Building the Digital City

As part of The Startup City, a case study the Marron Institute is developing with Richard Florida to shed light on the reasons New York has become the second global leader in the tech startup scene in the past decade, I attended a multidisciplinary conference titled Building the Digital City.

The conference brought together some of the leaders and change-makers of New York’s tech sector: entrepreneurs starting tech firms, engineers building and programming tech firms, public officials assisting tech firms, advocates supporting tech firms, architects designing space for tech firms, developers catering real estate to tech firms, internet providers wiring tech firms, journalists writing about tech firms, among others.  This long list is meant to emphasize the diverse industries involved in the rise of this sector and to reflect on how much the tech sector has changed the way others do business.

The reflections of the conference were extremely varied, focusing on a number of topics including the methods for attracting and fostering talent, the potential benefits and barriers of regulation, the role of real estate, the role of entrepreneurs in mentoring and investing in new tech startups, the importance of good infrastructure, and the role of the City of New York and the role of its new mayor.

Talent

• New York City has long been a leader in media, fashion, real estate, finance and other sectors.  Naturally, the city has a diverse pool of talent available to apply their skills to technology-oriented ventures.
• New York City has transformed itself into one of the most dynamic and safest places globally, providing a high quality of life paired with a diverse, well-paid and innovative job market. Part of that high quality of life includes walkable neighborhoods, a 24-hour transit system, great schools, culture and entertainment. As a result, New York City not only attracts talent; sometimes that talent then refuses to move elsewhere. According to Craig Nevill-Manning, Director of Engineering at Google in New York, the company wanted to “desperately hire” some people from New York in 2002, but the potential hires would not move to San Francisco. That, coupled with the fact that Nevill-Manning wanted to move back to New York just as desperately, initiated the move. At first, Larry and Sergei were “dubious that there were at least 15 good people to hire in New York,” but today the 3,000-person office has proven otherwise.
• Entrepreneurs mentor and invest in other entrepreneurs. Endeavor has extensively researched this, creating maps that estimate the multiplier effect certain firms have had on the startup environment. As Kevin Ryan, Founder of Gilt said, 30 to 40 people that have left Gilt have gone to other tech startups; so now, someone who has worked at Google and has “deep technical talent” does not fear that there are few potential employers. 
• Rachel Haot, Chief Digital Officer for New York City, discussed immigration policy as an essential issue that needs to be resolved. More than 40% of all small businesses in New York are started by foreign-born immigrants so fostering an open and inviting environment for national and international talent is fundamental.
• New York City has created dozens of programs focused on building capacity for students to better prepare for the technology sector, such as the Applied Sciences Competition that spurred Cornell, NYU and Columbia to invest in new tech-oriented campuses. These initiatives are  “expected to more than double the number of both full-time graduate engineering students and faculty in New York City over the next three decades” according to the Economic Development Corporation. Additionally, the Alexandria Center for Science & Technology, the Academy for Software Engineering, the Software Engineering Pilot Program, the NYC Generation Tech Program, and the Digital Ready program, among others, also build capacity in the technology sector.
• Regarding technology within elementary and high schools, Ben Fried, Chief Information Officer for Google, said that “computers expire like melons” so “I rather the government focus on great teachers that are digitally aware than shower money at equipment that will be in the garbage in ten years”. Yes, it’s important that children access technology, but it’s much more important that they access the right content.  Good teachers will help them do that.

Regulation

• For the market to work, regulation is necessary.   For people and firms to trust each other and for firms to invest in new ventures, a stable, regulatory environment is needed to reduce risks. However, regulation sometimes gets in the way of innovation; it can be stifling if it does not adapt to current times. One example is the number of constraints peer-to-peer networks have faced in New York. As David Hantman, Head of Global Policy for AirBnB mentioned that “yes we need [regulation] but it should get out of the way when we are trying to get the sector to grow”. The new mayor should focus on changing regulation that forbids things that people are going to do regardless of regulation. People are going to rent their apartments to make some extra money in one of the hottest real estate and tourism markets in the world, whether it’s legal or not.
• Regulation also makes the real estate sector in New York unique. It´s so stringent that building or repurposing in the city requires almost unreasonable amounts of time and money, which plays a part in making real estate distinctively expensive. However, it has also been instrumental in creating mixed-use, affordable housing, public open spaces, ground floor retail and the great urban environment we enjoy today. Jed Walentas, Managing Partner at Two Trees Management, explained how regulation accidentally contributed to the rise of DUMBO.  Land use restrictions forbade certain industrial buildings from being converted for residential use, and they were instead converted into artists’ lofts.  When they were eventually allowed to be converted for residential use, light and air regulations meant that only parts of a building could become residential; parts would still have to be commercial. The influence of artists and mixed-use buildings played an essential part of DUMBO´s transformation.

Real Estate

The real estate sector has to adapt to this shift in various ways, some examples include:

• Real estate needs better Internet infrastructure. Some developers and managers don’t allow more than one provider into a building, stifling competition. Others don’t install up-to-date technologies, such as fiber optics, that could have huge benefits for their tenants and attract new ones. The lack of connectivity is obviously a large constraint for tech startups that depend on the Internet and its speed, sometimes exclusively.
• Startups are looking for offices they can afford.  According to James Sanders from The Center for Urban Real Estate, 86% of startups are in prewar buildings. “New ideas require old buildings” is a famous quote by Jane Jacobs, implying, among other things, that old buildings are usually cheaper than new ones. MaryAnne Gilmartin CEO of Forest City Ratner, explained why renting new buildings to startups is financially impossible: any new office has to rent for “$60 dollars a foot if it wants to make profit;” startups can´t afford that. They have chosen older, more affordable buildings which presents an opportunity for savy real estate developers.
• Startups cannot sign long-term leases because it’s too risky. It’s impossible to sign for 10 years when you aren’t sure you’ll make it to next year. Both WeWork and General Assembly, as well as other co-working spaces provide flexible subleases to their tenants, offering flexibility in terms of space and length of commitment, among other valuable amenities.
• Generally speaking, startups don´t like corporate-looking offices.  They prefer places that can be adapted into fun, dynamic spaces, but this requires open floor plans and flexible rules. Common questions MaryAnn receives from startup tenants are: “Can I bring my dog to work? Can I put my bike in the elevator?” According to Jed Walentas, Class A buildings have “institutional ownership and management and are not conducive to how these tech companies behave.” This is another reason why many startups have ended up in prewar buildings.
• An entire panel at the conference discussed the importance of open floor plans and co-working spaces for the productivity of startups and their fast-paced innovation. We have inherited office design from management theory that is 40 years old, according to R&D Consultant, Jennifer Magnolfi. Today we work differently; we work at higher speeds. She emphasizes that we are “untethered from our desk to the city,” creating a 24-hour workday that does not necessarily need as much office infrastructure as in previous years. A study by Andrew Laing found that “individual workspaces are only actually occupied on average about 42% of the typical day,” calculated for a 9-5 workday. Developers that capitalize on this will have a competitive advantage.
• Finally, the real estate sector has had to get smarter about how it creates more neighborhood amenities to attract the right kinds of tenants. MaryAnn mentioned that as a developer, you have to “give away the ground floor if necessary.  You don´t drive the pro forma with the ground floor;”. The right ground floor retail will create a better vibe and will bring the tenants you want.

Infrastructure

• Some panelists were very vocal about the inefficiencies created by incorrect infrastructure, such as thousands of wifi contracts from competing providers for a service the government could provide for free. The debate about free wifi for the development of innovation is alive in other countries as well.  In some places, access to Internet has even been declared a human right; U.S. policies lag way behind that. However, New York City is partnering with Verizon to provide free wifi in 20 parks, and the city has also launched programs to provide wifi to marginalized communities, especially those in public housing.
• Another debate is bandwidth.  Some people think bandwidth can reach excessive amounts and that it will foster inefficient use, such as teenagers that video-chat themselves to sleep because they can. Carlos Dominguez, Senior Vice President at Cisco, said “bandwidth will never be enough because we will always find more applications to use”.  For cities, bandwidth is a competitivity issue, so there will probably be large bandwidths and some incentives for efficiency. He cited Clay Shirkey regarding the problem of Internet noise resulting from excessive bandwidth saying, “it´s not information overload; it’s filter failure.”
• One thing was clear: Brooklyn is way behind the rest of the city, and even the state, in terms of providing fiber optics for businesses.  It was not clear why this is the case, but I speculate that it may be because its industrial real estate and infrastructure has only recently been transformed to provide for technology firms. However, things are changing; New York City has just launched ConnectNYC, a challenge for businesses to compete for free construction and installation of fiber optic infrastructure.

All of these factors contribute to New York’s position spearheading the tech sector and to the shifts it has already made and will continue to make moving forward. The key for cities, I think, is adaptation.  Adaptation may mean incentivizing change in dynamic sectors or, sometimes, just catching up with them. At the Marron Institute, we look forward to learning which of those was true for New York City through our Startup City case study.