Yesterday, BBC’s Nastaran Tavakoli-Far wrote an article talking about New York’s startup scene in comparison to Silicon Valley. The article missed a key difference between New York and Silicon Valley: investor maturity. Investors in Silicon Valley have been investing in technology far longer than most New York investors. They’ve learned that they need very large exits (acquisitions and IPOs) to offset failed investments. So they typically only invest in companies that might have a very large exit. This is why smaller, niche businesses are more often funded in New York than in Silicon Valley.
The article claims that New York startups solve specific problems for everyday life, whereas Silicon Valley startups have a “broader game-shifting approach.” Tavakoli-Far talks about New York’s industrial diversity as being the source of this, claiming a more diverse investor population will invest in more industries than a typical Silicon Valley investor. This is wrong. Good investors don’t necessarily invest in industries they understand. They make investments that will get them a return. And they rely on good entrepreneurs to understand and manipulate the industry.
Silicon Valley investors have the risk-reward equation figured out — they look for potentially huge businesses because it’s one way to manage a profitable fund. Whereas New York investors might still be figuring out the risk-reward equation — the scene is too young to know how well New York investors have done, at least with New York tech companies. The most well known New York tech company is Foursquare, which was last valued at $760M before ad-based consumer internet companies started losing valuation due to Facebook’s bad IPO.
All that said, I wish more Silicon Valley investors weren’t so set on huge exits. There are a lot of great companies out there that have cashflow issues in the early stages and could benefit from a small investment, even though they won’t have a huge exit. Yet I understand that investors have a job and their job is to make their funds profitable. And probably the easiest way to do that is to fund businesses that might have a huge exit.