There are many reasons why New York should be the center of the universe (it has been to me since I moved here in 2002) but in terms of tech startups, New York seems to struggle compared to the usual suspects on the West Coast or even Boston.
One reason that is always thrown into the discussion amongst NY based startups is the tech brain drain by Wall Street. For many engineers the job security and lofty salaries paid by banks and hedge funds made joining a startup seem a dumb idea. Furthermore the lock-in effect of end-of-year bonuses created a timing-problem. When looking for that great engineering candidate, a startup does not have 6 months time to wait.
This problem might have gone away – at least for some time.
Risk of joining a startup
Amidst the financial meltdown we now see major Wall Street firms cut headcount in IT. In earlier downturns we saw headcounts in administration and on trading floors shrink but IT always seemed to be excluded. Not this time. I have friends at Merrill Lynch that got all projects stopped right now and that have been told to wait for the announcements what will happen after the merger with Bank of America. Whose platform will the bank consolidate on (I heard Merrill’s might make the race)? What about the teams that work on the discontinued platforms?
Janco Associates, a management consulting firm, earlier this fall declared that the financial firms’ woes will glut the IT job market. According to them and based on interviews with sources within Lehman Brothers and Merrill Lynch it has been confirmed that a large number of IT professionals in both organizations will lose their jobs by the end of the year. More than 230 IT professionals at Lehman Brothers who make $250,000 or more a year will be out of a job by year-end. At Merrill Lynch, more than 180 IT professionals making more than $250,000 a year will be without work as well. And let’s not forget all those hedge funds that will blow up over the next couple of months. A friend of mine just left his position as Head of Software Development at a midsized Quant Hedge Fund ($400M in assets) to start his own tech startup. According to him, most funds below $1B in managed assets will not survive the next 6 months.
So the relative risk of joining a startup, right now, has been reduced significantly.
Salary
For those engineers that do not loose their jobs as part of the downsizing, there is still the salary aspect. It is true that most startups probably will not be able to match the salary levels enjoyed on Wall Street. But next years bonuses are quite uncertain right now. This removes already one lock-in reason to join a startup right now.
But there is another reason that might make the salary question become less important. In the last weeks I spoke to quite some engineers from investment banks and hedge funds - we are hiring financial service engineers right now. None of them liked their job in financial services too much from a technology perspective. Some guys from Lehman Brothers were fed up having a very narrow scope in terms of technologies and relevance of their projects. The same I heard at Merrill Lynch. They are looking for the satisfying experience of being part of designing and implementing and application end-to-end across all layers. Something a tech startup is all about.
Eventually great engineers want to use interesting technologies to solve challenging problems. Wall Street’s huge IT departments with headcounts of a couple of thousands in each major firm did not do a good job to provide an environment that is interesting to work in. In the end great things are achieved by a small team of great engineers. As an example a major investment bank used to have a problem with their equities execution platform, which had become a piecework of many different platforms acquired over the years. When it came to build a new global equities execution platform they set up a team of only 10 engineers to build it. That leaves many engineers with boring maintenance and life support for legacy systems.
The financial crisis removes a major obstacle for the development of the NY tech startup scene. Engineers from Wall Street are joining startups – Josh Koppelman created a website for them (www.leavewallstreetjoinastartup.com) - or founding their own startups. Strateer is one of them, somebody else is working on build a discount consumer platform to trade government bonds and another company was founded to compete with rating agencies for better credit ratings, using mathematical models and natural language processing. There are many more.
Unfortunately though, this is only one (positive) effect of the financial crisis for NY tech startups. At the same time when hiring tech talent becomes easier, it be comes extremely challenging to raise money. VCs, in anticipation of a nuclear winter, are keeping much more cash in their funds (I heard a number of 40%) to help provide liquidity to their existing investments during the next year if needed, and Angels are preserving cash for what ever comes next year. But that topic has been covered already extensively during the last weeks.
It seems like the business model of online broker firms has been so far: drive an aggressive marketing campaign to bring in bodies and then hope that some of them are active investors. Those people that turn out to be active investors get a lot of additional services and tools (most of these too complicated for me) to make them stay as long as possible and to not make them move to the competition. So everybody is fighting for this 10% of active accounts. Nobody cares about the other 90%.
e we gathered feedback for Strateer, which we just started a couple of weeks earlier.
When I mention Strateer to people I meet, I often get a surprised look. Starting a company that provides a better way to invest into the stock market seems to be completely insane to people given the current state of the financial markets. People behave as by the end of year there will be nobody left that owns stock. So let’s close the stock market - the last one please switch off the light.
January.
