Jones Lang LaSalle


Alive and Well in Silicon Alley
March 12, 2006
By WARREN ST. JOHN

THEY arrived in crisp button-downs and pleated Dockers, 150 or so, nearly all men in their 20's and 30's, few of whom would probably object to being called a nerd.

The event, the New York Tech Meetup — part technology conference, part Showtime at the Apollo for geeks — was a monthly gathering where entrepreneurs are invited to access their inner Steve Jobs by describing their companies for a discerning and occasionally rowdy audience of technologists and venture capitalists.

As Drew Robertson, a suited executive from an Internet company called CallinSearch, learned the hard way, it can be a tough crowd.

Mr. Robertson took the podium to give a strictly timed five-minute pitch for CallinSearch, a program that allows Web surfers to make phone calls and send instant messages to sites turned up by search engines. He began by asking his tech-savvy listeners simplistic questions about their knowledge of the Web.

"You're going to get booed off before you start," shouted Scott Heiferman, a founder of the social networking company Meetup and the organizer of the Tech Meetup.

Prescient words, it turned out. Mr. Robertson faced a barrage of withering questions and eventually slunk offstage to mocking laughter from the audience.

"I got ambushed," he said afterward. "I didn't know it was a 'Gong Show' thing."
Rambunctious technology gatherings in Manhattan? Venture capitalists on the prowl? Geeks having fun at the expense of suits? What was this, 1998?

In fact, it was last Tuesday, and the bustle around the New York Tech Meetup, which began with just four attendees a little more than a year ago, is but one bit of evidence that reports of the death of Silicon Alley may have been greatly exaggerated.

Though few new-media entrepreneurs would say it loudly for fear of jinxing themselves, Silicon Alley is buzzing again. In recent months a number of Manhattan new-media companies have been involved in heady high-dollar deals that carried a faint but alluring whiff of the good old days. Start-ups are once again popping up like mushrooms in Manhattan, and last May the New York Software Industry Association opened a technology incubator at its headquarters at 55 Broad Street. It now houses 14 new companies.

And while blog publishers like Gawker Media have garnered much of the attention in the last couple of years, the action on the Alley extends far beyond blogs to software companies, e-mail newsletter publishers and online entertainment companies.

At the Tech Meetup, there were presentations from a new search engine company called Transparensee, a company called Loto that translates Web pages between Chinese and English, and Homethinking, a site that ranks real estate brokers based on sales histories.

"Everything is cranking up," said Nicholas Butterworth, a member of the original Silicon Alley generation of the mid-90's who is himself starting a new technology company. "There is definitely something in the air. It's not exactly the same as it was the first time around, but it's got some of that same spirit."

Mr. Butterworth, a founder of the online music site SonicNet back in the day, is soon to move into an office at the Broad Street incubator. Sounding very 1995, he declined to discuss his new venture on the grounds that he is in stealth mode.

The surest sign of renewed life in Silicon Alley — a broad term for New York's digital media scene, most of it located in lower Manhattan — has been the deals. Last week the women's portal iVillage, a survivor of the first boom and bust, was sold to NBC Universal for $600 million. Last fall AOL bought Weblogs Inc., a publisher of blogs including the popular technology site Engadget, for $25 million.

In January, Heavy.com, an online entertainment company aimed at young men, took on $10 million in venture capital. On Thursday, Mr. Heiferman's Meetup announced it had sold a 10 percent stake to a group of investors that included eBay.

But perhaps the news that set the Manhattan digital scene most atwitter was a report in The Wall Street Journal last month about a potential sale by Robert W. Pittman, the former MTV and AOL executive, of Daily Candy, an e-mail newsletter about fashion, dining and travel trends. According to The Journal, Mr. Pittman, who paid roughly $3.5 million for a majority share of Daily Candy in 2003, was putting the company on the block for upward of $100 million, about 9 or 10 times its earnings, a conservative multiple by technology industry standards.

But the mere notion of a sum that large was enough to paralyze some aspiring Alley entrepreneurs between present-day hopes and the cold reality of just a few years ago.
"It's great for Daily Candy and exciting for the industry," said Sascha Lewis, a founder of flavorpill, a publisher of e-mail newsletters about cultural happenings. "But what we have to do today is keep the lights on. You've got to learn from the lessons of the past. All that is just noise until things happen."

Not so long ago Silicon Alley was all but obliterated. Dozens of companies went out of business during the burst of the technology bubble, and the economic slow-down following the 9/11 attacks took still more. Employment in information technology in New York City plummeted to around 35,000 at the end of 2005 from around 50,000 in 2000, according to the New York State Labor Department.

Along the way any semblance of a digital community in New York dissolved as well. Launch parties gave way to pink slip-parties and then to no parties at all. The Silicon Alley Reporter, a trade publication, folded, and the New York New Media Association, a focal point for the tech community during the boom, quietly closed its doors in 2003. Nerds went underground.
"In 2002 it was definitely embarrassing to say you were doing Internet stuff," said Mr. Heiferman, who founded the Web advertising firm i-Traffic in 1995 and Meetup in 2002. "It seemed so passé."

A number of factors have contributed to the rebound, investors and online executives said. Start-up costs and overhead for running a consumer-oriented Internet company have plummeted, as hardware prices have fallen and packaged or open-source software has taken the place of the programming departments that once had to build sites from scratch.

New forms of targeted advertising from companies like Yahoo and Google have allowed small companies to sell adds online without sales staffs. And large established companies with hefty marketing budgets have been spending more on online advertising.

But perhaps the biggest change on the Alley has been the shift from a culture of profligacy to one of financial discipline. While first-generation Web entrepreneurs once boasted of mountains of venture capital, massages for staff and Aeron office chairs for all, the current crop of Alley executives can't let a conversation go by without pointing out how utterly miserly they are.
"I was crazy cheap," said Dany Levy, the founder and editor in chief of Daily Candy, explaining how she built her business. She said she has long urged employees to print on both sides of a sheet of paper, and that she bought candy for her company's media kits in bulk from Duane Reade just after Halloween, when it was on sale.

In the SoHo offices of Thrillist.com, a three-man start-up that aims to be a kind of Daily Candy for men, Ben Lerer, 24, one of its founders, said his business plan "is all about saving every possible penny." He said he and his partner, Adam Rich, 25, pay their sole employee, a writer named David Blend, "beer money," a claim Mr. Blend disputed.
"Actually it's half my beer money," Mr. Blend said.

During the dark years, some first-generation Silicon Alley companies held on by laying off employees and cutting costs. Rufus Griscom, the chief executive of Nerve, the sexy literary site and Web community, said he employs half the number of people he did in 2001.

Other true believers started pared-down companies from the rubble of the bust. Mr. Lewis and Mark Mangan, for example, were partners in an e-commerce company that sold furnishings and accessories and went belly up in 2001. As part of their marketing campaign, the two published a weekly e-mail letter about cultural events, which they called flavorpill. They continued to publish the newsletter from their part-time jobs — Mr. Mangan as a Web developer and Mr. Lewis as a D.J. — and organically built an audience before pitching big companies for advertising business.

Since then, flavorpill has run ads for American Express, Audi and Anheuser-Busch. The company now publishes nine e-mail letters with 300,000 subscribers, and it has been profitable for the last three years, Mr. Lewis said. Last year revenues were close to $2 million.
"It's the classic 'learn from your mistakes and move on,' " he said. "All of us who were here for the first go-round understand how the hype and hysteria allowed for an overzealousness and a lack of focus."

Mr. Griscom of Nerve has had a similar turnaround, he said, adding that Nerve has increased its revenues by an average of 37 percent a year for the last five years. "Compared with 2001, we now have half the staff, half the buzz, and more than five times the revenue," Mr. Griscom said.
Another sign of change: Mr. Griscom said employees are again agitating for stock options. "After 2001 nobody ever asked me about options," he said. "There wasn't that sense of opportunity." He said his company unveiled an options package for employees last week.

Because of their organic growth and lean budgets, many successful companies have little or no need for venture capital, the lifeblood of the first round of Manhattan new media companies, which tended to spend first in the (sometimes vain) hope of earning later. Josh Abramson, a founder of CollegeHumor.com, said some weeks he gets daily feelers from venture capitalists eager to invest in his company, which had $6 million in revenue last year, up from $2 million the year before. He tells them all the same thing: no thanks.

"We make enough to finance our growth on our own," he said. "The reason we've been successful so far is because we've been pretty stingy. We haven't spent any money we didn't have."

The preferred exit strategy has changed in Silicon Alley as well. The first time around, initial public offerings of stock were the holy grail of Internet executives, a mentality that resulted in countless paper millionaires who were never able to cash out their shares.

The more common exit these days is to follow in the footsteps of the photo-sharing service Flickr or the social bookmarking company del.icio.us, both of which were bought by Yahoo for undisclosed sums. Dodgeball, a mobile-phone-based social networking service founded by a graduate student at New York University, was bought by Google last May. A private sale to a larger Internet or media company can end with in cash in hand, if at less astronomical sums than during the bubble years.

A lot could go wrong to derail the momentum of New York's technology scene. Advertising spending could drop. A shortage of talented programmers could slow the speed of development, Mr. Butterworth said. And it's unclear whether big Internet companies will continue to pay large sums for individual companies like Flickr and Dodgeball that are essentially one-off features for their sites. With these uncertainties and the memories of the bust not entirely faded, Ms. Levy said she planned to stay cheap.

"There is all this buzz about valuations," she said. "But you never know."

Copyright 2006The New York Times