Welcome to Inside the Mind of a NYC Angel Investor, a new series at AlleyWatch in which we speak with New York City-based Angel Investors. In the hot seat this time is David S. Rose, Managing Partner of Rose Tech Ventures. David is the Founder & CEO of Gust, Founder and Chairman Emeritus of New York Angels, and is the Founding Track Chair for Finance and Entrepreneurship at Singularity University. David sat down with AlleyWatch to talk about how the New York startup ecosystem has evolved in the years since he was named “the patriarch of Silicon Alley,” how he came to found New York Angels, and his thoughts on how near the Singularity really is.
If you are a NYC-based Angel interested in participating in this series, please send us an email. We’d love to chat. If you are interested in sponsoring this series that showcases the leading minds in angel investing in NYC, we’d also love to chat. Send us a note.
Bart Clareman:, AlleyWatch: Tell us about your journey into the angel business – how did you become an investor and why this asset class?
David S. Rose: I was brought up with a role model of an entrepreneur – my father is an entrepreneur so, sure enough, I started my first company when I was about 10 years old: “Rose Productions, A Multimedia Organization”. My brother was a magician and would do children’s birthday parties. Our marketing department helped him understand that, as a performer, he really needed headshots and fliers and business cards and brochures and posters, and Rose Productions would be happy to supply them.
That was great until about a year later when my one client realized the sum total of his revenues equaled the sum total of my revenues, so I lost my one client. But I was undeterred, and I continued starting companies all the way through high school, college, and business school.
In college I got into letterpress printing, which is still my avocation, and ran the print shop in my college as an entrepreneurial venture. At Yale, I majored in Urban Affairs, and then began my career in government with Senator Daniel Patrick Moynihan, first as his Special Assistant for Urban Affairs, and then as Acting Regional Director of his New York office.
Despite having an enormous amount of fun conducting congressional investigations, sitting on boards with the Mayor, and drafting OpEd pieces for the New York Times, after a couple of years I realized I was at heart a private sector entrepreneur. So I left Moynihan, went back to Columbia to get an MBA in real estate finance, and then joined my family’s businesses in entrepreneurial real estate development. I spent the next decade as a real estate developer.
Did you ever lose your passion for starting new companies of your own?
Never. Along the way, I kept starting companies on the side. I started one of the very first computer training companies, The Computer Classroom, with my business school math professor in 1983. In 1988 I started a software company that turned into a wireless messaging company; when that began to take off, I transitioned from real estate into tech.
From there I fell backward into venture capital financing. I raised my first VC round in 1991 from Warburg Pincus, which ultimately enabled us to develop the first wireless Internet broadcast network, called AirMedia Live. That got us more financing, and more people; the company expanded and became a multinational with 125 employees.
Along the way I was a finalist for the E&Y Entrepreneur of the Year award here in New York. (As an example of how I come from an entrepreneurial family, although I was a finalist in 1999, my father actually won the award in 2003! He is currently 87 years old and still chugging away as an entrepreneur.
How did you go from starting companies to investing in them?
After the dot com boom came the dot com crash, which completely wiped out my wireless Internet company. At that point, having been unceremoniously removed from the entrepreneurial playpen, all I could do was become an investor. There, too, I had a family history, as I’m actually a third generation angel investor as well as a third generation entrepreneur.
I joined the local angel group, which back then was an offshoot of the New York New Media Association, the trade association for dotcom companies in New York. Eventually, the trade association disbanded, so I spun the angels out into a new group called New York Angels, along with a group of serious investors like Esther Dyson, Alan Patricof, Josh Kopelman, and Howard Morgan. Once that took off, I started doing more and more investing.
Around that time I also got involved with Ray Kurzweil (author of The Singularity is Near) and Peter Diamandis (Founder of the X-Prize competition) as an Associate Founder of Singularity University. SU is a next generation Silicon Valley think tank and training ground for the world of exponentially growing technology, and I founded its Finance, Entrepreneurship and Economics track.
How did you go from there to founding Gust?
If you put everything together— my background as an entrepreneur, as an investor, and as a theorist on the future of business— I realized there was a one-time opportunity to effectively rebuild the global financial ecosystem for financing of companies.
The stock market initially began in 1701 in Amsterdam as a way to aggregate public monies so merchants could afford to buy ships and set forth to trade. These days there are 700,000 US businesses that get incorporated and hire employees every year, none of whom get financed through the public markets. Instead, the existing capital markets have moved from capital formation to exits, so there’s no way for the public to get money into these early stage companies.
At the same time, the cost of starting a company has dropped like a rock. My first company took $20m in VC to get to the shipment of our first Internet product in the early ‘90s. My second company took only $2m. Some years later, my first angel investment company took $200k to get to its first Internet product shipment.
Nine years ago, I led New York Angels’ investment into Pond5, an online marketplace for video stock footage. When they came to us, the founders had a website that was up and running and generating revenue, a full management team, and they had spent a grand total of $20k—yet another order of magnitude decrease.
How much of that is costs dropping versus you or your management teams getting better?
It’s all costs dropping. These are all exponential cost reductions. Back when I was running AirMedia, my wireless company, we had a whole server room filled with computers and air conditioners. By the time Pond5 was founded, literally everything was hosted online in the cloud, and they used existing tools and open source stacks rather than having to build things themselves. They got a $500k check from New York Angels and that was the first and last capital they took before we exited at a $130m valuation.
Today, if you have an idea for an app or a website, you can sketch it on the back of a napkin and send it off to UpWork, where there are over 12 million freelancers from around the world who’d be happy to design or code something for you for a few thousand dollars.
As costs decrease, it means more and more people are able to invest. That’s why the pool of available capital is expanding, from private equity to venture capitalists to active angel investors and now into the world of unaccredited crowdfunding. Access to capital is expanding, and the ability to do things with that capital is expanding.
At the same time you have a globalized world, and while in the beginning it seemed like everything happened only in Silicon Valley, now New York is actually growing faster as a tech center than Silicon Valley. In fact, Accenture did a survey of all the world’s major cities last summer, looking at startup growth, investment, governmental support and so on, and determined that the #1 innovation startup ecosystem in the world was New York City.
Speaking of New York City’s ascension as a tech center, can other jurisdictions follow in those footsteps or is New York—being New York—unique?
Several years ago if you had been in charge of economic development for a city or state or country, you would have asked, “how can I get a big company to build a plant here and create lots of solid, blue collar jobs?” Back in the 1920’s, a Ford manufacturing plant would have 100,000 employees…today you can do that exact same thing with 1% of the people.
Then in the 1960s and ’70s and ’80s, economic development efforts turned to attracting corporate back office operations centers with white collar jobs like processing checks or running call centers. But now those have all disappeared as well, either because they have been off-shored or because it’s all been computerized.
So the question is, if you’re in charge of economic development in 2017, what can you do to grow your city/state/country. And it turns out that all you can do in the new world of exponential tech is to grow and incubate new companies. It’s like planting your own food instead of going to the supermarket.
To do that, one needs to ask, how can government help startups? First, there are some baseline things which we are wonderfully fortunate in the U.S. to have, like the rule of law, the bankruptcy courts, and little to no corruption.
After that, the initial instinct of government economic development agencies is to attempt…