From the Mailbag: The Valley vs. The Street - Where to Start?

Is the Valley the only place to do a start-up? And what about New York, anyway? Now this is a question I've been asked more than a few times over the past two years, and as time goes by I feel better able and more qualified to answer it due to my own start-up and investment experiences. So the catalyst for this post was this recent email from an IA reader:

My name is [let's call him S. Valley] and I'm an internet entrepreneur in Palo Alto. I was referred to your post on the shift from Wall Street to Main Street and I very much enjoyed your thoughtfulness. A good friend formerly at a hedge fund is now starting his first internet company and going through a similar transformation, loving most of it along the way...

I noticed you have stayed in New York. This friend and I have had a spirited debate about whether starting his company in New York is a significant disadvantage. I've argued, for not entirely objective reasons, that anywhere outside of the Bay Area is more plausible but still handicapped for an internet company. I'd be curious on your view of this...

Now, myself and Mr. Valley engaged in a little email tennis around this topic, the contents of which I will share with you, my patient and loyal IA readers. This response, from me:

Hi S. Valley. Yours is an oft-asked, provocative question. I should blog the answer (and maybe I will), but my punch line is that it depends on the nature of the company and the nature of the customers. Sure, there are base level resources that need to be present (i.e., access to talent, access to angel and VC capital), but I'd argue that a financial services Web 2.0 application is better started in New York than it is in the Valley (though I'm sure Peter Thiel would disagree). Massive access to talent. Close to customers. Seasoned and well-heeled angels and VCs. But for a CGM start-up, the Valley is probably a better place. So, in short, I think it depends. New York has come a long way, to be sure. But it ain't no Valley, either.

Well, and Mr. S. Valley's response:

I would agree that New York has caught up. In his case, his service will target consumers and my argument has been that the engineering, adviser, and VC resources for consumer internet startups are richest in the Valley by probably 3-4x anywhere else. His counter-argument is that a high-quality startup in the smaller bowl of NYC can draw the top talent, which in most areas is comparable...

I do love that the production costs for internet have lowered and distributed so much that nearly anyone anywhere with a great idea can bring it to reality. What I don't know yet is how much the fuzzy value of relationships and face-to-face interactions can be ported. I've felt these facilitate trust and value development beyond any other communication method...

So there you have it. But I'd like to address a few issues that weren't specifically raised in either the question or my response. And just be clear, notwithstanding the fact that I am a New York denizen I am trying to look at this issue in a fair, open and dispassionate way. Believe me, ok?

1. Intimacy among entrepreneurs, VCs and University ecosystems: My perception is that both the Bay Area and Boston are much more evolved than New York in the way technology and IP is transferred among these constituents. And this is a shame. Because the greater NY area is home to some of the finest institutions of higher learning in the land. We are just not quite good enough yet at making sure breakthroughs in the lab make it to the marketplace. This will evolve over time. But New York is far, far behind its East and West coast start-up cousins.

2. Breadth of the angel ecosystem: This is a place where New York has made huge strides in the past few years. As a member of New York Angels and as an independent angel investor I have seen tremendous activity among experienced, value-added individual investors in this City. But one thing NYC lacks is the breadth and depth of successful entrepreneurs who have made their big money on their own deals and are now recycling their wealth into new, exciting start-ups. This has the dual benefit of keeping these extremely talented entrepreneurs engaged and invested in the successes of the future together with providing a large pool of investable angel capital from which to draw. New York has not yet had the magnitude of big entrepreneur pay-offs to rival the Peter Thiels and Reid Hoffmans of the world.

3. VC integration into the entrepreneur community: Big VC/entrepreneur schmooze-fests. Networking events. Start-up business plan contests. These are all good ways to solidify the closeness of a region's start-up ecosystem. Both the Bay Area and Boston have historically done a really good job of this, while New York is more nascent in its efforts. That said, my friends at DFJ Gotham Ventures are hosting a venture challenge at Columbia Business School (my alma mater) that is just the kind of thing that gets the juices of young entrepreneurs flowing. Real cash ($250k+ of funding). Real feedback. A real stage on which to shine. This is good stuff. New York needs more of this.

4. A culture of winning the start-up lottery: It is just a fact that the Bay Area and Boston have many, many more examples of start-ups reaping those mythical 100x payoffs than New York. And this is ok, because New York will get there. But until this happens, New York will still be a Second City of start-ups, because nothing speaks like success. Success breeds success. Success attracts dollars. Success attracts the best talent. It creates a barrier for other ecosystems to take hold. Not that it can't happen, because it will. But it just takes time. And New York simply isn't there yet, IMHO.

In short, I Love New York. But I also acknowledge that it is not yet the #1 place to do a start-up. My partner, Jeff Stewart, argues that NY is better for start-ups because of its Selling Fields.  It may be for some applications and businesses, but it is not there yet, IMHO. But I love being the underdog. Because just when you least expect it...