It’s Where You Are

Why are people willing to sacrifice so much to be where the action is? That’s a question raised in an article in the Wall Street Journal about New York’s continually up-and-coming tech scene.

What the 30-year-old lacked was the cash to rent a real office, hire full-time employees or buy a new jacket. So what did Mr. Deuskar do? He moved his entire operation to the most expensive city in the country.

New York has emerged as the hot destination for tech start-ups, the way Paris attracted drinkers in the ’20s and Portland attracts gentleman farmers. I keep reading about this trend and scratching my head: If you were launching an Internet business that didn’t require you be in any particular location, wouldn’t it make sense to head someplace cheap? I imagine moving back to Buffalo, where my savings would last 5,000 years and I could tap a huge population of SUNY students willing to work for free beer.

But Mr. Deuskar, bolstered by a $30,000 prize from a Wharton School business-plan competition, was determined. Last June, he swapped the $1,655-a-month Philadelphia duplex that doubled as the Stylitics office for a $3,655 two-bedroom in downtown Brooklyn, his new NYC headquarters. It was a rough summer. Mr. Deuskar recalls a 10-minute discussion at Target with co-founder Zach Davis concerning the affordability of a $12 whiteboard. The interns and contractors working at the apartment snacked on those giant jars of animal crackers you find at the dollar store. He donned the same worn French Connection. blazer every day for pitch sessions and client meetings all over town.

Two months later, $800,000 in angel funding rolled in, but that didn’t relieve the pressure. Hiring was the toughest problem, says Mr. Deuskar. There’s plenty of cheap engineering talent in Philly—bright folks willing to work for $60k. But in New York, engineering talent is scarce, and salaries are inflated by the big financial firms. You get kids fresh out of school demanding six figures. Mr. Deuskar wound up paying $20,000 per hire in recruiter commissions.

Insurance and payroll taxes cost more here, he discovered, and the telecom bill is higher. And last month, when it came time to rent a real office, Mr. Deuskar agreed to pay $5,500 a month for an 1,800-square-foot space on West 36th Street. It’s a great Fashion District location, but it’s 40% more than the price of a comparable office in Philadelphia, he says. Then there are the $14 cocktails, the $17 movie tickets, the $75 sushi dinners…

The story is familiar to reader’s of Enrico Morretti’s New Geography of Jobs. People could do business cheaper elsewhere, but choose to move to expensive cities because of the many externalities they provide. The article later answers its own questions:

It’s paying off. Since Stylitics moved to New York, Mr. Deuskar says, he and his co-founder have been invited to appear on panels, teach classes and speak in Paris. And backers are impressed. Stylitics investor Kirsten Green, managing partner of Forerunner Ventures, told me she’d be less inclined to fund a start-up based in Philly, simply because of the logistical hassles: “I focus on companies in San Francisco and New York,” she says.

Location, location, location.

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