Why Yahoo! Buying Tumblr Is Not Great For NYC's Tech Scene

By Greg Gretsch, Managing Director, Sigma West, an early-stage technology VC firm in Silicon Valley.

For years we’ve been hearing about how the ascendant tech startup scene in NYC is going to rival Silicon Valley’s tech-hegemony. It’s a story the mainstream media has run with hard because, after all, NYC is the apex for the mainstream media and, who doesn’t like rooting for the home team? For those NYC cheerleaders (I’m talking to you Bloomberg and WSJ), Yahoo ‘s purchase of Tumblr was solid confirmatory evidence of the momentum-shift they’ve been trumpeting. Yet, while the acquisition was clearly a good thing for Tumblr’s founder and early backers, it was at best OK and at worst a bad thing for NYC’s quest to challenge Silicon Valley’s tech dominance.

The confluence of elements at the core of Silicon Valley’s vibrant tech scene have been long discussed – fantastic universities, access to capital, and access to a strong startup support system. NYC long had great universities and human capital (although not as much tech DNA) but, somewhat surprisingly for the financial center of the world, NYC just didn’t have a strong startup funding culture. To be clear, there is plenty of wealth to be invested in NYC; somewhat ironically there are five NY metro area hedge-fund titans who each made individually more in 2012 than the entire purchase price of Tumblr. Lots of money, just not lots of it going to tech startups. Another way to put it is that there are lots of billionaires, just no tech-billionaires. In the last 10 years, at least the money side of the equation has been looking better for NYC. According to the PWC/NVCA MoneyTree, NYC’s share of venture investment dollars grew from 5.8% of the US total in Q1 2003 to 9.8% in Q1 2013. NYC is taking venture investment share from other markets, but it is not taking it from Silicon Valley. Over that same period, Silicon Valley’s share of US venture investment dollars went from 32.5% to 37.9%.

So what is NYC missing and in what alternate universe could the Tumblr acquisition be bad for the NYC tech ecosystem? What Silicon Valley has in abundance that no other tech-center rivals is what I will refer to as the anchor-tenant companies. Anchor-tenant companies are those that become large independent and growing tech leaders. They continue to generate wealth; their alums continue to spawn new companies; and they continue to buy interesting startups fueling the cycle. There are tech giants in places other than Silicon Valley (Microsoft , Amazon, IBM ), but no area rivals the valley for the sheer number of these tech titans. Silicon Valley has them in every corner of tech and continues to create them. Just since the tech bubble burst, we’ve added LinkedIn and Facebook (started post bubble) and Google and Salesforce (IPO post bubble) to name just a few.

This brings me back to Tumblr. A great company and a great outcome. But now that the music has stopped and Tumblr has taken a chair, the company has stopped playing for the big leagues. Tumblr may ultimately become as meaningful to Yahoo! as YouTube has become to Google, as Yahoo! CFO Ken Goldman implies, although I’m skeptical. But even if it reaches that lofty status it will be bittersweet for the NYC tech community. Because instead of having a large independent tech giant around which an ecosystem can flourish, NYC will have a large satellite division of a Silicon Valley company.