New Tech City (Center for an Urban Future)

The Center for an Urban Future, a think tank headed by Jonathan Bowles, has released a lengthy report  about New York City's tech sector, titled "New Tech City." The Center's findings indicate amazing growth over the last decade. While "New Tech City" contains mostly good news for the local tech set, there is a dash of cold water--just a bit--to leaven any prospective startup's bright-eyed optimism.

First, the good news!

• New York is home to the fastest growing tech sector in the United states and has beaten Boston to become second only to Silicon Valley. Out of the top seven technology regions in the country only New York saw a rise in VC deals between 2007 and 2011. During those 4 years venture capital deals rose by 32% in New York while declining 11% nationwide.
• Center for an Urban Future reports New York's tech sector is sustainable and has major potential for growth in the future. This is in contrast to the dotcom bubble that burst so dramatically at the end of the 1990s.
• The Center also found that Manhattan alone has 431 startups and in recent years more than a dozen established startups have migrated to New York from San Francisco and Boston.

Time for some real talk. New York is a good place for continued growth, but the report also notes many of these new startups will fail. Mr. Bowles elaborated in an email to Betabeat, stating that they interviewed over 50 people for the report and were told many startups won't make it because "There just isn’t a market to support every one of them."

"Many are competing in the same space," Mr. Bowles told Betabeat, "For instance, look at all the companies in the fashion tech space. Already, at least one or two of those have shut down." However, Mr. Bowles states this is a relatively normal thing for the industry--"a natural shaking out process."

"All of that said," wrote Mr. Bowles, "I think the bigger message from our report is that even if some of the city’s startups fail, the city is so much better positioned today to keep growing its digital sector."

Good lord, we look like a bad Wooly Willy

We had no idea. Really. These dudes tell us nothing. Nobody wants this to be an Arrington-SV Angel style relationship more than us, but they're not buying it.

As we reported earlier today, Thrive Capital just had a big, 17X exit with GroupMe that is a feather in the cap of the young fund.

Now Fortune is reporting that Thrive Capital has raised a new, $40 million fund, a step up from their first $10 million fund. Aside from GroupMe, Thrive also had an exit when Hot Potato sold to Facebook. OnSwipe, a Thrive company, recently raised $5 million.

Small VCs, like start-ups, would be wise to close their financing now, before macro-economic uncertainties get any worse.

Disclosure.

Dead fund walking

Earlier this week Betabeat reported on some findings from the National Association of Venture Capital, which showed that while the number of firms raising capital was shrinking, the amount of dollars put into VC the first half of 2011 was actually up 70 percent over the same period in 2010.

More positive data was released today by local analytic firm CB insights, which found that VC dealflow and funding were at an all time high for the 9 quarters they have been tracking the numbers. Of course, that time period includes some of the darker days in American economic history. But much of the nation isn't out of the woods yet, so the fact that venture capital is exploding says something about the unique climate in the tech sector.

For those who want to cry bubble, however, there are some strong contrary indicators worth noting. As we pointed out on Monday, the fact that fewer firms are raising that capital is a sign that the herd is still being culled from the heady dot-com days, with many of those funds finally reaching the end of their 10-year life cycle. While a number of new funds have recently appeared or raised in New York--like Level Equity, which just raised $120 million--the number of firms raising funds nationally is at a 16 year low.

We also may have seen the peak for seed stage funding. CB Insights found that early stage deals had dipped to a five quarter low, and some high profile investors like Chris Sacca have publicly declared that they are sitting out the seed stage game until valuations come down a bit. Expect a reckoning in New York over the next year as a number of companies that raised seed capital exhaust their funds and try to raise a series A.

Now a group of digital vets has raised a monster $120 million fund for Level Equity, to invest in media and tech firms. Three of the founders -- Benjamin Levin, George McCulloch and Sarah Haas, come from Insight Ventures, with Glen Shields joing from LeverPoint.

The group has a number of IPOs under its belt and Insight has a couple of hot web companies in its portfolio, including Flipboard and Twitter. 

“There is a pretty small group of us, really young guys, who are in the fortunate position to be making investments in tech,” Mr. Wohlstadter said, grabbing a seat in an oversize armchair. Ivy League handsome in a white Oxford shirt unbuttoned a few notches below the neck, he bounced his smart phone from palm to palm, flagged down the waitress and ordered a Brooklyn Lager.

“What do you think of Hashable?” Mr. Wohlstadter wondered, name-checking one of his investments.The Observer related our score on the application, which gives users a way to track meetings and awards points for each connection. “Oh, man,” Mr. Wohlstadter laughed. “You need to get out more.”

Mr. Wohlstadter, 23, began funding entrepreneurs a year and half ago—just a few weeks after graduating from Harvard. A friend, Eliot Durbin, also in his 20s, was the driving force behind the creation of Penny Black, and brought Justin on to help source deals and manage investments for a wealthy Wall Street pro. The project grew from there. “A bunch of his friends saw what we were doing and asked to get in,” Mr. Wohlstadter recalled. “Bankers, attorneys—it became sort of an investment club.” In the wake of his early success Wohlstadter joined up with a formal fund, BOLDstart, and a young venture capitalist was born.

“There are a lot of people that want to get involved in all the cool innovation that is going on right now but don’t have the time or energy to do so directly,” Mr. Wohlstadter explained. “That’s where I come in.”

Mr. Wohlstadter isn’t the only young gun pumping money into the Silicon Alley scene these days. David Tisch, Ben Lerer and Josh Kushner (kid brother of Observer owner Jared Kushner), all under 30, have emerged as some of the most prolific investors in town. Each can claim, to varying degrees, experience as a Web entrepreneur, a bond they share with the young founders they fund.

Despite their high profiles, though, it’s still too early to say which, if any, of their bets will pay off. “We’re all just two years in doing this, so for us to have ‘exits’ is rare,” Mr. Tisch, 29, acknowledged. “You can’t be judged on that, so your status comes from the perceived quality of the deals you have done.”

“Young guys are close to the deal flow, the technorati, the hackers,” noted Roger Ehrenberg, an investment banker–turned–angel–turned–venture fund manager.

These investors are working principally at the seed stage, the wobbly early moments of a company’s lifespan when it’s often little more than an idea. Few of these investments, which range from $25,000 to $250,000, will pan out, but they can mean a tremendous windfall in the rare event that the fledgling company turns out to be the next Facebook or Twitter.

Often such investors are referred to as “angels,” a term originally applied to wealthy New Yorkers who risked their money backing Broadway plays. “An angel, in the original sense, was the kind of person who would bet on a dream,” explained David Rose, who began funding tech companies during the heady dot-com days and helped found the early-stage investment group NY Angels. “It’s much more professional now, but there is still an element of that.”

Mr. Tisch, who spends his days running Techstars NY, an incubator of select start-ups from around the nation, prides himself on his swift reflexes. Unlike Messrs. Lerer and Kushner, who invest through formal funds, and thus have to answer to their limited partners, Mr. Tisch is free to jump on any fresh project he finds promising. “In a lot of the deals I do, maybe I didn’t lead the round, but I was the single first person to say, ‘Yes, I’m in,’” he told The Observer. “I can use my gut. I don’t need to answer to anybody. That’s my freedom as an angel.”

The flood of early-stage money has made for a certain giddiness among young entrepreneurs. “I felt like a kid in a candy store,” said Vin Vacanti, recalling how he raised money for his company, Yipit, using Angel List, a online network that matches investors and start-ups. “I was browsing through all these names I had heard of, investors whose blogs I read every day.” Before he knew it, Yipit was being offered more money than he knew how to spend.

For the creators of Greplin, a California-based start-up, the enthusiasm of the local angel scene was almost dizzying. “I flew here to meet Chris Dixon, and he liked the company, and he cut me a check,” founder Daniel Gross recalled. “The next day I get a call from Jordon Cooper at Lerer Ventures saying he heard about me, and then they cut me a check. Less than a day later I get a call from Josh Kushner, saying he’s heard about me from Dixon and Cooper, and then he’s cutting me a check. It was incredible.”

“There’s a lot more interest in seed-stage investing now, from people who really know the sector, and that’s great for local start-ups,” Mr. Dixon, an investor and entrepreneur, told The Observer. “There is a class of older angels here who have built tech companies, and can really add a lot of value to young startups. What screws up New York is all the random rich people from Wall Street and real estate who know nothing about tech but still want to invest. It’s the same network that keeps new restaurants opening.”

For the more experienced angels—those with battle scars acquired by launching their own tech companies—the flood of seed money can be grating. “These founders are talented, and there’s no doubt they have the ability to create a great business,” said Josh Reznick, who built and sold an online marketing company before becoming an angel investor. “But 20 minutes into the conversation, when they should be asking for $50K, they’re talking about $1.5 million, and I’m just flabbergasted, ’cause we’re talking about an idea on a cocktail napkin. There is frankly way too much money that wants to be invested.”

It’s a complaint that offends some of the younger dealmakers. “It pisses me off that people are complaining about the number of angel investors that have entered the market,” Lerer Ventures’ Mr. Cooper, who founded the start-up Hyperpublic, wrote on his blog. “Personally, I welcome anyone who wants to cut a $50K check to support a new product and pull a smart mind out of Wall Street or advertising or any other industry that is not pushing the limits of what can be,” he continued. “I’m not saying all these companies that are getting funded deserve funding or the valuations they are raising at, and many of them will die, but I’d rather see a slew of dead carcasses on the side of the road with a single world-changing product leaping over them on the way to victory.”

Back at the Ace, Mr. Wohlstadter scanned a text message from his girlfriend and fired back a response. “She hates it when I say I’m working and then it turns out I’ve been writing on my blog,” he said.

“There are certain advantages,” he went on, “not having a family yet, just being able to pound it out all hours of the day or night. I am at every single party, every event, and I’ll take a call from a founder at 3 in the morning to talk about a bug in the software.”

He’s also heading down to Austin for SXSW to promote his companies. “I am an evangelizer; I mean, I will talk about this stuff nonstop.”

The lobby was filling up. The Black Keys were on the sound system. A row of figures was pecking away at laptops along a wooden table, faces washed in the white light of their screens. “The angel craze means a lot more funding for new ideas,” Mr. Wohlstadter said. “But often that becomes a sort of tragedy of the commons, you know. All that money, and no one to guide the entrepreneur.”

Disclosure.

Investors are increasingly interested in smaller, more agile funds, according to a piece Venture Capital Dispatch. They are seeking a return to the founding days of VC, when former entrepreneurs ran the show.

Highlighted in the piece is New York's Roger Ehrenberg, who raised $50 million for his new fund, IA Ventures, last year, even though he had $85 million in demand.

The smaller funds have shorter exit windows and thus more flexibility. As First Round Capital's Josh Koppelman put it,

“When I hop on a train in Philadelphia I can either take the local or the express. I think most traditional VCs when they fund a company kind of buy an express ticket to an IPO. And I think what you’re seeing with some of these smaller funds, they’re buying a ticket on a local train.  They’re going to the same destination - trust me, I want a billion dollar outcome just like anybody else - but our fund size allows us that when the doors open at a $50 million stop, or at a $200 million stop, or a $500 million stop along the way, we can sort of look around and say, ‘There’s smoke on the train, we need to get off."

 

bpopper [at] observer.com | @benpopper