New York

VC in NYC: The investors and deals shaping the city's startup scene

September 23, 2019
This post is the second in a three-part series exploring New York City's expanding venture capital scene.

Venture capital has made a name for itself in the Big Apple, the longtime home to traditional buyout firms and investment banks. The IPO and exit lens that we looked through last week helps make this clear. While WeWork is no longer a stellar exit example—the company has shelved IPO plans until at least October—Datadog's shares soared 39% during its public debut last Thursday, no small feat for the East Coast enterprise software company. The NYC-based e-bike peddler Peloton could see similar success in its upcoming offering.

Beyond exits, the deal data also supports the idea that the NYC metropolitan statistical area is coming into its own as the No. 2 venture capital ecosystem behind San Francisco, ranking second with respect to both deal value and count. Since 2010, the story reads as one of unequivocal growth. VC funding in New York, across multiple stages, is following an upward trajectory:

 

Although annual deal count has mostly hovered around 1,200 since 2014, it's on pace to grow again this year, and total deal value keeps climbing. Last year's record-setting $14.25 billion in venture investment marked a 91% increase over 2014's $7.46 billion figure. And 2019 is poised to take the cake, with roughly $15.63 billion worth of VC deals already in the books.

The deal breakdown illuminates an ecosystem shift in line with the VC industry as a whole—as companies stay private longer, the rise in larger, late-stage rounds is significant. Late-stage venture deals in New York have demonstrated exceptional growth. As of Sept. 5, these investments accounted for about 69% of the total VC deal value in New York this year, compared to 47% in 2013, per PitchBook data.

By contrast, since the beginning of the decade, early-stage deal value has fluctuated and ultimately decreased as a portion of the total, from 44% in 2010 to 40% in 2018. 2019 could see that figure fall further—so far, early-stage VC comprises just 26% of total deal value in the New York metro area.

What else accounts for the jump in late-stage VC? For one thing, the NYC venture capital market could be coming of age. According to PitchBook analyst Cameron Stanfill, technology has led the charge.

"The New York venture ecosystem, over the last few years, has been dominated by a handful of startups that were able to scale rapidly by taking a technology-first approach to traditional industries," Stanfill said.

Examples abound. In April, UiPath, a robotics process automation startup, raised a $568 million Series D funding round led by NYC-based Coatue. The company now touts a $7 billion valuation. And in June, Dataminr, which specializes, of course, in data mining software, closed a $392 million Series E at a valuation of nearly $1.6 billion.

But the rise of later-stage deals doesn't indicate that the industry will slow down anytime soon. Lerer Hippeau managing partner Eric Hippeau cautioned against recognizing the phenomenon as a sign that the New York ecosystem has "matured," arguing that the term could imply a plateau is on the horizon.

"I don’t think that we have seen the apex of it at the moment—I think it continues to grow," Hippeau told PitchBook. "If I look at the early-stage pipeline, where we are mostly focused on, the number of companies that are looking for funding continues to grow, maybe 20-25% every year."

Big City investors

Of course, these deals would amount to nothing without the investors behind them. Lerer Hippeau is New York's most active venture capital firm when it comes to making investments across the US, with 482 under its belt since the start of 2010, according to PitchBook data. Of those deals, 287 were in companies based in the NYC MSA, also putting the firm on the top of the list when it comes to New York firms making local deals:
 

Lerer Hippeau, established in 2010, focuses on early-stage investments. Its Soho office currently runs two funds: a "core fund" focused on seed and Series A rounds, and a "select fund" focused on Series B, C and D rounds in companies it has previously invested in. Its New York-based investments make up the majority of the firm's business—more than 59% over the past decade—and include fast-growing startups such as Casper, Blade, Glossier and Warby Parker.

New York firms investing in hometown startups extend beyond Lerer Hippeau. RRE Ventures' closed 209 such investments over the past decade also account for around 59% of its total deals. Roughly 50% of Boxgroup's deals are in companies based in the Big Apple, as are about 37% of Great Oaks Venture Capital's.

With Silicon Valley hungry for cash, why do many New York-based firms continue to devote such significant shares of their investments to NYC startups? Per Eric Hippeau, the best capital is local capital. "We live in the community, we understand where the challenges are, and we are equipped to help companies with issues," he said.

And while New York startups might not have an edge over Bay Area competition, according to Hippeau, the city nonetheless differentiates itself.

"There's perhaps a more practical angle to companies in New York than might exist in San Francisco," he said. New Yorkers like to get things done.

Investors and deals underscore a flourishing venture capital ecosystem—one in which startups have the resources to establish and excel. From hedge funds to fashion houses, nearly every segment of the economy has a foothold in New York. That domain knowledge creates value.

Up next, we'll be digging into the plethora of successful startups that call New York home. Notably, the city's top players include female-founded startups like Away and Rent the Runway, both posting valuations in the billions. More on that next week.

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