Investors, Entrepreneurs Discuss NYC's Rapidly Growing Seed Funding Community

Last week at TechCrunch Disrupt, some of New York City’s most notable investors and entrepreneurs took the stage to talk about New York City’s seed funding situation. The title of Startup Mecca still clearly belongs to Silicon Valley, but as panel moderator Erick Schonfeld noted, the number of startups making their way to the Big Apple is on the rise and dealflow in New York is quickly heating up.

The conversation touched on quite a few subjects, including what kind of companies tend to do best in New York. Betaworks CEO John Borthwick posited that many of the startups doing well in NYC — Tumblr for example — tend to focus largely on the UI and user experience. He says that many of the web’s building blocks (AWS, etc) are already in place, and many of the services that will do well are building off of those. CEO Mike Hudack agreed with this, saying that we no longer have to classify all web companies as “technology companies”. Rather, they can be media companies leveraging online content. Jalak Jobanputra, SVP at the New York City Investment Fund, says that while a lot of the infrastructure has been built, there is still much work to do in mobile. She also noted that many people were coming out of Wall Street to start their own ventures.

Chris Dixon, who has blogged extensively on raising money and other topics, says he doesn’t like to think about investing in terms of NY vs Silicon Valley (though he does wish there were more startups instead of lawyers in NYC). Rather, he wants to bring an SV-like ecosystem to New York. He also said that the notion that finding real estate in NYC was an issue was a red herring (Hudack added that if you can’t handle the real estate, you shouldn’t be doing a startup).

Regarding the trend of taking seeding funding from large VCs, most of the panelists seemed to think that it was a bad idea, namely because it could lead to issues down the road if your VC does not decide to follow on.

For more, check out my live notes below and the video of the talk.

Here are my notes from the talk:
John Borthwick, CEO, betaworks

Chris Dixon, CEO, Hunch & Angel Investor

Mike Hudack, Co-founder & CEO,

Jalak Jobanputra, SVP, New York City Investment Fund

Erick – Percentage of companies we’ve covered that were from NY increased in the last 18 months.

JB: Betaworks is a holding company. We’re not a fund. We biuld stuff and we invest. Everything we’re doing is focused on the social, realtime web. This concept that there’s an emerging connected set of companies — we view it as a loosely coupled network of companies. We think a lot of the groundwork has been lain – AWS, etc. We think lightweight apps — they can  be huge — where a lot of the emphasis is on front end, UI, initial experience. A lot related to media business, advertising business and the like.

Why in New York?

CD: I think if you look at the 90’s, the big heavy companies were actually in Boston.

JB – We learn so much from the west coast.

MH- To the point about building blocks being bulit… A lot of businesses that are interesting are media, publishing, and communications.You don’t need to think of every company as web as technology company. Blip doesn’t think of itself as a tech company, it’ s a media company.

JJ-I think that with mobile, there is still a lot of infrastructure that needs to be built. I do think New York’s hard technology scene is still growing.

Erick: What about recruiting, office space in NYC? What are the things you need to know about balding a startup in NYC?

CD — I think the real estate thing is a red herring. Basically all these expenses are salaries for smart people. I think NY is similar to Silicon Valley in that almost nobody working there actually came from there. We recruit a lot of people MIT, CMU, Penn.

MH- Real estate is relatively easy. We found our first office on Craigslist.

JB – We went to a startup that had taken a space that was bigger than their existing capcaity and just rented some desks. If you can’t sort out real estate you shouldn’t be entrepreneur.

JB – We’ve been inspirred by West coast investors who understand value of syndicates. The value of of bringing in great investors, people who will help you at different times, different stages.

Erick – Is seed funding really challenging venture model?
CD – I think venture firms freaked out back in the 90s. Yale/Harvard was really succesful, and then everyone copied it, and there were a ton of bad funds. People really dont need that much money. These days we have more educated entrepreneur. They think about net dilution over time. There’s tons of issues with taking early money from big VCs. Biggest is that if they dont follow on you’re basically toast. Because if Sequoia gave you 500k, and they aren’t involved later, people wonder what’s going on — it’s the same signal is if I just got fired and want to find a new job, people are wondering what went wrong.

MH- I wouldn’t take that money.. Similar issues if you take a strategic investment and then aren’t acquired. People are asking what your strategic is doing.

Let’s talk about what each of you guys are doing .

JJ- I’m with the NYC investment fund. About a third of what we do is venture. I joined two years ago. We’ve set up our seed fund in response there being a dearth of seed money. We’d looking to help seed the entire ecosystem.

CD- The Founder Collective is a $40ish million seed venture fund. There’s about $15 million from entreneurs in the local area. Our thesis is that we’d rather have entrepreneurs betting on entrepreneurs rather than bankers. The advantage is that they can probably see the value better.

JB – Our model is a little different. We aren’t a fund, we’re a holding company. From investment standpoint, what we’re looking at has to be in beta — we want something we can look and feel and touch. I don’t like the abstraction of ideas, I like the real product. We love to see data, even if it’s from 50 users.

What about the second, third tier areas? Say, Pittsburg with CMU. Do you invest in any startups in those cities?

CD- Thing is, you need the critical mass.

MH- When we started Blip people had the same complaint about NYC. They said we had to move to Sf. That was only a few years ago. I dont see any reason why can’t happen in any of these cities. but it does take time.

JJ- I’m seeing a lot of entrepreneurs from secondary cities who actually are thinking of moving to NY, which does have critical mass.

JB – There’s a lot of great stuff happening in NY. Great stuff in London, Asia, and even out in the Middle East. What is happening is the wave of innovation from the first 10/15 years of Internet, which is washing through the rest of the world.

What do you think about if a VC will follow-on if they do participate in a seed round?

CD – I’ve sat in VC meetings, listened to the LPs. We’re doing this to get options.

MH-With the amount of money sunk in a seed round, your company is an option, but it isn’t a major sunk cost. They can drop you.

CD- That said, if Fred Wilson does a lot of diligence and invests 500k i think he will want to follow on. It’s the VC who meets an entrepreneur for 5 min and gives 20k — that’s bad.

Erick – If you have a first time entrepreneur, what are you looking for?
JB- At the end of the day, a lot comes down to the individual’s passion for what they’re building. Their belief in it, and understanding of the product and market. There’s a difference between someone who has had and is solving problem vs someone who comes top down, decides to look for a problem based on marketsize without having had it themselves.