Living in a Bifurcated Market
New York City is a decidedly odd place right now. During 2004-07, Wall Street was a powerful engine that propelled growth and good fortune across a vast swath of the city, creating massive wealth, buoying an already heady real estate market with concomitant knock-on effects in retail, restaurants and entertainment and big-ticket consumer durables (e.g., cars and other high-priced toys). Today, it seems as if every days brings news of more large-scale layoffs on Wall Street, be it Citigroup, Lehman, Morgan Stanley, whomever. The unwinding is happening fast and furious, putting people on the Street with no clear prospects for employment. Because all firms are in the same position. Superstars will always have a home, but what about the merely good? They’re currently out of luck. Will Wall Street come back? Of course it will. But when? Not for some time. Nobody knows.
On the flip side, the technology, media and advertising communities are doing ok. Advertising will certainly suffer in an economic downturn, but there is so much more to do in technology that has a clear path to monetization and the media industry is in the midst of massive disruption, creating opportunities for smart, nimble, creative early-stage companies. The entrepreneurial vibe in NYC hasn’t been better during my four years as an active participant, and based upon the deals I’m seeing the performance of my portfolio companies I see little slowdown in this part of the NYC business ecosystem.
So how does one reconcile the troubles of old-line Wall Street with the promise of new-age digital media (and financial technology and other areas ripe for disruption)? Quite simply that by having a seemingly endless bankroll courtesy of the credit bubble, Wall Street has grown undisciplined and gotten distracted from managing risk. This explains the lions’ share of the problems we’ve witnessed over the past 6-9 months. Young start-up companies, however, attract and have available only a fraction of the resources open to large Wall Street and private equity firms. Even when venture capital investing gets crazy it doesn’t compare in size or scale to the Wall Street bankroll, not by a long shot. This keeps small companies hungry, disciplined and focus on winning. It also makes them easy to adjust to changed economic circumstances by deferring new hires, selectively laying off staff and intensely focusing on managing cash. Not quite so easy at large Wall Street firms, I’ll tell you from experience.
While sales at Manolo Blahnik and other hoity-toity boutiques will eventually get hit by the big-money Wall Street slow-down, restaurants and kitschy stores on the Lower East Side and in Tribeca are likely to keep on humming due to the vibrant small company scene. While this birfurcated existence can’t go on forever, my handicapping is that it will continue much, much longer than people expect. Contrary to the alleged statement of Charles Duell, that “Everything that can be invented has been invented,” we are in the midst of a time when innovation and idea generation appear to be at an all-time high. And it is imperative that we continue to provide incentives and opportunities for young companies to be formed and to bring their intellectual property into the marketplace. They are our future, and will serve as a counterbalance to the problems being experienced in the more established parts of our economy.
