New Heights for High-Tech Startups

While New Jersey may be playing ‘catch up’ with Silicon Valley and other regions, it has nonetheless experienced an increase in overall high-tech startup activity.

By George N. Saliba, Managing Editor  On May 27, 2015

An altered and diminished labor market has driven many people – from recent college graduates to retirees – to form their own high-tech startup companies, and their efforts have been facilitated by a robust Internet era, which features easy access to relevant information, as well as smooth communications with colleagues and other experts.

More broadly, back-of-the-napkin startup ideas have also been fostered by the market’s demand for smartphone applications and, separately, the budding “Internet of Things,” the latter which can involve remotely controlling and/or interacting with physical objects ranging from homes’ thermostats to self-driven automobiles. Ideas and opportunities also abound in financial technology, healthcare and life sciences arenas, for example.

David J. Sorin, managing partner of McCarter & English’s East Brunswick office, and head of the law firm’s venture capital and emerging growth companies practice, adds, “Our economy is at the point when businesses are incorporating and integrating much of the technology enhancements of the last generation.”

He stresses that the ability for entrepreneurs to start companies today, reach commercialization and ultimately profit (all with less capital), has “never been more true than now, because companies don’t have to re-invent the wheel every time they want to develop something; the technologies [already exist].”

Meanwhile, opportunities have been created for high-tech startups because many large companies have reduced their internal technology development capabilities in order to reduce costs.

Access to Capital

Access to capital for early-stage companies is yet another factor fueling the growth in high-tech startups, with angel investors and venture capitalists often eager to invest in promising companies. Kathleen Coviello, director of the technology and life sciences division at the New Jersey Economic Development Authority (EDA), says, “Right now, I am seeing a pretty favorable market for seasoned entrepreneurs with a good business plan, for raising funds. There is a lot of capital available in the markets; there’s a lot of liquidity. The M&A market is very strong. So, for the right entrepreneur, we’re seeing multiple term sheets.”

However, capital is a double-edged sword, because while investors may wish to invest in early-stage companies, they can be hesitant to place their money into “seed stage” companies that are often initially funded by entrepreneurs’ friends and families.

Mario Casabona, entrepreneur and angel investor at Casabona Ventures and TechLaunch (a technology accelerator), explains, “What concerns me the most is that angels are moving toward the lower-risk venture capital [area] and you have friends and family that are providing some funding to [seed stage companies], but not enough to bridge that gap. There’s a real void between the seed [stage] and what we call the post-seed and pre-early stage.”

He adds, “The reason this has become more obvious is because the startup ecosystem is growing in New Jersey. Things are coming together; you hear about [new startups] every day. Due to all of this activity, the investor community hasn’t caught up. We haven’t had enough successes for the investor community to jump in. It is going to take some time; perhaps a five- to 10-year period. We are looking at a couple of years of some dry times, and then I think things will start flourishing.”

New Jersey as a Location

Overall, New Jersey faces competition from other locales such as Silicon Valley, lower Manhattan and the Cambridge section of Massachusetts. In those regions, coffee shops, for example, are often teeming with high-tech startup persons, and these landscapes not only spawn innovation and a sense of community, but can also propel capital investment.

The good news, again, is that New Jersey has seen growth in its high-tech startup community, evidenced by high-tech “MeetUps” in cities such as Hoboken, and the fact that just three years ago, there was essentially one technology accelerator in the state, while today there are perhaps half a dozen.

Moreover, startup-related endeavors have been undertaken by Montclair State University’s Feliciano Center for Entrepreneurship, Tigerlabs in Princeton, Stevens Institute of Technology, the New Jersey Institute of Technology (NJIT), Rutgers University, Rowan University and Princeton University, among other entities.

Bert Navarrete, CEO and managing partner at Tigerlabs (a micro venture capital fund and entrepreneurship center based in Princeton), believes professional networking capabilities – especially for New Jersey’s incumbent industries (healthcare, banking, education, etc.) – are “very powerful.” Yet, Naverrete explains, “A lot of our companies in New Jersey are very challenged with [the task of] identification and recruitment of great technology [employee] talent. If you look in the Silicon Valley area and even in New York City, there is a war for talent amongst a lot of the technology companies that are trying to find developers. However, in [New Jersey’s] case, we are uniquely challenged because most of the younger generation of developers – those who would normally graduate from some of our universities, be employed as entry-level employees and rise up to the level of management – tend to gravitate toward the larger cities of New York City, Boston and San Francisco. We have a little bit of a ‘flight of talent’ that leaves New Jersey. That is a unique challenge for companies that want to eventually domicile themselves here in New Jersey, and stay for the long term.”

For this reason, Navarrete tells New Jersey Business that – on a scale of 1 to 10 – he personally rates New Jersey as a “five” for a locale in which to establish a high-tech startup. He stresses, “What limits the ability for me to rate it higher is that, again, it is still very challenging for a lot of the most successful startup companies here to find, retain and recruit technical talent. At some point, many of them are faced with the decision to either really buckle down here, or relocate to either Philadelphia or New York, just because there is more available talent for them to recruit, there. Until that changes, it is going to be hard for New Jersey to climb up in the ranking.”

Meanwhile, the EDA’s Coviello says, “I think the cost of securing talent is becoming more difficult, but for the right opportunities, we’re seeing folks who are willing to take lower salaries for higher equity positions. At the same time, I am seeing clusters in both Hoboken and Jersey City. Folks are saying to us: ‘It is a lot less expensive to run my business on the New Jersey side of the river, than in Manhattan.’ It has the same urban feel – for the Millennials – that you will find in Manhattan, and at a reduced price. And it is easier to get around. I see a lot of really interesting opportunities. I think we have to capitalize on them, and I was just on a panel yesterday saying, ‘We have to let people know about them.’ I am very, very bullish, now, on what we are seeing.”

However, New Jersey is still striving to match the higher-pitched activity in the aforementioned out-of-state locales. Unfortunately, the Garden State has a reputation for having an onerous business environment and a lagging transportation system; it also lacks a defined center of commerce.

Moreover, while great strides have been made in New Jersey’s higher education arena, McCarter & English’s Sorin says, “Look at Harvard University and MIT near Route 128 [in Massachusetts]. You can also look at Stanford University in Silicon Valley, or increasingly look at a school like NYU, in New York. New Jersey has universities that have certainly tried [to do similar things], and are increasingly active in recognizing the importance of doing them, even for their own students. As the traditional career paths for their graduates are changing so rapidly, [colleges and universities] have to adopt the kind of entrepreneurial spirit that exists elsewhere. I don’t think we are quite ‘there’ yet, but we are moving in that direction, which is a very favorable sign to me.” (See related higher education story on page 36.)

In broad terms, for Dennis Bone, director of the Feliciano Center for Entrepreneurship, located in the School of Business at Montclair State University, “The trajectory [for startups in New Jersey] is on a positive slope. There is more very specific activity, in terms of coming up with more funders, and coming up with a bigger community in which entrepreneurs can put their teams together, and get all the parts. All of that is on the rise, and in my opinion, that is going to continue.”

The EDA

The New Jersey Economic Development Authority (EDA) has been instrumental in assisting New Jersey’s high-tech community, and its Edison Innovation Fund is the umbrella for much of what it accomplishes in the technology realm. Among many other endeavors, the EDA awarded funds to three co-working entities: Indiegrove in Jersey City, Mission 50 Workspaces in Hoboken and Cowerks in Asbury Park.

The EDA is also, for example, funding one of its Newark-based portfolio companies: Phone.com. The EDA provided it with an original Edison loan, the company met all of its milestones, and it remains on Inc.’s 500 list. Phone.com
is backed by one of the EDA’s venture fund partners: FS Ventures. The EDA also invested in FS, which opened a second office in Hoboken. The EDA’s Coviello says, “FS is a Newark company at NJIT using our university as a partner. It is active in the New Jersey Tech Council, and it is working with a venture fund that is a partner to us. So, we are leveraging opportunities to help build the [startup] community.”

The EDA has numerous, intricate programs, many of which are legislatively-driven: the Grow NJ Assistance Program, the Technology Business Tax Certificate Program, and the New Jersey Angel Investor Tax Credit Program.

Coviello says, “My team is measured on its support to the community. We had one company that just participated in our Founders and Funders event that [attained] a follow up meeting with an angel group. They said to me: ‘We didn’t know government was like this.’ They said, ‘It was so customer service focused.’”

South Jersey

While much has been said about high-tech startups in northern and central New Jersey, South Jersey has its own node, but does interact with the tech communities in the north, as well as in Philadelphia. Additionally, notable efforts – such as those by The Camden CoLabs (which opened in July 2014) – are underway.

Suzanne Zammit, director of The Camden CoLabs, says, “We have a lot of companies that are on the verge of becoming successes. Since The Camden CoLabs program itself is so new, we don’t have any graduates, yet. However, there is one company called Tassl (a higher education alumni app and software firm) that has investors very interested. Tassl is on target with their business, and I see a lot of success in their future. So, there are a couple of companies that we are working with that are on the verge of getting investment capital that will help them grow their businesses, and help them launch to success.”

Conclusion

Although New Jersey may not have the fanfare of Cambridge or Silicon Valley, its high-tech startup status has nonetheless noticeably increased in recent years, and state government, higher education, investors and, of course – entrepreneurs themselves – are all lifting the community to greater heights. The Garden State has long been the genesis of key technological developments, and high-tech startups will likely become an even larger part of that landscape.

 

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