Investor's Business Daily
December 2, 2002Investor's Business Daily: Internet & Technology
Silicon Alley Still Not Paved With Gold
By Doug Tsuruoka
Tuesday, December 3, 2002
Jason McCabe Calacanis says it reminds him of the old days. Ex-dot-commers are hanging out in New York bars talking about plans for starting nifty new companies.
"Office rents are cheap, and there's a ton of talent out there that will work for very little money," Calacanis said.
But the good old days in Silicon Alley - a swath of southern Manhattan roughly below 23rd Street known for tech start-ups - are definitely over.
Calacanis was the publisher of Silicon Alley Reporter, a magazine that traced the rise (and fall) of New York's tech entrepreneurs.
His glossy folded in October 2001 after many Internet firms failed to make money and couldn't secure more financing from venture capitalists. New York, at the time, had the highest concentration of dot-com firms of any U.S. city. Two more blows followed: a general tech recession that hit in the first half of 2001 and the 9/11 terror attack. Both events caused large clients to pull back outsourcing work to local dot-coms.
After the smoke cleared, about 1,500 Web technology, consulting and services firms in Silicon Alley had gone belly up and more than 10,000 dot-commers were out of work. Companies affected included tiny two-man Web shops and larger players. That's out of almost 5,000 firms headquartered in Manhattan and other parts of the city, such as Queens and Brooklyn.
"You can't have a magazine about unemployed people," Calacanis quipped at the time.
The survivors still dream big. But there hasn't been a notable Internet start-up in New York since most venture financing vanished two years ago.
Signs are the New York neighborhood that nursed the Internet revolution won't rise from its ashes anytime soon. If it does, its business and culture will be a lot different from the "boom" years of 1997 to 2000.
One change: a shift from developing general Internet "content," such as Web magazines with ad- or subscription-dependent revenue models, to more specific technical work, like developing better software to serve Internet ads.
The casual and creative nature of the "Alley" will likely remain, fueled by New York's larger urban culture. But six-figure salaries at start-ups for newly minted MBAs are probably gone forever.
"There's a lot more humility in the Alley these days," said Kaleil Isaza Tuzman, the managing director of Recognition Group. His firm provides financing for distressed dot-com firms.
Analysts say there are only about two dozen major Internet firms left in the Alley.
They include Net ad firm DoubleClick Inc. ( DCLK); content Web site iVillage Inc. ( IVIL), targeted at women ; domain registration service Register.com Inc. ( RCOM); and Internet media and research firm Jupitermedia Corp. ( JUPM)
An estimated 3,000 smaller Web shops, consultants and software firms also are hanging on.
Some say it isn't all that bad. "Silicon Alley isn't dead. Only about 7%-10% of our 600 members have gone belly up," said Bruce Bernstein, president of the New York Software Industry Association, a software trade group.
But the local industry is much more consolidated. And those left are fighting hard to get jobs from Fortune 500 firms in a slow economy.
Most firms only have 10-50 workers, rather than the hundreds or thousands some New York dot-coms had on payroll at the peak of the Internet boom.
Chef, D.J., Actor
Many dot-coms aren't even in Manhattan anymore, having moved to less costly offices elsewhere in the city or in nearby New Jersey.
Nearly 6,000 dot-commers got pink slips in the layoffs after the World Trade Center attack. Some analysts say only about half have found work with other firms, mostly traditional companies that don't have much to do with the Internet.
Calacanis says he knows of three CEOs from some of the bigger, but crashed, Internet companies, who have taken jobs far afield. "One became a chef, one became a D.J. and one is trying to become an actor," Calacanis said.
Others have moved on in other ways. For instance, Candice Carpenter, the founder of iVillage, married Random House CEO Peter Olson and has started life anew as a mother, wife and writer.
Still others burned out. After five years of nearly 24/7 work grinds, many are kicking back.
Some who cashed stock options before the Net stock meltdown have taken up yoga and are living off bank accounts. Others have taken extended vacations.
Lowered Expectations
Many of the Alley's smartest people won't return.
Some analysts say the brutal consolidation in the industry is a good thing. They compare it to the shake-out that hit PC and software makers in the 1990s.
Those dot-coms that are still around, they say, will lead the industry.
"We went from thousands (of firms) to a handful. But things are more efficient now," Calacanis said. For his part, Calacanis is publishing a new magazine, Venture Reporter, which tracks venture firms.
Tuzman says these days, most Alley CEOs, like those in other industries and other cities, are concerned with creating operating efficiencies. They're no longer focused on mergers, capital markets and fund-raising.
If capital's needed, Tuzman says, "the talk today is about how much money can I get in one shot. You can't have sane expectations of getting more."
Investing With Caution
He says any venture capitalists still around are heavily vetting dot-com business plans for their "resiliency."
People willing to invest in dot-coms seem to be extra careful when looking at New York firms. Though dot-coms elsewhere in the U.S. touted grand business schemes that had no chance of success, some of the worst offenders were in Silicon Alley. For example? Bike-based delivery service Kozmo.com and online gift certificate firm Flooz.com, two of the more outrageous premises to bite the dust in 2001.
And many say the impact of 9/11 is still being felt.
For three months after the attack, work at many Internet firms in Manhattan stopped.
Young Alley-ites had trouble coping with the personal and business effects of 9/11. Many were traumatized by the attack, which took place only about a mile from Silicon Alley. Many also had friends, family members or associates who died at the World Trade Center. Thousands of dot-com workers didn't return to work until weeks later. Others quit and left the city. The inexperienced staffs of many dot-coms also had trouble juggling the loss of business in the aftermath of 9/11 and went bankrupt.
Such fallout has, by most accounts, delayed a meaningful business recovery in Silicon Alley by at least a year. The impact's so great that Silicon Alley may lag the rest of the country after the tech sector recovers.
Some say the first rebound will take place in online advertising. Local firms expect bottom lines to swell as big clients shell out more to advertise on the Web.
"We're seeing very strong growth for 2003," said Allie Savarino, senior vice president of global marketing for Unicast Communications Corp., a New York-based Web ad firm. "Highly-branded and targeted sites and leading portals will benefit most from this," she said.
Greg Stuart, president of the Interactive Advertising Bureau, an online ad trade group in New York, disagrees.
He says even if online ad spending rebounds, most ad dollars will flow to big Internet companies outside New York, like Yahoo Inc. ( YHOO)
"It won't go to small, independent Web shops in Silicon Alley," Stuart said.
Others hope more venture financing will return to bolster old firms and perhaps fund new ones.
Some say the government should step in. "Silicon Alley will come back, but it's going to need attention from the city and state," Bernstein said.
Bernstein says one thing government must do is provide funding to turn the Alley into a major software R&D center.
Tuzman co-founded a start-up called govWorks.com in 1999 that was profiled in the documentary "Startup.com." The film traced the rise and fall of a dot-com in the Alley's heyday.
Today, Tuzman is adjusting to life after the fall. He has a new book coming out in December about being an entrepreneur in tough times.
Comparing the Alley of five years ago to the one now, he says: "We were in a mode of self-delusion. That isn't around anymore. People are acutely more aware of risk."
Jupitermedia CEO Alan Meckler sees it another way. He insists the Alley was a big success, not a failure.
"Part of the reason Silicon Alley isn't around anymore is because the Internet is everywhere. That makes the concept of having a place like this in New York quaint and outdated," Meckler said.