Mr. Pinsky and Ms. Sterne

Yesterday morning, Betabeat popped out of the subway a little further downtown than normal for an Internet Week breakfast panel at Eventi. The four speakers, assembled to discuss the city's role as a leader in the new tech economy included Seth Pinsky, president of the New York City Economic Development Corporation, Rachel Sterne, the city's chief digital officer, Daniel Huttenlocher, dean of Cornell NYC Tech, and Craig Gotsman, director of the Cornell-Technion Innovation Institute.

Considering our profile of Mr. Pinsky and multiple features about the battle between Stanford and Cornell to win a chance to build on Roosevelt Island, it was not unlike seeing the pages of Betabeat on stage--only with free pastries and a lot more suits.

The event, which was sponsored in part by the Observer Media Group, was moderated by New York Observer editor-in-chief Elizabeth Spiers and former New York City Council member Kenneth Fisher from Cozen O'Connor, another sponsor.

We were hoping the panel would touch on the often-overlooked subject of failure rates among startups, which surfaced recently in a report about the state of Startupland, New York. And the topic did indeed arise, by way of an anecdote from Mr. Gotsman, who said one of the key traits of a good entrepreneur is willingness to take a risk. "If he's not willing to take a risk, he's dead before he starts, he's just not going to start," said Mr. Gotsman, before launching into what he called "a really bizarre example."

"I was recently sitting in McKinsey--the McKinsey here in New York, the management consultants. They were helping us to do some research behind offerings on the new campus," said Mr. Gotsman. They had assembled a team of 15 "techies" from within McKinsey, that included recent graduates from Stanford, Princeton, MIT, Berkeley and the like who had studied computer science and engineering, even up into the post-doc level. "Literally I could see the sparkle in their eye," when he talked about the mission of the applied sciences campus, said Mr. Gotsman. "I asked them, why are you guys not out there making startups?" he said, "Why are you sitting here in McKinsey giving me advice about how to do it? They answered, 'We didn't want to take the risk.'"

Mr. Gotsman said the city needs to figure out a way to educate and help the best and brightest to become less risk averse.

Mr. Pinsky chimed in that the issue of risk was tied to the ability to build critical mass in the startup sector, which he called, "the biggest challenge that we face."

"Once you have that critical mass it becomes self-sustaining," said Mr. Pinsky. "So you have to have a number of people who have succeeded as well as a number of people who have failed and you can use those lessons for themselves and teach them to others."

Dean Huttenlocher put a finer point on it. "The reason critical mass is important in the tech sector is because 90 percent of startup companies go belly up," he said, adding that employees are well-aware of that. "Until you have a critical mass where there's a really good community not just in scale but also in strength of the networks of people across the corporate boundaries, it's very hard to attract the best talent. Because they need to know that they know somebody at ten other startups so that when this one blows up, they can jump to another one seamlessly. They don't have to spend six months unemployed. And that's something that other areas of the country have that we're just starting to build here."

Mr. Webb.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

I meet all sorts of people starting new companies. A ton of them are starting hot new tech startups and are out there looking for funding and often succeeding. Many more are starting much-needed service firms in high tech—providing much-needed services along the lines of iOS app development, web development, marketing, PR, content creation, and backend development. There are massively talented people in both types of companies. They do the same work. They hang out together, they have the same skills. They need each other.

Yet one segment of them have the potential to earn millions, and the other doesn't.

It makes no sense.

Red Hat doesn't really sell anything at all other than the consulting and support services around their open source Linux products. And I remember back when they IPO'd, everyone hailed it as a stroke of genius, the way of the future, the dawn of a new era, etc., etc. That struck me as really strange—most service companies are saddled with low revenue multiples, but for some reason Red Hat bypassed that. Removing all traditional revenue streams was part of the dot-com zeitgeist, and in 1999, Red Hat rode their service company to an IPO.

Of course, in 1999, service companies could still go public with decent multiples, with Agency.com and Razorfish mooting successful IPOs in 1999 as well. Of course, Razorfish and Agency.com took a dive in the dot com crash, and with them the dreams of any service company of ever having a major tech IPO again. And while they both survived, it was in different forms, neither being an independent, publicly traded company again.

Red Hat, however, survived. Today, Red Hat's PE ratio is a staggering 67. For a service company.

I was reading yesterday that Dell is going to become an IT company now. HP was thinking about this a few months ago, too, right? They bought a company called Autonomy and were going to turn into some sort of consulting company. Reason prevailed on that one.

I can see why both companies would consider this, because the strategy proved golden for IBM some years back. IBM became more of a consulting services company, and in doing so shed their image of a loser in the operating system wars and became more of a bad ass, high tech McKinsey. Their stock commensurately rebounded. IBM has a price to earnings ratio of 13 (a price to earnings ratio is essentially the market cap, or value, divided by its annual revenue).

But start a services business today, in the tech industry, and you'll be lucky to get a value-to-earnings ratio of 2 from investors and VCs, or private buyers. The public market seems to be far more generous with revenue multiples for service firms than tech VCs.

So, now, why is that? What does the tech industry have against services companies?

The traditional answer has been that services companies are heavily reliant on specialists, and if those specialists left, the company wasn't worth as much. But it's not clear to me how this is any more true for, say, McKinsey or IBM than it is for Google, Groupon or Facebook. The other argument in the old days used to be that non-services companies were selling concrete goods, and had factories and the like, and even if a key person left, they could keep on selling. That makes sense, of course, though the transition of IBM and the hoped-for transitions of HP and Dell make me wonder if that logic hasn't been turned on its head. They still own factories, but their PE ratio goes up when they focus on consulting? And I suppose Facebook and Google have some physical property in the way of expensive data centers, but I hardly think that's what their value is based on.

Then, of course, there's the mythical algorithm—the belief that tech companies are somehow doing things in a more automated way, and make money with fewer people.  Never mind Google has some 20,000 people (with a PE ratio of around 20) and Groupon has over 10,000 and no profit.

Okay, okay, I keep harping on this, I know. What's the big deal? Tech companies are just awesome and doing cool shit and worth a lot of money and if they're overvalued, then what's the harm, right?

But these things have consequences. I love tech, I love the ability for it to disrupt so many industries. But the fact is that the valuations of tech companies, and the commensurate stock options that they can offer, divert employees from other industries. Because you can't offer really sweet stock options if there's no real chance your company's ever gonna break a revenue multiplier of 2. Believe me, I tried. This creates an economic incentive for talented employees to flock to the tech industry over other industries. What industries? Banking! Okay, that's probably for the better. Advertising! Oh no! Quelle horreur! Ha. Okay, but, what about health care? Green tech? Education? It can make a difference. Sure, if you have a high tech, dot com education, green tech or health care company, you can have a high multiple. But, then, I have yet to see education, green tech or health care be very disrupted by dot-com companies (though we are all, of course, keeping our fingers crossed.) But that is a topic for another day. Fact is, tech siphons good people away from lower-paying, important industries every bit as much as banking does.

Concretely, think about this the next time you need a kid to build your new iPhone app, and can't find one, because they are all working at tech startups. Why wouldn't they? If they choose the right one, they can make a payout ten times what they'd ever make building your app freelance. And if they choose the wrong one, they'll still make just as much as you'd pay them. I see this all the time. And it's directly tied to the tech industry's inexplicable, misplaced fetish for product companies over service companies.

Ms. Clegg (right) and Ms. Kimball

Foursquare's Naveen Selvadurai, Craiglist's Craig Newmark, dotcom doyenne Esther Dyson and Nassim "I see black swans" Taleb walked into a Chelsea loft. No, it's not a lead-up to some joke about how Wall Street is drowning the tech bubble. It was the scene of a dinner party hosted by Takeout, a budding consultancy that sloughs off the dated McKinsey model--train an army of MBAs to travel around the country consulting--for a fresh look more appropriate for the digital age.

Why ask an MBA to tell you how to fix your company when you can hire someone who runs their own? Hey, it could have saved Conde Nast somewhere in the six figures. Just imagine how their troubled iPad editions would look if they'd tapped the brains behind New York's tech scene to figure out the internet instead.

Takeout, a reference to "taking out" the status quo (and not,  say,  Seamless deliveries), started in London in 2007, but recently ramped up its efforts in New York. By next month, it expects 75 percent of its business to be based out of its New York office. Microsoft, Gilt Groupe's Jetsetter, and iVillage are already clients, along with a few other big players that prefer not to be named. But the proof is in the pounds.

For a project with The Central Office of Information in the UK, Takeout brought in two young company founders--Moo.com's Richard Moross and Moshi Monsters' Michael Acton-Smith--to help government employees think like a start-up. The end result were ideas like "g-bay" (eBay for governments) that auctioned off unused goods and resources to other departments or the public, as well as a text messaging service that nudged citizens about paying fines and court appearances. All told, the projected saving amounted to roughly £1 billion pounds. "I wanted the intellect without the rubbish," Alex Butler, the COI's Transformational Strategy Director, emailed Betabeat. "This wasn't a project about charts and fancy words."

As for the Chelsea loft with all those bold-faced names, that belongs to Takeout's founder, Judith Clegg, a former consultant and entrepreneur voted Top 100 Digital Powerbrokers by Wired UK. Jess Kimball, a former speechwriter for futurist Faith Popcorn (the woman the New York Times' once called the "Nostradamus of marketing"), was recently brought in to head up Takeout's New York operations.

Mr. Selvaduari and the like were gathered there for a pro bono assignment that Ms. Kimball was only at liberty to describe as a project for a senior British policy staffer. In that case, it was just a one-night assignment. But that's exactly the point, explains Ms. Kimball. By leveraging "a consortium of the smartest entrepreneurs, academics, artists, journalists, and former executives around" rather than career consultants, Takeout's clients get access to thinkers who have no interest in a full-time gig.

"One of the things we've learned about smart people," she added, "is that they tend to have so many more interests than what they picked for their career. The current economy knows how to capitalize on then, figuring out how to use people's strengths." Through Takeout's associate network, some experts only work with the company a few days a year. "We're able to offer more flexibility and intellectually interesting projects," said Ms. Clegg. Experts are paid a fee, but Takeout is also putting in place an equity share program that gives their network a pro-rata share in the business.

As the operation expands in New York, Ms. Kimball says she wants to put the call out to all brainiacs--"basement tinkerers, big dreamers, weekend experts"--that Takeout is hiring. And if the start-up fever should infect McKinsey-types who want to leave the corporate box, Ms. Kimball sounds open to that as well. When Betabeat told her we'd mentioned the company to an MBA friend, she quickly emailed back, "Oh, fantastic! We love recovering consultants."