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July 22, 2012

Why Hasn’t NYC Produced More IPOs (While Boston Has)?

Over a year and a half ago, I did a two-part blog post on the East Coast IPO malaise – one focused on Boston (Massachusetts more broadly), another focused on New York.  In these two posts, I expressed optimism that there was a strong pipeline of companies that would result in public offerings if the macroeconomic environment was stable enough.  And in assessing the two markets, my conclusion was that the New York market had a stronger pipeline of pre-IPO companies that would be attractive to the public markets than Boston.

On the heels of the successful Kayak IPO, I thought I would do a retrospective look back.  In doing so, I realize I was dead wrong.  In the last 18 months, Boston has produced far more IPOs than New York, and the remaining pipeline in Boston seems to be quite strong (see Boston Business Journal's IPO Watch), arguably stronger than New York for the next 6-12 month window.

There have been eleven Boston-based technology IPOs since my blog post, including:  Brightcove ($430M market cap), Carbonite ($240M), Demandware ($740M), EXA ($130M), Kayak ($1.2B), Merrimack Pharma ($730M), Synageva Biopharma ($1.2B), Tesaro ($360M), TripAdvisor ($6.0B), Verastem ($210M) and Zipcar ($730M).  A few of Boston-based the companies that I highlighted as potential IPO candidates in 2011-2012 have chosen to sell instead, including Endeca ($1.1B, Oracle), Kiva ($775M, Amazon) and ITA ($700M, Google).

Meanwhile, not a single New York technology IPO has taken place.  Maybe I'm mistaken, but in reviewing the data, I couldn't find a single one.  There was one big exit from my list of NY IPO candidates – Buddy Media ($700M, Salesforce.com) – but no others.

11-0 in IPOs and 3-1 in big M&A in favor of Boston?  What’s going on here?  Is this a law of small numbers or a fundamental issue?

I’m not sure of the answer, but a few theories have surfaced as I talk to others:

  • The IPO culture hasn’t fully permeated NYC?  There are only very few public technology companies based in NYC:  I count AOL as the only one with > $1 billion market capitalization, whereas Boston has 30-35 innovation economy companies with greater than > $1 billion market capitalization.  Perhaps Boston CEOs, CFOs and boards feel more pressure to go public sooner and/or are comfortable with the IPO process because they community has done it so many times.  Honestly, this theory doesn’t totally resonate with me as NYC is the heart of Wall Street – all the relevant bankers, accountants and advisors are there.  If any technology hub can build a strong middle market public company ecosystem, it should be NYC.
  • NYC’s tech sectors are out of favor with public markets?  This theory suggests that the sectors that NY is particularly strong in – consumer, advertising technology, media – are out of favor for some reason.  Perhaps the poor performance of the Facebook IPO soured Wall Street on the consumer sector and advertising-based business models?  But then why have consumer plays like Boston-based Kayak, TripAdvisor and Zipcar done so well?  As for the adtech sector, why did DC-based Millenial Media, a mobile advertising network, have such a strong public offering if the sector is out of favor?  Again, I’m not sure this theory holds water.
  • NYC companies are more sizzle than steak?  This theory is that because NYC companies are so heavily covered in the mainstream media, they are perceived to be ahead of where they really are in terms of actual business progress.  E-commerce companies like Etsy, Gilt Group and Rent the Runway get a lot of ink compared to, say, Boston-based Wayfair and RueLaLa.  But if you objectively examined their financials in terms of actual revenue scale and profitability, who is really closer to being ready to file their S-1?  This theory resonates somewhat with me.  For example, there is no TechCrunch reporter in Boston, but a number in New York and Business Insider is a strong local publication that does a nice job cheerleading for the local sector.

My firm, Flybridge Capital, operates with both offices and portfolio companies in both cities.  We are seeing amazing things going on in the NYC start-up ecosystem and are investing heavily there in 2012.  My summary view is that the outperformance is due to a more vibrant seed and Series A environment in 2003-2006, which is when many of these companies were started.  Given how strong the seed and Series A environment has been in NYC for the last few years, the results should even out over time.

Unfortunately, I can’t say the same for my Red Sox this year...


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Good post. Timely - I was thinking about this recently & wondering who the next NY tech "giants" would be? One question is whether a lot of the recent Mass IPOs/M&A are generally of a vintage was there was an under-investment in NYC tech. Looking at companies funded in the past few years (depending on when you want to date NY tech rebounding) it would be interesting to compare.

Hi Jeff, you are missing another reason why NYC hasn't had many IPOs as compared to Boston. Many of the NYC companies that are doing well were started in 2007 or later, so it will take a few more years before they are IPO ready. The Boston IPOs that were stated in this post were started before 2007 I believe. You also forgot to mention Admeld (NYC company) which was a $400M acquisition by Google in June 2011.

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Hey Shaig – Yes, I thought I made that clear in my last
paragraph:  the seed/early stage environment was simply better in those years
and there’s a lot of innovation and tech history and depth that Boston has.  As
for AdMeld, as good as that outcome was, I set my M&A cutoff at $500m+. 
Buddy was the only one that cleared that bar.

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Indeed. When the lists of most valuable private companies get
compiled by various media firms, like WSJ and Business Insider, there’s a
preponderance of NYC companies. That implies the next cohort will outperform or
hometown media bias.  I’m not sure which.

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Not sure how you are defining "based", as Kayak's HQ is Norwalk, CT -- more NY than. Boston. Yes, their tech office is in Concord, MA, but seems arbitrary to put them in the Boston category.

Not sure why there is even a question. It is well established that Boston has had a vibrant tech sector for much longer than NYC has. Outside of DoubleClick and the couple of examples you cite in the previous article, there were few large scale, independent technology companies to emerge in NYC over the last twenty years. Contrast that with the numerous companies that developed around Boston in that same time period.

It has only been out of the ashes of the first dot com boom that real tech companies developed in NYC (as opposed to digital agencies and consultancies). Given that the bulk of higher valuation startups were launched post 2007, I would suspect that IPO's may emerge at the earliest by 2013, but most likely 2014.

Another thing to consider however is the lack of appeal of IPO's in general. Most public offerings this year and last have had a mediocre performance. With high profile flops Facebook and Groupon garnering most of the attention, it is little wonder that boards and CEO's are wary. Added to that the fees, scrutiny, and regulatory headaches, it is little wonder that tech companies in NYC have held back. It is not NYC tech sector out of favor with public markets, but rather the other way around.

When one company sticks its toes into the IPO waters and takes the leap, we will see a rash of NYC tech companies jumping in. We are still a good year off from that happening however.

Especially if you are going to exclude IBM, CA and others that are commuting distance from NYC.

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Hi Mark – If that were true, I don’t think 11 Boston-based IPOs would
have gotten out so successfully.  I haven’t done looked at each of the 11 to
see if they’re trading higher than offering, but my impression is that most of
them are (TRIP, ZCAR, DWARE and BCOV I’m pretty sure are).

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Evan – Good point on Kayak. Founder Paul English has always referred
to it as a Boston company as the bulk of the company is based there, so I was just
going by what he says.  Many companies are split – with R&D in Boston and
business development in NYC – so it can be grey in some cases.

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The problem with IBM and CA is that they are far enough away
that they don’t mix with the NYC innovation economy. I never see IBM or CA executives
in the city at tech events.  In fact, I see way more Boston companies at NYC
tech events than IBM and CA execs!

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Great post Jeff. I think you hit on it in the last paragraph, NYC just hasn't enough time to develop enough deals and the real time factor is probably one year post-Lehman. I think that time frame is the result of lighter technologies, faster time to market, large customers willing to test with early stage companies, and other similar "efficiency" factors here in NYC. But there is another trend that is much bigger - the business models are stable enough in digital media and digital commerce, these revenue sources minimally large enough to get noticed by industry giants (ecommmerce still only ~8% of commerce), AND mostly to me, the large industry players can pull the best practices of digital media and commerce into the traditional brick and mortar world for their brands, goods and services.

Awesome post Jeff! NYC will have its day soon :) I wanted to introduce you to our new blog HowToWriteABusinessPlan.com, here we interview startups that have recently graduated from an accelerator program. We are in the UK so most of the companies that we interview are European and really awesome!!! but we do also have some great interviews with US based startups coming soon! you should check us out, I think you would love some of the startups that we talk about!

i think it's all of the above (including Shaig's comment about time)

NYC is a trader town. people like to trade stocks not hold stocks. so what Buddy did is more in line with how NYC folks think. Boston seems to have a long standing culture of building public companies, like Silicon Valley.

that said, i think we have a couple NYC based companies that will choose the IPO route in the next few years. we are not in a hurry nor are they.

Great post, I myself wasn't really aware of the Boston startup scene before reading the blogs of Bijan Sabet, Fred Wilson and Brad Feld (though his is of course more Boulder focused). Oh, and on Fred's and this new subscribers behalf, get Disqus, you'll love it!

While I'm not in the same position as you - I find it peculiar to say you don't see IBM ppl at city tech events. IBM has strong partnerships with Fordham Univ. - NYU - Columbia - and CUNY regarding different types of tech. I would assume that would translate to start-ups who are often started by ppl coming out of school.

I'm not sure what collabs CA has with any schools... but if I were to guess - it would be Hofstra - NYIT - and SUNY Stony Brook - but I'm not sure (I do know the founder gave Stony a whole lot of money). As far as directly in NYC I couldn't say... but the founder Mr. Wang is considering moving his Islanders hockey team from Nassau County to Queens or Brooklyn. LOL.

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