Why Venture Capital Keeps Flowing Into New York City

By BrainStation May 27, 2019

After a record year of investments and big-money deals in the Big Apple, you might have expected venture capital (VC) activity in New York to stagnate in 2019 – instead, the East Coast tech hotbed has only gotten hotter.

The first quarter of 2019 saw New York metro-based VC-backed companies raise $4.5 billion, a 110 percent increase over the fourth quarter of 2018, and a massive increase over the $2.7 billion raised over the same quarter in 2018.

Amazingly, this kind of growth is expected to continue. Here are some of the reasons why New York’s VC activity has maintained such a feverish pace.

VC Activity Is on the Rise Everywhere

Although we’ll get to the ways in which New York’s VC situation is special, it’s worth noting that VC activity is going through the roof across the United States and beyond.

It was a banner year in 2018 for VC funding in the U.S., with a record $130.9 billion invested in American startups, surpassing the all-time high in 2000. That staggering number was spread across 8,948 deals. Other numbers were similarly positive, including a 33 percent year-over-year increase in exit value and the highest-yet figure for fundraising, with $55.5 billion raised across 256 deals.

And experts believe 2019 could be on pace to top those figures.

According to the 1Q 2019 Pitchbook-NVCA Venture Monitor, the deal count trended downward in the first quarter of the year but larger deals elevated the overall value. Moreover, first-quarter capital investment was the second-highest quarterly total in 10 years (behind only the record-setting fourth quarter of 2018).

Perhaps most impressive is that 2019 could be poised to surpass 2018 for record exit value, with Uber headlining a series of expected high-profile public offerings.

New York Is Outpacing Even That Growth

In the first quarter of 2019, the Pitchbook-NVCA Venture Monitor found that the Mid-Atlantic region, which includes New York, generated 30 percent of all the deal value of VC dollars – more than double what the region reeled in during the fourth quarter of 2018.

According to the recent Global Startup Ecosystems Report from the New York City Economic Development Corporation, New York City is the world’s second highest performing ecosystem with 7,000 startups and over $71 billion in Ecosystem Value. New York grew from $2.3 billion invested in startups in 2012 to approximately $13 billion in 2018 (the sector now boasts 326,000 jobs).

New York is also taking a larger and larger share of the country’s overall VC funding.

In 2017, dollars invested in New York represented over 14 percent of all investment dollars in U.S. venture-backed companies. Surprisingly, that share has risen gradually over the past decade, more than tripling 2009’s rate and doubling 2012’s.

As New York’s piece of the pie has grown, the Bay Area’s has shrunk. Over the first half of 2018, the total number of investments in New York-based companies was almost half that of the Bay Area, compared to only 10 percent in 2006.

It’s not just the quantity of investments in New York that’s on the rise, but the average size of investment – it was up to $12 million in the first half of 2018, compared to less than $4 million as recently as 2012.

Numbers from Pitchbook show that there were only 91 deals greater than $20 million between 2010 and 2013 – through August of 2018, there were already 87 deals of that magnitude.

New York’s Startup Scene Continues to Diversify

In the early part of the decade, New York’s tech startup landscape was mainly associated with eCommerce (Etsy), social networks (Tumblr, Foursquare) and media (Buzzfeed, Vox). As the ecosystem has matured, New York is now a hub for fintech, biotech, food, cybersecurity, consumer tech, and much more.

Consider the diversity of 2018’s biggest funding rounds.

Peloton – which aims to create an indoor cycling studio experience that can be accessed from anywhere – raised $550 million to bring its total to $994.7 million in equity funding ahead of its IPO this year. Second-hand shopping app Letgo raised $500 million Series E, and real-estate platform Compass brought in $400 million Series F.

The variety in New York’s thriving startup scene doesn’t end there. Dataminr – billed as the world’s first real-time information discovery company – closed a $392 million funding round at a $1.6 billion valuation, more than twice its 2015 valuation of $680 million.

Meanwhile, home buying tool Ribbon announced a $225 million funding round, health insurance company Oscar Health raised $165 million, robotic process automation vendor UiPath raised $153 million in Series B funding – before receiving another $225 million Series C in September – and online startup Harry’s shaving club raised $112 million Series D funding before announcing plans to move beyond the shaving business.

The Global Startup Ecosystems Report found that three New York sub-sectors are growing particularly quickly: health and life sciences; advanced manufacturing and robotics; and cybersecurity, a sub-sector that generated more than $1 billion in VC investment in 2017 alone.

“We are lucky to have the confluence of existing markets and industries along with the creative culture to drive a truly diverse tech ecosystem,” said Julie Samuels, Executive Director of Tech:NYC.

An Improving Environment for Exits and Mergers and Acquisitions

For years, the criticism of New York’s tech scene was its relative lack of high-profile IPOs and mergers and acquisitions – despite success stories such as Etsy and Blue Apron – but that has finally changed.

In fact, 2018 began with a bang as Roche’s acquisition of digital health analytics startup Flatiron Health for $1.9 billion established the largest tech acquisition in New York history.

Stunningly, that figure was almost matched mere months later when Adtech pioneer AppNexus, a marketplace for digital advertising, was acquired by AT&T for a reported $1.6 billion.

Other big exits in 2018 included Salesforce’s acquisition of AI-powered marketing intelligence platform Datorama was for a reported $800 million and MINDBODY’s acquisition of spa management platform Booker for $150 million in March.

There were also two major acquisitions of New York-based public bicycle and electric bicycle sharing platforms, as  JUMP Bikes was acquired by Uber for a reported $200 million, and just months later Motivate, the company behind Citi Bike, was scooped up by Lyft for a rumored $250 million.

Now, all eyes are on WeWork, which announced in April that it confidentially filed IPO registration paperwork.

Other New York companies that went public recently are also performing well. MongoDB has seen its stock price more than quadruple since going public in October 2017, while digital knowledge management platform Yext has a market cap of $2.37 billion after pricing its April 2017 IPO around a $1 billion valuation, and Etsy similarly has seen its market cap skyrocket to $7.26 billion after a year in which its stock price grew more than 100 percent.

Strong Local Early-stage Investors

New York’s thriving startup ecosystem in part owes to the robust venture support provided by a number of local early-stage firms, with some of the most active among them including Lerer Hippeau Ventures, Contour Venture Partners, Greycroft Partners, FirstMark Capital and Female Founders Fund.

Other multi-stage investors have also been generous with early-stage investments, including Bessemer Venture Partners, General Catalyst Partners and New Enterprise Associates.

And of course, it generally helps that New York stands as the financial capital of the U.S., and the number of VC firms operating locally remains high.

A Commitment to Innovation

New York didn’t become a hub for innovation and entrepreneurship accidentally, and one of the reasons it’s become such a rich ground for VC investment is the robust government support of the city’s booming tech ecosystem.

In 2018 alone, several new initiatives were announced to drive further innovation in the country’s largest city.

The New York City Economic Development Corporation (NYCEDC) announced the city would provide up to $100 million to build the Applied Life Sciences Hub while also providing $17 million to help with the June launch of Johnson & Johnson’s new JLabs biotech incubator at the New York Genome Center.

The city announced the NYC Blockchain Resource Center, intended to stand as a physical hub for the industry, and in October opened RLab, the first-ever city-funded virtual and augmented reality lab in the United States. Another tech hub in Union Square received full council approval in August, and in October, the New York City Economic Development Corporation and Cyber NYC – the $100 million public-private investment intended to grow New York’s cybersecurity ecosystem – announced the launch of the Global Cyber Center.

Initiatives such as these will help ensure New York’s record-setting VC activity can be sustained in the years to come.

“NYC is creating the infrastructure to grow industries of the future,” said Ryan Birchmeier of the NYCEDC.

“This work is focused on ecosystem building that will attract new venture capital investment, grow startups, increase international expansions and create good-paying jobs for New Yorkers.”