Sorry, NYC, Tumblr selling to Yahoo was not the "win" we needed

By Erin Griffith , written on May 20, 2013

From The News Desk

New York has advertising in its DNA. But somehow the city's two most promising startups -- Foursquare and Tumblr -- have failed to capitalize on it.

We're not surprised when Silicon Valley startups focus on product and eyeballs and then waltz into an ad agency's office assuming advertisers are desperate to give them money. Valley startups are not supposed to understand how advertising works. Or so the stereotype goes.

What is surprising is the fact that Facebook and Twitter built large advertising businesses from the Valley, while Foursquare and Tumblr struggled to do so just two miles from Madison Avenue. Foursquare had a difficult round of fundraising earlier this year, narrowly avoiding a down round by taking on debt. And while Tumblr has crossed the symbolic $1 billion line with its sale to Yahoo, it did so with a gargantuan user base and pathetic $13 million in 2012 revenues according to reports. What ever happened to New York playing to its strengths?

New York tech companies have always been underdogs, not just in comparison to Silicon Valley, but in their own city where fashion, finance and media rule. Five years into this whole startup revival thing, tech is not dominant, no matter how often our cheerleader mayor stops by BuzzFeed's offices.

Which is why New York techies are constantly yearning for big exits that prove how important the city's tech industry is. Two memes are often cited in conversations about the future of New York:

1. We need a big consumer Web win to legitimize New York.

This is about taking New York out of the shadow of Doubleclick, and the impression that New York is good for adtech and fintech but not much else. So far our biggest exits haven't done much to dissuade that argument: Ad exchange company Right Media sold to Yahoo in 2007 for $850 million. Social advertising SaaS platform Buddy Media sold to last year for $689 million.

2. We need a big standalone tentpole company that doesn't sell itself to a Valley company.

Again, Right Media and Buddy Media are both adtech companies... that sold to Valley companies.

Tumblr and Foursquare, with their floppy-haired, magazine cover-ready CEOs and exciting consumer-facing products, were tasked with breaking both of those archetypes about New York startups. To do so, they took Silicon Valley approach of worrying about user growth and product first, waiting to worry about monetization. And wait they did. Tumblr, founded in 2007, spent the first six years of its existence thumbing its nose the advertising industry. Twentysomething founder and CEO David Karp famously said the idea of ads on Tumblr's platform made him sick to his stomach. Foursquare was also skiddish about letting big brands onto its platform. The company always had vague plans to monetize by selling tools to the local restaurants and bars in its network, but never quite executed on that.

It's not just Tumblr and Foursquare. The New York Tech Meetup famously bans questions from the audience about business models, possibly in an attempt to move New York away from the city's rational, bootstrapping, revenue-focused reputation. In order to build the next Google, or Facebook, or Twitter, New York needs some magical thinking that goes beyond dollars and cents. We need to "let our winners run," wrote Fred Wilson, whose firm, Union Square Ventures, has backed both Tumblr and Foursquare.

Well, they may have run too far.

We know how Foursquare has played out. The company, founded in 2009 and backed by $112 million in venture money, did little to earn revenue in its early days. Even in 2012, the company earned just $2 million, Businessweek reported. This year the company raised an emergency round of financing, mostly debt to avoid taking a down round.

Foursquare is building a sales team and revenue is growing with sponsored recommendations and promoted updates, CEO Dennis Crowley adamantly insists. He noted at a recent conference that Foursquare is now "routinely" signing up large national retailers with six-figure deals.

But this may come at the cost of its user experience. Last time I used Explore to find a restaurant nearby, Foursquare suggested I try Taco Bell. With four years of my check-in data, Foursquare should know that I have never eaten at a Taco Bell, and presumably that's not because I've never heard of Taco Bell or never knew one was nearby. (In the US we can assume there is always a Taco Bell nearby, right?) And even if I liked Taco Bell, it's a pretty lame suggestion. But Taco Bell has deeper pockets and a more sophisticated ad strategy than a local sandwich spot, so that's the risk Foursquare is taking as it claws its way to revenue.

Tumblr has been slow to monetize too. The company has a very small business of selling templates and stickers, but it has avoided traditional ads, per Karp's fear of tainting his community. He told the New York Times that Tumblr could be "wildly profitable" overnight, had it decided to switch on banner ads. With a network of 100 million blogs and 300 million monthly uniques, I have no doubt that he's right.

Instead, Karp decided to go for brand advertising dollars, hiring people from the agency world to sell sponsored posts, a sort of "native ad" approach which is in-vogue at conference panels but represents a tiny portion of ad spend online.

The idea was there, and Tumblr was reportedly on track to earn $100 million this year by the rosiest estimates. Others say that figure will likely be flat, with Tumblr only pulling $15 million in revenue this year. Not great for a company valued at $800 million with 140 employees. Brands have been curious to try the platform, but they hadn't allocated large budgets to the platform the way they have with Facebook and Twitter.

So when Marissa Mayer offered $1.1 billion, Karp took the offer. It's a little ironic -- Tumblr's ambitions to bring TV-style creative brand advertising to the web echoed that of Yahoo's in the early 00's.

So how did Facebook and Twitter build big businesses with ads ($5 billion and a reported $350 million last year, respectively), while Foursquare and Tumblr could not? If there is something the Valley has that New York doesn't, it's not ad expertise. No, as far as I can tell, it is access to far more cash, and talent with experience in scaling.

Having room to run means you need fuel to power that run in the form of talent and capital. When consumer Web companies talk about not focusing on revenue, it's a bit of a misnomer. The business model implicit to the Valley playbook is trading ever-escalating eyeballs for venture capital. Apparently that playbook only works -- so far -- in Silicon Valley.

Venture capitalist Chris Dixon, who has built two startups in New York which he sold to Silicon Valley companies, pointed to the benefits of scaling a company in Silicon Valley at our PandoMonthly last week:

In the Valley, he said, "There are people you just pull the people out of XYZ company who did that exact same thing there for the last 5 years. For employees 50-500, you're not inventing a new thing, you're just pulling them off the shelf. ... You get this whole second layer, right off the shelf and that dramatically accelerates that second stage, and if you look at a bunch of companies in New York and other places, they have to be more experimental, like, "Let me see if this person can do that job." (Note: Dixon is an investor in PandoDaily.)

That's not to say that, with Foursquare's struggles and Tumblr's sale, all hope is lost. In the last six months, a few new winners have emerged from New York's tech scene. It started with Mayor Bloomberg's We Are Made in NYcampaign. The campaign featured six New York startups chosen for their diversity of location, size and sector, featuring ads around the city in subways, taxis, and local media.

The list, which included AppNexus, Songza, Etsy,, Kickstarter and Learnvest, notably excluded Foursquare and Tumblr. It felt odd -- the Karp-Crowley one-two punch seemed a given for every list, article, and award related to New York, tech, youths, what's hot, important people under a certain age, rising stars, disruptors, or revolutionizers. Their exclusion (or perhaps they declined) sent a quiet signal that the torch had been passed. New York's tech scene is moving onto phase two: where companies aren't ashamed of making money, and they don't want to sell out.

The question is whether the torch has been passed to a group of companies with lower ambitions than its wide-eyed predecessors. Sure, Etsy and AppNexus are easier to monetize than a mobile social network. But are we okay with trading easily monetized "base hits," for startups with a greater risk and reward?

The new class of leaders I see emerging includes Jon Oringer, CEO and founder of Shutterstock. The company went public last Fall and is now valued at $1.64 billion. And Brian O'Kelley, CEO and founder of AppNexus, which is up to 400 employees and is expected to IPO next year. And Perry Chen of Kickstarter, who may not be comfortable as an "anchor" of New York's tech scene but is beginning to speak more publicly about his company, defining who it is for (creative people!) and what it is not (a store). And Chad Dickerson of Etsy, who has outlined his company's plan for providing investors with liquidity while keeping Etsy independent. And 10Gen, a company which is quietly sucking talent from Wall Street to build one of New York's most exciting hardcore tech companies. And even Gilt Groupe, which should file to go public any day now and has, despite facing some rocky times when flash sales went out of vogue, given birth to its own mafia-like diaspora.

These are companies that don't plan to sell and have put all the elements in place to ensure they end up in that position. Oh, and the most interesting thing about them? Only one relies on advertising.

[Illustration by Hallie Bateman]