated by the pursuit of greater ideals:  the vision of making this little patch of the world a better society where creativity is supported, passions can be pursued and new jobs can be created almost as quickly as new ideas.  These people are the lifeblood or our community and the fact that so many ran for this position reminded me of how many people in our region are willing to give more than they take. 

In sum, I suppose that I have two messages here: 

First, thank you to everyone who offered to help lead.  Stay involved, drive forward, you will continue to make a difference. 

Second, to Nate - go get 'em.

Twitter Tech Communities: A New Project

In an attempt to weave some more connective tissue into our community I am launching a few twitterbots.

Each of the bots below is designed so that any message sent to them is published by the bot, making that message visible to all of the bot's followers.  If you follow the bot you will see what everyone is tweeting.  This is effectively a mass email list for twitter. 

Follow the bots, send articles and thoughts to them and be plugged into the tech community.

Special thanks to the man, the myth, the legend: Whitney McNamara.  Whitney created this type of twitterbot (he built the shakeshack bot and others) and took the time to set these bots up for all of us to use.

Here are the links to the various twitterbot communities:

• National (TechieFeed)
• New York (NYTech)
  
• Silicon Valley (ValleyTech)
• Southern California (SCalTech)
• Northeast (NortheastTech)

The State Of Venture: The Ugly, The Bad And The Good

There is one topic on the minds of all entrepreneurs right now: the impact of the economy on their startups. The economy is the centerpiece of every networking event and panel, and it even consumed the Q&A session after my speech at VANJ last week on how to raise VC. It’s inescapable.

The financial crisis has and will continue to effect the venture world. Despite how bad things have become, however, there is a silver lining for the best startups. Here are my thoughts on the good, the bad, and the ugly of the current economic environment.

The Ugly: Economy In Shambles
We all know how troubled the financial markets are right now. The public markets are in an irrational downward spiral, the gears of our credit machine haven’t unlocked despite being greased by the government bailout and the exit environment is as slow as it has been anytime in the last 30 years . In a nutshell, our economy is undergoing a substantial realignment that is leaving the weakest to be killed off quickly by the consummate predator – the global financial community (Thomas Friedman’s so-called "electronic herd”). The casualties have included most facets of the American economy, including financial institutions (Bear, Merrill Lynch, Lehman, WaMu), big corporations (Automakers, Linens ‘N Things, Circuit City), millions of households and, yes, the government, which is watching corporate tax revenue evaporate while the cost of providing life support to the ailing economy is climbing.

The Bad: Venture Market – An Innocent Bystander
While the industries in which venture capital firms traditionally invest (IT, life sciences and, more recently, clean technology) are not directly in the line of fire of this economic downturn (as they were in 2000), the venture space has and will continue to be adversely affected.

An investment banker I know recently stated his view that it will take at least six months for our economic wizards to be able to quantify the size of the financial correction; we don’t even know how bad it is yet. Uncertainty drives corporations and consumers alike to hedge all bets by cutting their spending on everything from advertising to autos. As pockets tighten, it becomes more difficult for companies (whether B2B or B2C) to generate revenue, creating the need to reduce costs or take more capital from investors.

Unfortunately, right when companies need the investment community’s support, venture purse strings will be tightening. There are a few reasons for this conservatism. First, later stage investors (the growth stage venture firms) know that companies that they invest in today won’t be able to exit as quickly as they once might have because the public markets are sick and the corporate buyers are conserving cash until they understand how bad things are going to get. An increased time to exit means lower effective returns.

Second, many VCs expect growth stage capital to become less accessible (for the reasons described above) and, as a result, are increasing their capital reserves for their portfolio companies.  VCs hope to fill part of the follow-on financing gap, enabling their companies to stay afloat while holding out for growth capital. While this is good for portfolio companies, it does mean fewer deals in the portfolio. VC funds are fixed in size, therefore allocating more to each company generally means fewer new investments.

Third, some limited partners (the investors in venture funds) are reducing their allocations to venture capital, despite the fact that venture capital traditionally performs well in recessionary market environments. With the net asset value of nearly all liquid assets devastated by the market crash, many limited partners are now experiencing what is being referred to as the “denominator problem.” For example, if an institution had originally planned to have 10% of its assets in venture, the decline in value of the other 90% of its assets effectively increases the percentage of the portfolio that venture capital represents. An LP may have seen the percentage of his/her assets in venture capital increase from 10% to 14%, leading him to pull away from the very asset class that is likely to provide the best returns in this environment. The magic of this math is that it encourages LPs to invest more in the most troubled asset classes, not the healthiest. While some LPs will follow this logic and cease to make investment in venture until the value of their other holdings rebounds, others will invest more in venture because the fundamentals of the venture sector are even more attractive now. Without new commitments from LPs, there will be less fresh capital coming into venture funds. The net effect is likely to be fewer investments at all stages of the venture market.

In sum, revenues are going to be lower and less capital is going to be available. This of course leaves entrepreneurs with one option: reduce costs. Coincidentally, reducing costs often means making layoffs, exacerbating the downward spiral of consumer spending. It’s hard to buy Christmas gifts without a job. Additionally, the decline in capital means that valuations will drop substantially–a trend that is already visibly taking hold in the market. Times in the venture world are challenging. As any good entrepreneur knows, however, change creates opportunity.

The Good: The Weak Will Die Quickly; The Strong Will Win Big
In this new economic environment, access to capital will become an increasingly important differentiator. If venture investing contracts substantially, a strong balance sheet will no longer simply be a means of staying with the pack, it will increasingly become a substantial advantage, enabling some companies to get way out in front of their competition. While many startups are deploying limited resources, trying to manage costs and weather the storm, the few well capitalized players in each market segment will be positioned to invest for the future, laying deep roots into their markets that can support rapid growth with the drought ends. Furthermore, as layoffs continue to take place at the corporate giants (such as American Express), startups that are well capitalized will have an opportunity to hire high caliber people now looking for work, increasing their advantage and mitigating the human capital constraint that traditionally plagues new ventures in booming economies.

This is a virtuous cycle for the winners. As competition becomes more polarized, the leaders will eat even more of the laggards’ lunch making it even more difficult for the back of the pack to compete. Customers naturally gravitate towards the financial stability of the winners and in tight economic times the second tier players may not be able to reduce their margins to win over the more price sensitive buyers, limiting their means of catching up. These dynamics will likely kill the weak off more quickly, enabling the winners to more quickly separate themselves from the pack.

While I believe the frontrunners will come out of this downturn positioned to win big, the story isn’t entirely bleak for the second and third tier players. Once the end of the downturn is in sight, corporations will likely exploit the financial woes of startups to make low cost acquisitions. The hunters will be coming. For some entrepreneurs this could yield decent (if not life altering) returns.

Conclusion
There is no doubt about it—times are tough for the overall economy and that has, and will continue to, impact the venture marketplace. The companies that are not going to succeed will likely discover their fate more quickly (a blessing in disguise), the companies that might have otherwise squeezed by in a better economy should be sure the corporate sharks smell their blood and the winners should be opportunistic and cautiously thinking big. In sum, I think it’s a great environment for the best entrepreneurs. While at today’s valuations it will likely cost founders a pound of flesh to acquire the capital they need to win, they’ll be able to turn a pound of flesh into a mountain of gold.

VC Awakens In A City That Never Sleeps

Ty McMahan ran a great article on the Wall Street Journal today about entrepreneurhsip in NYC. Definitely worth a read.

(I thought King Kong would make NYC seem tough.)

Venture Capital Awakens In The City That Never Sleeps
by Ty McMahan

New York City's status as the world's financial capital may be slipping with the turmoil on Wall Street. But its venture capital scene is blossoming...Full Article

The NY Region Is Hot

mThere’s always a lot of talk within the NY venture community about how well the region is doing as a place to found and grow technology businesses. Working with some of the folks at DFJ Gotham, I recently did some analysis that quantifies a few of the strengths of the NY Region – I’m going to share a few of those findings below. Looking at the data one can objectively state what all of us who live here know to be true: NY is a growing hub of high-tech activity.

Methodology
The AEA Cybercities report provides a great deal of data about the high-tech sectors in the top 60 US cities. However, the city view doesn’t accurately capture the regional tech communities – these ecosystems often span more than one city. As a result we rolled up the territories defined in the report into regions that parallel the actual technical communities. While the AEA has Silicon Valley as an isolated territory, we integrated San Francisco, Oakland, Menlo Park, etc. into what we called the Silicon Valley Region – a more realistic view of where Sand Hill VCs actually invest and where entrepreneurs out there consider their stomping grounds. Similarly, the SoCal Region includes San Diego, LA and a few other independently listed geographies. The NY Region includes East PA, East NJ, West CT, Westchester, etc.

Findings
Here’s the scoop. Based on the AEA data, of the major regions the NY Region is:

• 1^st in total high tech jobs
• 1^st in the number of new high tech jobs annually
• 4^th in high tech salaries, behind both Boston and Silicon Valley

Making Sense of This Information
Given the sheer number of people in the densely populated NY region, it’s not surprising that there are a lot of high tech workers. However, the fact that there are more techies here than anywhere else in the US might surprise some. My gut tells me that this viewpoint may be a result of the reality that the NY tech scene is sometimes overshadowed by the other prominent industries in the region (finance, advertising, pharma). However, living in a land of giants doesn’t make you small.

It’s worth noting that based on this the implied percentage of the technical talent in the NY Region is currently working in startups in smaller than that of the Valley, leaving a deep bench of talent to join companies or start the next big thing.  We're poised to continue to grow.

On another note, it’s common to hear those who don’t know NYC well state that it’s an expensive place to be a startup. I often hear the local entrepreneurs argue otherwise. The data point about NY tech talent being less expensive than it is in Boston or out West supports the argument that NY is an affordable place to start a company, at least with respect to the biggest cost for most start-ups: people.

It's nice to see some data that supports what all of us on the ground here already knew: New York is hot.

NY's TheU: Helped Change The World

Doug Imbruce and his team at TheU.com spent the week trying to change the world. 

Doug is a media savvy visionary who until this week I have only known as a great guy and an innovative entrepreneur.  However, I learned something new about Doug this week - he has unique character required to stand up and do what is right even when it's unpopular or uncommon to do so.

He and his team recently came across an news article that increasingly sounds like a recycled story - a person is going to die without surgery and the funding for the operation was pulled at the last minute, leaving patient and family out in the cold. 

While he didn't know this person, he felt he could leverage his knowledge of the Internet to make a difference.  He took action by raising awareness of the issue - he created a digital petition, spread the story around the web and emailed the company's CEO.  In part due to his efforts the company reversed their position and the surgery is now set to take place next week.  Probably a life saved.

It would have been easier for Doug not to do anything about this, but he did.  I guess the message that I took from this was that maybe we could all do a little more.

If nothing else, next time you bump into Doug Imbruce buy him a drink.

Announcing The NY Venture Community

I have just launched a new LinkedIn group called the NY Venture Community.

The New York Venture Community is the LinkedIn group for entrepreneurs, startup teams, venture capitalists and venture service providers in the New York region. 

The purpose of this group is to make it easier to 1) find other people in region interested in venture and 2) connect with these people.  Lastly, being part of this group will make it easier for others to find you.

The group is free and open to all.

Click here to join.