Investors are finding their way to profits through funds, crowdfunding and direct investments.By Christine Giordano
Investors are taking note: New York City is in an unofficial race to become the new Silicon Valley of tech startups.
The state's tax policies allow new businesses to operate tax-free for 10 years. Investors who want to give seed money to New York businesses are able to observe start-ups through the city's many incubators, which foster business growth. Larger tech companies are creating strong pools of tech talent, while the city's wonderland of activities lend themselves toward enticing the younger workforce.
"While New York may have started out being very media and ad-tech oriented, it has diversified and become very accommodating to VC investment generically," says Brian Rich, managing partner of New York-based growth equity firm Catalyst Investors. "The community has been built up substantially. Major tech companies like Google (ticker: GOOGL, GOOG) are fostering a base of talented workers for start-ups in the New York area."
Rich says New York is poised for market share growth in venture capital investment. "New York is at about 12 percent of total VC investing nationwide right now." He has his eyes on "three technologies that are going to change the shape of business as we know it within the next five years or so" – companies that offer technologies in artificial intelligence/machine learning, robotics and virtual and augmented reality.
The best way to invest in startups is to choose promising companies early on when they need seed money, because the second rounds of fund raising tend to be priced much higher and offer less reward, says Charlie O'Donnell, partner and founder of the venture capital firm Brooklyn Bridge Ventures. He researches promising tech funds, and creates a basket of 30 or more companies that need seed money.
Would-be investors can find such funds on the Quora website and First Round Capital and Gotham Ventures are two of many firms that specialize in seed funding. When choosing a fund, it's always best to see data on the fund's past performance and the firm's track record with other similar funds.
If investors don't invest through funds, they should surround themselves with other experienced investors, and consider joining an angel group of investors, he says. "You want to be in rounds where you know there are some professionals who know what they're doing," he says.
The Built in NYC website has listings of angel investor groups. Before you invest, ask around by talking to reputable bankers, lawyers or accountants. Like investing through a venture capital fund, angel investors generally make money only after several years – if at all – after a business they've invested in is sold or has a public stock offering.
Another method is through crowdfunding, although, O'Donnell says many of the hotter new startups don't want to work with everyday investors. Still, whereas you once needed to be an accredited investor with an annual income of $200,000 or a net worth of $1 million, crowdfunding now allows less affluent investors to get in on the game through many sites such as Flashfunders or Seedinvest with varying amounts.
If you go the crowdfunding route, invest only 5 percent of your portfolio, experts say, and diversify into 10 or more companies to hedge your risk exposure. Continue to research the companies you invest in, and make sure they have industry experience and backing from venture capitalists.
If you're actively seeking startups, consider business incubator accelerator programs. "It doesn't guarantee success, but at least you know that someone who has experience in the startup world has looked at it," O'Donnell says
One such incubator in New York is The Health Lab, where startups are connected with mentorship, research and testing. Currently attracting interest is RecoverMe, an injury recovery business focusing on the part-time workers compensation market; and Angulus, with a medical device using accelerator technology.
Unity Stoakes, co-founder and president of StartUp Health, says he's noticing a "wave of niche startups." Bigger investment firms are taking notice, he says, including GE Ventures, which is invested in 20 startups including Ornim Medical, Digisight, SilverVue and Apervita.
Here are some notable New York-based tech startups, some of which are seeking funding.
TheSquareFoot. This startup makes the search for office space as easy as renting an apartment. They combine a Zillow-like online listings platform with an in-house brokerage team to help businesses through the entire leasing process. "They're essentially the Compass of commercial real estate, a $30-billion-a-year industry," says Mark Lee, partner at Hokku public relations. TheSquareFoot is currently seeking investors for its Series A round of financing. Prospective investors can contact the company directly; the minimum investment requirement is $25,000.
Elemental Path. This smart-toy company is recognized for their award-winning line of CongiToys, which features internet-connected dinosaurs that are powered by International Business Machine's Watson (IBM) technology. The toy creates an interactive experience for kids similar to Apple's Siri (AAPL) or Amazon.com's Alexa (AMZN), with Elemental Path's patent-pending Friendgine technology that ensures kid-safe responses.
Two years ago, the company competed to win the licensing of the Watson technology. "CogniToys saw an incredibly successful Kickstarter campaign in 2015, raising over $275,000 in 30 days," says company spokeswoman Nicole Brief. "It's now on shelf at Toys R Us stores nationwide, as well as Amazon and its own e-commerce site."
Elemental Path recently closed a $3 million investment round and is currently raising a $4 million investment round to support their new product development and expansion into foreign languages and countries, including China. The minimum investment is $100,000.
DojoMojo. The company executes sweepstakes, contests and giveaways with multiple brands to acquire e-mails, social followers and phone numbers of potential clients. It centralizes everything on a single platform "where creating, executing and analyzing the efficacy of your partnership marketing efforts takes a fraction of the time it previously did," says DojoMojo founder Colin M. Darretta, who says more than 1,000 companies are already using service.The company is not actively raising investment money right now because it is seeking to build relationships with investors before taking capital from them.