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NYC Is the Next Venture Capitol Part 2

March 8, 2014

nytech apple capitolMy post a couple of days ago was an excerpt from a longer white paper I wrote on the state of the tech startup ecosystem in NYC. In order to conserve space and not make it TL;DR I eliminated some sections, including some more in-depth analysis of the startup funding scene and an exploration about NYC’s X-factor, our community. For this of you more interested in seeing the full monty, I am including links to download the white paper and a presentation based on it.

The full white paper can be found here: NYC is the Next Venture Capitol WHITE PAPER 3-14

The presentation can be found here: http://www.slideshare.net/dbaronoff/nyc-is-the-next-venture-capitol-presentation-3-14

I’d love to hear your thoughts!

NYC is the next Venture Capitol

March 6, 2014

nytech apple capitolThis post is not about comparing Silicon Valley to NYC.  That’s tired.  Silicon Valley is the gold standard and there is no “next Silicon Valley.”  What this post is about is how NYC has become a unique place to build multi billion-dollar startups. First, to frame the evaluation, it’s important to get the prevailing criticisms of the NY tech scene on the table:

  • We lack talent, particularly technical resources.
  • It is just too expensive to live and to build a startup in New York City.
  • Seed rounds are easy to get funded in NY, but follow-on rounds are difficult.
  • We’re deficient in terms of big exits and content to sell companies early.
  • And finally, NYC is strong in traditional sectors like AdTech, FinTech, Fashion or Media, and nothing else.

While at one point there may have been truth to each of these points, they are simply no longer accurate. To address these topics in some detail, we’ve constructed the following graphic as a summary of the “state” of NYC’s startup ecosystem and why we conclude the city is on the rise as an important venture capital center: skyscraper When you consider the growth of New York as a funding target for venture firms, it’s worth noting that the city has emerged as number 2 or 3 in the US – but more importantly, we’re the fastest growing region over the past decade for financings[29].

usmap
Focusing on NYC, we actually observe great health at every stage since 2006:

  • More than $13.5B in venture financings in more than 2,700 transactions[30].
  • More than 800 M&A transactions, including solid exits between $50M and $1B in the past two years. Notable companies include Admeld, Buddy Media, indeed, MakerBot, tumblr, among many others[32].
  • Critically, we’re seeing the surge of very strong companies toward IPO in the $B+ range, such as AppNexus, mongdoDB and ZocDoc.
  • NYC accounted for 7 or 9.3% of the total number of US VC-backed IPOs for 2013[32]. Additionally, Shutterstock, the most the successful of 2013 NYC tech IPOs was not VC-backed, stands with a market cap of nearly $2.7b.

Sectors It is certainly true we have stars in what are considered NYC’s traditional sectors like Fashion and FinTech. But not as heralded are the world class companies emerging in more tech-heavy sectors such as Hardware and Enterprise Tech – not thought to be NY’s strength. Of note is that 27 of the Business Insider Digital 100 are NY companies.

sectorlistThe data supports the diverse investment activity among sectors in NYC. According to the PWC Moneytree Report, VC investment activity for the period 2012-2013 breaks down as follows[33]:graph1

Software investments dominate VC investments across all stages over the last two years, nearly twice the number of financings for Media & Entertainment.  It’s not surprising that media investments are still important within the NY ecosystem, but a more granular taxonomy shows the following[34]: graph2 Of special note is the acceleration of Internet Commerce, which at 15.6% of all financings over the past two years is catching up to media investments. The X-Factor   There’s no surprise that the NYC tech community is incredibly active and inviting. This is clearly demonstrated by the more than 350 individual tech meet-ups, comprising more than 320,000 members with more than 1/3 of them active monthly. But could community be NY’s X Factor and is its impact quantifiable? NYC tech has had two distinct generations in the past 14 years – the “Internet bubble clean up” period from 2000 to 2005, which prepared us for the beginning of “gear up” period starting in 2006. In just 7 years, we’ve gone from one of many tertiary tech regions, to a top entrepreneurial center in the US. Some great and growing exits and leading companies in their sectors indicate that we’re following the right trajectory toward success. Silicon Valley didn’t “happen” overnight; it took more than 30 years for its ecosystem to mature. New York City appears to be on a faster trajectory, and in the next 2-3 years, there will be no doubt that it has arrived if:

  • our community continues to demonstrate its special nature of support and collaboration, paying it forward to create new generations of founders,
  • the focus of capital remains trained on our startups as a top three recipient of financings in the US, and
  • most importantly, our terrific cohort of leading tech companies racing toward escape velocity, produces billion-dollar, thriving public companies.

** Many thanks to the inSITE Fellows Program and fellows Zak Schwarzman, Patrick Chang and David Lerman for helping to pull together data analysis for this article

Footnotes

1. Partnership for NYC

2. Building a Digital City: The Growth and Impact of New York City’s Tech/Information Center, p. 2

3. LinkedIn Research, Dec 2013

4. Startup Ecosytem Report Part 1, p. 35

5. H1 Base

6. Angel List Research, Jan 2014

7. Fortune

8. NYEDC, p 4 Economic Research and Analysis, Tech Trends August 2013

9. NYC TechCity, p. 1

10. Meetup.com Research, Dec 2013

11. Meetup.com Research, Dec 2013

12. NY Tech Meetup Research, Dec 2013

13. Promoting Entrepreneurship in NYC, NYEDC p2

14. Mark Birch Research

15. Mark Birch Research

16. AON / Partnership for New York, p. 11

17. US News & World Report

18. AON / Partnership for New York, p. 11

19. Partnership for New York City, NYC Jobs Blueprint, p. 25

20. Academy for Software Engineering Bronx Academy for Software Engineering

21. The Computer Science Education Foundation of New York City 22. WNYC 23. NYC Real Estate Broker’s estimates, Jan 2014

24. Partnership for New York City, NYC Jobs Blueprint, p. 13

25. NYC TechCity, p. 8

26. NY VC Almanac, p. 7

27. The Atlantic / Martin Prosperity Institute

28. National Low Income Housing Coalition Report, March 2012 http://nlihc.org/sites/default/files/oor/2012-OOR.pdf

29. The Atlantic / Martin Prosperity Institute Updated with 2012 Data

30. NY VC Almanac, p. 7

31. PWC / NVCA Moneytree Report Feb 2014, data from Thomson Reuters

32. Wilmer Hale Research, Feb 2014.

33. PWC / NVCA Moneytree Report Feb 2014, data from Thomson Reuters

34. Thompson One

CSNYC: The NYC Foundation For Computer Science Education

November 5, 2013
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Education is very important to me and my family; My mother was a public school teacher for 50 years, my father Chairman of my town’s school board and I continue to serve on three charitable boards related to education – Lyndon Institute (my old high-school), The Rashi School (where our children attended) and the University of Vermont Foundation Leadership Council (my alma mater). My wife Jessica and I are convinced there’s no way have a greater impact on the future than finding ways to energize children and young adults through innovative education. And like many issues plaguing our society, the cost of education continues to grow exponentially and our public schools keep falling behind.

This is why we jumped at the chance to support a totally new and inspiring effort led by Fred and Joanne Wilson and my dear friend Evan Korth as they create a $5m seed fund to invest in computer science education in the NYC public school system called the . Fred discussed this amazing development last night at the NY Tech Meetup or CSNYC. CSNYC will be a great prototype for expansion across the country going forward. With skilled jobs demanding a strong technical orientation, an early and thoughtful education in computer science will help make our kids more excited about learning and ultimately our cities more competitive – which should create a virtuous cycle of revival.

As Brad Feld wrote yesterday, this is a prime example of how the community can step in to fill holes that government funding just can’t. If this is interesting to you, Joanne, Fred, and Evan are hosting an event at USV on Monday, November 18, 2013 for 6pm to 8pm for those who can consider making investments of $5,000 and above due to space constraints. Separately, there is a Crowdrise campaign to allow donations of between $50 and $4,999 for those who can’t participate at these levels.

If this is an important area to you, I encourage you to support this visionary effort. If you are willing to consider contributing at the $5,000 or greater level and can attend the event at USV on Monday, November 18th, register here. I will be attending and look forward to seeing you! 

BitSight Revealed

September 10, 2013

bitsight logo 

I’ve been an information security junkie since grad school at USC in 1987-88, when I studied under two of the most forward-thinking researchers on the topic, Dr. Len Adelman (the “A” in RSA) and Dr. Deborah Estrin (now at NYC Cornell Tech). Obsessed with what the future might hold for security on the Internet, I continued my focus as I left the operational world to join the venture capital industry, and was fortunate to work with great companies – some like Internet Security Systems, which nailed timing and execution, and others ahead of their time, like Mazu Networks, which pioneered DDOS detection and prevention.

Having seen the swarm of InfoSec startups that grew too vast too quickly at the end of the last century, I watched but did not invest in the sector after 2002, because I was concerned it was oversaturated. I was looking for something radically different and it took almost a decade to find it.

A little over two years ago, I made a seed investment in a stealth security startup based in Boston called BitSight. Founded by two MIT Sloan classmates, Stephen Boyer and Nagarjuna Venna, they sought to change the way information security was provided to meet the gathering storm of open cloud services, the expanding universe of data integration among businesses and the increasing sophistication of cyber criminals. They believed they could transform how companies manage information security risk with objective, evidence-based security ratings.

After two years under a cloak of secrecy, BitSight is launching today, with the announcement of their first service, Partner SecurityRating, which helps solve the problem of risk management among businesses that share data over the Internet – which is obviously most businesses these days.

Companies have hundreds or more business partners with which they share sensitive data via various feeds and APIs. These companies are at risk of this important data being exposed via a breach on a partner network for which they have no control or insight. Prior to BitSight, the best they could do were periodic manual audits of their partners, based on intrusive methods such as interviews, questionnaires and on-premise penetration testing. BitSight quantifies security risk and helps them mitigate by providing continuous monitoring, ratings and alerts on the security effectiveness of partner networks. Similar to consumer credit scores, BitSight ratings are objective, automated and derived completely from externally available data – requiring no invasive acts. For the first time, security professionals and risk managers can get the insight they need to make proactive, data driven decisions to manage third-party security risk. This was a big idea more than two years ago, and since inception the team has developed its proprietary algorithms and service in concert with several leading customers.

While BitSight is the first company to harness the power of big data insights via a cloud service to attack information security problems, the core reason we invested was because of the team. Stephen and Nagarjuna have recruited an amazing ensemble, starting with their CEO, Shaun McConnon. I first met Shaun in 1996 when he was the founding CEO of Raptor Systems, one of the first firewall companies, which he led to a successful IPO and even more successful acquisition. Shaun then went on to build two other successful InfoSec startups, Okena – acquired by Cisco and Q1 Labs – acquired by IBM. I was fortunate to recruit Shaun to serve on a board with me, and thrilled that he saw such promise in BitSight that he asked to join as our CEO. This core team has added executives, researchers and developers possessing a rare combination of deep, successful InfoSec experience with advanced algorithms and data science expertise. I think this mixture gives BitSight a great edge in taking on the challenge of ever-increasing security risk in a cloud-centric world.

I think we’re at an inflection point for infrastructure to support the next generation of Internet services. The move to cloud-based topologies with compound architectures built from multiple vendors as well as mobile-first solutions means that legacy solutions for InfoSec just won’t work. When you retain responsibility for security integrity, but no longer own your infrastructure – instead renting it dynamically from disparate vendors, you cannot use traditional premise-based devices and software to protect your business. There simply is no “premise” any longer on which to install them, and with servers, connections and underlying components dynamically changing, approaches need to change. Security services need to match these new architectures and BitSight is among a handful of early leaders delivering cloud-based security services.  I am convinced this approach will provide the next great opportunity to build very large, successful InfoSec businesses.

We are delighted to be investors in BitSight and look forward to the excitement to come.

Cisco Acquires Joulex

May 29, 2013

cisco joulex

Quick post – more to follow

Cisco announced today its intent to acquire JouleX – we’re very excited for Tom Noonan, Rene Seeber, Josef Brunner, Tim McCormick and the entire team. The press release is below -

Cisco Announces Intent to Acquire JouleX
Acquisition Enhances Cisco’s Software-as-a-Service Offerings with Energy Management for Enterprise Networks and Data Center Infrastructures
SAN JOSE, Calif. – May 29, 2013 – Cisco today announced its intent to acquire privately held JouleX, a leader in enterprise IT energy management for network-attached and data center assets. JouleX, with headquarters in Atlanta, GA, complements Cisco’s existing services portfolio by using the capabilities of the network to gain visibility into and control energy usage across global IT environments.

As the need for improved energy management increases, global companies are faced with a new set of energy-related challenges. Increasingly enterprises are focusing on network and IT energy efficiency and are seeking solutions to control energy consumption across their campuses and data centers. JouleX provides software for networked devices for enterprise and data center energy management, analytics, policy governance and compliance.

JouleX’s energy management solution, together with Cisco EnergyWise™, will provide customers with a simple way to measure, monitor and manage energy usage for network and IT systems across the enterprise, without the use of device-side agents, hardware meters or network configurations. JouleX’s software helps to reduce energy costs by monitoring, analyzing and managing energy usage of all network-connected devices and systems through a set of policies derived through analytics tailored for an enterprise’s needs.

“JouleX’s technology will strengthen Cisco Services’ Smart Offerings and complements our evolving services strategy. It extends our ‘Internet of Things’ capabilities and is a good alignment to Cisco EnergyWise,” said Faiyaz Shahpurwala, senior vice president, Industry Solutions. “With network-enabled devices increasing exponentially, our partners and customers are asking for this solution today to operationalize their energy management capabilities in the network and reduce cost. JouleX’s cloud-enabled, agent-less architecture will allow our partners and customers to quickly deploy this solution at scale in addressing their IT energy management needs.”

The acquisition of JouleX exemplifies Cisco’s innovation framework and supports Cisco’s five foundational priorities by enhancing our software and service offering across all customer segments and advancing our business and technology architecture. The JouleX acquisition is aligned to Cisco’s goals of developing and delivering innovative energy management solutions that streamline data and work flow across a unified network.

JouleX was founded in Munich and currently has research and development operations in Kassel, Germany. Upon completion of the acquisition, JouleX employees will be integrated into the Connected Energy Solutions team within Cisco’s Industry Solutions Group, reporting to David Goddard, vice president and general manager. Under the terms of the agreement, Cisco will pay approximately $107 million in cash and retention-based incentives in exchange for all shares of JouleX. The acquisition of JouleX is expected to be complete in the fourth quarter of fiscal year 2013, subject to customary closing conditions.

About Cisco

Cisco (NASDAQ: CSCO) is the worldwide leader in IT that helps companies seize the opportunities of tomorrow by proving that amazing things can happen when you connect the previously unconnected. For ongoing news, please go to http://thenetwork.cisco.com.

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No

March 28, 2013

media_icon_dislike_400_clr_9164I think I am a very positive person. Having grown up in rural Vermont, my wife often times describes me as an “optimistic farm boy.” I love innovation,  truly believe in the goodness of people and that the future will be better. So, why is it that I chose a profession that forces me to say “No” most of the time and moreover, encourages me to give critical feedback to energetic entrepreneurs that often verges on crapping all over their innovative ideas?

Few VCs would describe one of their main responsibilities as saying “No,” but in reality it is.In 2012 I reckon I officially said “No” to entrepreneurs about 99.8% of the time that they asked me for money (according to our internal deal log). And this doesn’t count the times at conferences, weddings, bar mitzvahs, soccer games and yes, sadly, even funerals, that I received informal pitches and wafted an air-biscuit of rejection in the idea’s general direction. I don’t want anyone to lament for me; as I know I have one of the best jobs on the planet, because everyday I get to meet with amazing people who seek to change the world, and I get to listen to their stories and plans. So in saying “No” so often, I want to make sure I say it well.

I think there are two critical elements to saying “No” well, while doing my job well:

  1. Being right most of the time when I say it, and more importantly when I don’t;
  2. Saying it in such a way that I show the respect due the receiving party.

First the easy part. As far as “No’s” go, it’s been a while since I looked at my own antiportfolio, but suffice it to say I have made some spectacular mistakes in “No’s” over the years. For the sake of illustration, I’d probably bookend my career at this point with Akamai and MakerBot as chief blunders. Saying “Yes” is harder than saying “No,” and for sure I have made a few mistakes on this dimension. (I’ll spare  the details). Ultimately, Venture Capital is a game of numbers, and a VC’s performance – the right “No’s” and right “Yes’s” –  needs to solve positively, or a VC no longer gets money to invest.

In part no doubt due to natural conflict aversion, the harder part for VCs appears to be saying “No” in a way that shows respect to an entrepreneur. The old way in VC was to never really say “No” at all, for fear of the repercussions: the entrepreneurs would become successful and hold the “No” against you in the future, or would tell their friends bad things about you. While I am sure there are many others, I have noticed two common strategies for delivering the “Soft No”:

  • “the phone-tag game” – never actually connecting to deliver the news,
  • “Dorothy and the Wizard of Oz” – creating a set of unattainable milestones only after which we’ll fund you,

What ever the meme, many VCs seem to do everything possible to avoid giving entrepreneurs the real reasons they’re turning them down. The rationale I have heard most often is that this avoids getting into a prolonged argument with the entrepreneur that could deteriorate and leave really hard feelings. I think this is baloney.

Personally, I feel that any entrepreneur who has the guts to present their idea out loud, whether primordial or well-formed, is taking the ultimate risk in putting themselves out there and deserves open feedback . I strive to respond to every single business idea pitched to me –  with honest reasons for saying “No” if that’s the outcome.  The feedback varies from the very light (“not a sector in which I am interested), to much more in-depth and specific to the particular business. It gets trickier when we pass on an investment because of unambiguous and confirmed negative feedback on personnel, as it is generally given under guarantee of non-attribution. Providing meaningful feedback without betraying confidential sources is quite difficult, especially if one doesn’t really know the entrepreneur well.

No one likes getting turned down.

Crashlytics Acquired by Twitter

January 28, 2013

Crashlytics_Twitter_Acquisition

At 5pm ET today, Crashlytics announced they had been acquired by Twitter. The entire Crashlytics team will remain intact and the Crashlytics product will continue to be developed. The founders will have significant roles within Twitter as well. While the purchase price was not disclosed, this was a tremendous outcome for the employees and investors.

There’s an old saying that great companies are bought and not sold. Crashlytics is a case in point. As a great example of a lean startup, they raised a $1M seed financing and a $5M Series A – and spent only 1/3 of it all by the time of the acquisition. On this funding, Wayne and Jeff built an amazing team, a revolutionary platform, a vibrant and addicted customer base of thousands and virally scaled their way onto hundreds of millions of mobile devices. In a little over a year.

When Twitter came knocking, we discovered that the teams and cultures matched remarkably well. It was clear that Twitter shared our vision for the future and together the opportunity to grow was just too good to pass up. I am very optimistic about the future of Crashlytics as part of Twitter, and grateful to work with this amazing team.

But it’s also bittersweet. We are fortunate to work with world-class entrepreneurs on a daily basis. Startups, like Crashlytics, that take off with ferocious acceleration and trajectory are rare indeed, and selling always begs the question of what could have been on a standalone basis? I am not a big “regrets” guy, so I will forgo the opportunity to wax prophetically. I know big things are in store for this team and I look forward to working with them again down the road.

We wish the entire team and the whole of Twitter the best of luck!

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