A consistent question I’ve received since starting Collaborative Fund in 2010 is why I founded the firm in New York instead of San Francisco — where I had lived previously.
In short, I’m a long-term believer in the budding startup ecosystem in this special city. Diversity, big industry, public transportation, abundance of capital, and talent – it’s a formidable combination.
But one thing that has held New York back as a true competitor to Silicon Valley is the lack of large and acquisitive technology companies whose stock commands a premium valuation.
We do have large “tech” companies like Bloomberg, American Express, IBM, and News Corp. But they are by and large valued as traditional businesses with lower valuation multiples than their West Coast counterparts. The five largest New York-based public companies trade at an average 14 times earnings. The five largest Bay Area-based companies, 27 times earnings. Higher valuation allows the latter group to use their stock as a currency to make lots of acquisitions — big and small — in ways New York can’t.
The importance of this has not been covered enough. I liken it to a garden where New York has all the right elements – good soil (schools), lots of interesting seeds (talented founders), abundant nutrients (venture capital), and farming labor (lawyers, accountants) … while lacking a big harvester.
This leads to an awkward dislocation where New York’s stars reach a ceiling, and then have to look west for options. We’ve seen this often: Buddy Media to Salesforce, Tumblr to Yahoo!, Hot Potato to Facebook, Behance to Adobe, Vine to Twitter, and so on.
Which isn’t healthy.
Back to our farming analogy: When an exit happens, the garden is replenished. Founders and early employees are typically rewarded with capital that allows them to become angel investors. Early employees go on to start new businesses. The lifecycle turns over with a fresh crop. But when exit options are geographically limited, the speed with which ecosystem turns over is reduced.
That’s why I was thrilled at this morning’s announcement that WeWork is acquiring Meetup. It feels like a watershed moment for the New York ecosystem.
We finally have a high-profile, highly valued company that is aggressively using its resources to harvest local talent. This isn’t the first time WeWork has opened its doors: It also recently acquired Flatiron School and FieldLens, both of which are New York based.
Collaborative Fund is not an investor in WeWork. And I don’t have an opinion on its valuation or future prospects.
But I’m rooting for more big New York companies to leverage their resources and play the critical role in harvesting local talent. It’s the last missing part of New York’s puzzle to make it truly competitive with the Valley.