Xconomy

by Robert Buderi

It’s no secret to anyone looking at venture activity that New York has blossomed over the past few years as a startup mecca. Riding a wave of investments in Web , media, and advertising startups, the city has recently climbed past Boston to become the second greatest center (after the Bay Area) of high-tech deal making when it comes to the general Internet space.

But why? It’s not hard to make some guesses about the economy coming back, or about the low cost of starting companies these days. But for a more expert perspective, I thought I would check in with Xconomist Rich Levandov, a partner at Avalon Ventures. Levandov is based in Boston, but he’s had a good ride on New York startups in the past few years—including some great exits with ad technology companies Tacoda and Pictela (both sold to AOL, Tacoda in 2007 and Pictela last December)—and he even took an apartment in the Big Apple last summer.

In fact, the first time I interviewed Levandov was back in 2007 about Tacoda. He and company founder Dave Morgan revealed they had made a deal to get tattooed with the Tacoda logo if the company returned 10x the investment Levandov, then with Masthead Venture Partners, had made—which it did when AOL bought it for about $275 million. (By the way, there’s still no tattoo three years later—what’s up with that, guys?)

Levandov, who also co-led the Series A round in Zynga with New York’s Union Square Ventures and Boulder-based Foundry Group, says he currently has seven or eight investments in New York, among them Ad Summos and TV ad company Simulmedia (which Morgan also founded)—and that he’s seriously looking at three or four more. It’s safe to call him extremely bullish on the Big Apple’s startup future. “Avalon’s interest in New York has been soaring, but I think it’s going to double again,” he says. (In case you doubt the NY connect with Avalon, Levandov’s colleague, Avalon founder Kevin Kinsella, is the son of Broadway and movie actor Walter Kinsella—and one of the original producers of the musical Jersey Boys).

So, following are some of his thoughts and observations on why the city’s innovation scene has exploded lately, what has changed in recent years, and what he thinks the future holds.

—It’s Safe to Go Back in the Startup Waters

“New York City has always been about ideas,” says Levandov. When it came to tech startups, those ideas were largely benched after the bubble crashed early in the 21st century, but that has changed in a big way the past three years or so. Now, he says, “It’s safe to do a startup again. It’s kind of like in the nineties, it was safe to do a startup. Then the big crash came and it became unsafe—everybody went back to their jobs in consulting.”

—The Money Is Being Shown

“There is a lot more smart startup funding and capital—angels, seed investors, and micro-VCs. They’re exploding in New York because of the perceived opportunity,” Levandov says, pointing to firms such as IA Ventures, former super angel Roger Ehrenberg’s new early-stage venture fund. “It’s the new Rich Man’s Parlor Game.”

“And then big VCs have increased their activities in New York City,” he adds. Here the list includes Boston-area firms such as Spark Capital, Matrix Partners, and General Catalyst Partners, firms like Avalon, which is based in Cambridge, MA, and San Diego, and a host from Silicon Valley that Levandov says includes Accel Partners, Sequoia Capital, and super angel Ron Conway. “The west coast VCs are showing up, the west coast angels are showing up—maybe it’s because New York City is just a fun place to be.”

” It seems like everyone is believing in my old Mantra, that every opportunity needs ‘People, Product and Money,’ and any two will get you the third,” Levandov adds. “New York City also has easy access to the $300 billion U.S. ad spend moving rapidly to the digital domain.”

—And You Need Less Money

“One thing that’s true of all startups, and true of New York City, is it just takes less money and less time to hatch a technology-enabled Web service. I would say within three weeks any good entrepreneur can launch a service and have it live on the Web.” It might be very crude and not work properly, but you can get the service up there and get feedback, Levandov says.

—Critical Mass of Successes

“What happens in Silicon Valley is happening in New York. You need some successful companies to either get acquired or go public. And when that happens, it just sort of sends out the tentacles for more companies.”

Take Tacoda. Levandov invested in it in 2004 and saw it zoom from 10 employees to more than a hundred in a few years, until the AOL acquisition. “Out of that, other companies were born,” says Levandov. “Pictela was one.” As already mentioned, Levandov invested in Pictela, and it also “turned around and got acquired by AOL.”

Then came Ad Summos, which was co-founded by Curt Viebranz, a veteran Time Inc. executive who had become Tacoda’s chief executive before its sale to AOL. “Curt became the CEO of Tacoda, and then they [he and Ad Summos co-founder Dan Jaye] started a new company, and I invested in that as well,” says Levandov. “That’s starting to happen all over New York, not just in my domain.”

—New York vs. Silicon Valley (and Boston)

“The wonderful thing about New York is you really have to be there to be in the pace of activity. San Francisco has a very fast-paced venture activity, [but] I think New York City is that on steroids. There are activities, there are launches, there are parties, there are demos, there are meetups. It’s the most high-energy, high-velocity city I’ve ever seen.”

New York, Levandov says, “is also very efficient.” If he has seven or eight meetings in the Bay Area, it might take a work week to complete them all, Levandov says. In New York. “I can do that in a day.”

All this efficiency and energy is translating into real companies, he says. “New York, I think, is becoming second to Silicon Valley in activity and energy in startups, certainly ahead of Boston-but Boston is picking up also. I think it’s going to rival Silicon Valley. The one missing piece, the one problem with New York City, is access to engineers and the expense of living there. We’re already seeing companies locating their headquarters more and more downtown because it’s easy access to Brooklyn on the L train,” where lots of engineers and programmers live. “In general, it’s just a little bit harder to recruit. “

—That Special Social Sauce

“To me, what New York is perfect for is the social media explosion because it is the most social city of any city in the world,” says Levandov.

With social media technology and trends pervading education, shopping, publishing, and more, Levandov says, the potential for New York is off the charts. “You take the most social city in the universe and combine it with the most important trend in technology, which is social computing—real treasures and jewels, valuable enterprises, can be built when you have those two trends and then add the fact that the money is showing up.”