For the burgeoning New York City startup and venture capital scene, Etsy Inc.’s blockbuster initial public offering Thursday is a beacon of what is possible.
The online marketplace for handmade and unique items, founded in Brooklyn in 2005, priced its IPO at a valuation of $1.8 billion and saw shares and market capitalization almost double on the first day of trading on Nasdaq.
It is a milestone for New York City, which has seen few startups, backed by venture capital, in recent years go public or sell for large amounts. Tumblr Inc., sold for $1.1 billion to Yahoo in 2013, was a rare example. Both Etsy and Tumblr count York-based Union Square Ventures as an investor. Union Square Ventures participated in a $600,000 seed round for Etsy in 2006, as Fred Wilson, the firm’s managing partner, described in a blog post.
Etsy raised $267 million in IPO proceeds, which is the most ever for a New York-based startup that is backed by venture capital, according to industry tracker Dow Jones VentureSource.
“Obviously, this is a very, very positive event in terms of the [New York City] startup ecosystem,” said Bill Gurley, general partner at Silicon Valley-based venture firm Benchmark Capital.
Mr. Gurley has in the past noted that New York needs an “iconic” IPO, and that the city struggled to produce one, which he had attributed to a conservative attitude among entrepreneurs in the city. Big IPOs, like Etsy’s, “can be infectious,” Mr. Gurley said in a recent interview.
Venture capital investors need large IPOs and sales of their companies in order to return capital to the funds that back them. It is also common in the venture industry for capital generated in an exit to be recirculated back into the same geography to fire up more startups. Employees from larger companies that go public tend to spread into younger startups or start new ventures with proceeds from stock sales, in a virtuous cycle that has characterized Silicon Valley.
“It is not often that you see multibillion-dollar companies out of New York going public. I believe it will happen more often,” said Eric Hippeau, managing director at early-stage venture capital firm Lerer Hippeau Ventures, which has been investing in New York-based startups in recent years.
New York suffered from a “slowdown in investments right after the 2000 crash,” Mr. Hippeau. The city attracted little capital through 2005, and venture investments have been picking up steam since then. Last year, startups in the New York metro region raised $5.7 billion in venture capital, according to Dow Jones VentureSource, up 58% from the $3.6 billion in 2013. Last year’s venture capital investments was the highest since 2000, when venture investors put $8.7 billion in the metro area’s startups.
“A great number of investments have been made by people like us, by [venture capitalists] in the past years. It should start to bear fruit, as these companies grow bigger and get ready for some sort of an exit,” Mr. Hippeau said.
Several New York-based startups are becoming well-known to consumers and have grown large in recent years, including news site Buzzfeed, eyeglass designer Warby Parker, and beauty item subscription service Birchbox. Five New York startups backed by venture capital were valued at more than $1 billion in their most recent investment rounds, according to The Wall Street Journal. These are AppNexus, Gilt Groupe, MongoDB, Sprinklr and WeWork.
“There’s a whole bunch of companies in the pipeline that should follow and have good exits, whether IPOs or acquisitions. It just shows that big iconic companies can be built in New York,” Mr. Hippeau said.
Lerer Hippeau Ventures has been investing the majority of its capital in New York-based startups, which is a rarity even for New York-based venture firms.
“We are putting big, big bets on New York,” Mr. Hippeau said. In that light, Etsy’s IPO “to me, is a good sign. It’s an encouragement.”