Over
the last decade, New York City (NYC) has become a prime location for
start-up businesses. With an extremely robust economy, an equally large
and diverse talent pool, a quickly emerging technology sector (second
in the world only to Silicon Valley), and more access to capital
markets than anywhere else, New York City is the ideal venue for
entrepreneurs seeking to start a new business in any industry.
Smallbiztrends.com rated NYC as the second best city in the U.S. to
launch a start-up in 2016. Many entrepreneurs who launch
start-ups in the Big Apple experience considerable success.
Kickstarter, Etsy, & Tumblr are just some examples of successful
and well-known businesses that originated in New York City.
Smaller businesses in NYC also
experience great success. Although estimates vary, it is clear that at
least 15,000 start-ups exist in the city at any given time.
CultureIQ, based in Herald Square, is a start-up that helps other
businesses measure, track, understand, and strengthen their corporate
culture. Their proprietary culture management software program
provides a platform for consultants, analysts, and managers to gather
and interpret a wealth of corporate culture data. This data can be
impacted by numerous interchanging, internal variables, such as
managerial changes, dynamic workloads, salary increases, and new
company policies.
Servy,
founded in 2014, developed a mobile application for the restaurant and
hospitality industry. Consumers and guests use the app to provide
feedback to a restaurant or hotel. When a customer provides a review,
the user receives some type of reward. The data from the evaluations
are provided in a real-time, cloud-based interface in order to
highlight particular areas that are suggested for improvement.
Many
other NYC-based start-ups center around the food industry.
Hungryroot Inc. in the Flatiron District delivers locally-sourced,
non-GMO, gluten-free, and under 500 calorie meals that can be
ready-to-eat in less than 7 minutes. The company also developed a
proprietary NATUREFRESH package designed to maintain farm-fresh crunch
and flavor for at least 8 days without preservatives.
These
are only a few examples of innovative start-ups in the NYC area. When
start-ups develop such technologies or innovations like those
mentioned, they may be eligible for research and development tax
credits that now have favorable provisions for start-ups.
The Research & Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13% of
eligible spending for new and improved products and processes.
Qualified research must meet the following four criteria:
New or improved
products, processes, or software
Technological in nature
Elimination of Uncertainty
Process
of Experimentation
Eligible costs include employee wages, cost of supplies, cost of
testing, contract research expenses, and costs associated with
developing a patent.On December 18, 2015,
President Obama signed the bill making the R&D Tax Credit
permanent. Beginning in 2016, the R&D credit can be used to offset
Alternative Minimum tax and startup businesses can utilize the credit
against payroll taxes.
Start-Up R&D Tax Credit
The new federal tax law is extremely beneficial for
start-ups. For the first time ever, a qualifying start-up can use
the credit against $250,000 per year in payroll taxes beginning January
1, 2016. Essentially, with the new start-up provision, companies
can claim the credit even if they do not pay income tax and regardless
of their profitability.
Tax
Credit Example
A company owes $300,000 in payroll taxes and they
qualify for $100,000 in R&D Tax Credits. The R&D credit can now
be applied to payroll taxes. Therefore, the amount of the payroll tax
that has to be paid is reduced to $200,000. The most amount of money
that can be deducted annually from the payroll R&D Tax Credit is
$250,000. Therefore, if the company qualifies for $300,000 in R&D
credits, the company would now only owe $50,000 in payroll taxes.
NYC Economy
It is no secret that the NYC economy is an excellent
place for entrepreneurs to start a business. It is home to the
largest municipal and regional economy in the United States.
Anchored by Wall Street, the New York Stock Exchange, and Nasdaq, Gross
Metropolitan Product (GMP) in the area topped $1.5 trillion in
2015. This number greatly surpasses that of the second ranking
city in the nation, Los Angeles, which generated comparatively less,
with $888 billion in Gross Metropolitan product in 2015.
The city’s population is also
exponentially expanding. This is encouraging for economic growth
since population growth and GMP tend to work in tandem. The five
boroughs added 55,211 people from July, 2014 to July, 2015. This is an
increase of 0.6%, thus bringing the city’s overall population to over
8,550,405 people, according to an estimate released in March, 2016 by
the U.S. Census Bureau.
In addition to its size, the NYC
economy is extremely diverse. A large number of food services,
entertainers, realtors, construction workers, healthcare workers,
financial professionals, technologists, and others industries flourish
in the NYC area. Even Wall Street accounts for no more than 5% of the
total jobs citywide. This diversity is one of the greatest strengths of
NYC’s economy.
Food/Hospitality
Restaurant and
food services are a driving force in New York City’s economy, with
industry sales generating billions in tax revenue every year.
Currently, there are over 24,000 restaurant owners city-wide, many of
which are start-ups with less than 50 employees. In 2014, food services
and drinking venues employed 273,900 people. That
constitutes a 38.7% increase since 2009, a period in which the industry
employed 197,500 people. This massive and continuously
growing economic sector is served by the world’s largest food
distribution center, a growing network of food incubators, training
centers, funding platforms, and a technological region that is now
second in the world to Silicon Valley.
Start-ups in particular have a
strong presence in the NYC food industry and consequently,
entrepreneurs in the food business recognize the opportunity that the
NYC market provides. As stated previously, New York City, home to
over 8.5 million people, is the most densely populated city in the
U.S. and was nearing 2020 population projections in
2014. According to U.S. Census Bureau statistics, Brooklyn,
Queens, and the Bronx were among the top 50 counties that gained the
most people nationwide during that same year (2014). This rapid
population growth is particularly encouraging for the food and
hospitality industries for the most fundamental reason—everyone needs
to eat. The logic behind this fact is simple; as population grows, the
demand for food will also increase proportionately.
Investors both around the country
and in NYC realize this direct relationship and have been acting on
this opportunity to excel. According to a Bureau of Labor
statistics report, food tech start-ups nationwide received
unprecedented investments in 2014. These innovators provide a
number of goods and services to final consumers, restaurants, supply
chain managers, and everyone in between. In the last decade, there has
been a rise in the development of mobile applications and software
programs, some of which are intended to help business owners control
inventory and place orders for fresh food or gluten-free products that
mimic gluten-packed market counterparts in taste and quality. Consumers
use apps, such as Grubhub, to place orders for take-out and delivery,
evaluate alternatives, and rate dining experiences. Meanwhile, food
manufacturers, like Raaka Chocolate in Red Hook, Brooklyn, can create
and advertise unique food products, such as unroasted or “virgin”
chocolate.
At the same time, restaurants and
other food businesses utilize software programs such as Revel to
control inventory and manage expenses. In the food industry,
margins are considerably tight. Most restaurants generate profits equal
to 1 to 4% of total revenue. Approximately 33% of expenses are spent on
inventory. Another 33% is spent on labor. About 4 to 10% of
food going into a restaurant never makes it to the table due to a
mixture of spoilage, theft, and mis-fires (where the kitchen or
wait-staff make a mistake and the food gets rejected). An
additional 15 to 20% of the food is left on the plate and not eaten by
customers. All this wasted food corresponds to significant dollars that
can dramatically impact a restaurant’s profitability. The
difference between a successful and non-successful restaurant often
depends on a manager’s ability to control inventory, labor, and
spoilage costs. The best way to accomplish this is by using restaurant
analytical software that generates intelligent insights.
Avero Co. in Gramercy Park
developed a number of software solutions that help restaurant owners
record and organize precise information and make intelligent decisions
aimed to maximize efficiency. Their solutions also help reduce
theft/fraud and minimize spoilage. Avero’s proprietary restaurant
analytics software package can be uniquely tailored to each small,
medium, or large business employing it.
Construction/Transportation
Over the next decade, the transportation industry in
NYC is expected to face several challenges. Aging infrastructure,
a growing population, and increasing congestion are expected to cause
issues that will demand more creative solutions. Much of the city’s
roads, bridges, subways, water mains, sewer systems, schools, and other
public buildings are over 50 years old. Their critical components
are well past their useful life expectancy, and thus are highly
susceptible to breaks and malfunctions. Over 1,000 miles of New York
City water mains are over 100 years old, leading to frequent and
disruptive breaks. More than 160 bridges across the five boroughs were
built over a century ago. In fact, in 2012, 47 bridges were deemed both
structurally deficient and fracture critical, a designation engineers
use for bridges that have little structural redundancy. This makes them
more prone to failure and collapse.
Traffic congestion is another
issue the city faces. NYC commuters spent an average of 73 hours
behind the wheel in 2014. This is a 20% increase from 2013, which was
previously considered to be the most in recorded history. What was
previously a 45 minute drive from Manhattan to JFK Airport on any given
day is now closer to an hour.
The Partnership for New York City
released a report in 2014 that documents the economic impact of traffic
congestion on the city and overall region. The report explains how the
increasing problem of traffic congestion costs the regional economy
more than $13 billion a year, resulting in the loss of as many as
52,000 jobs annually. Despite these losses, New York City is forecasted
to add 1 million more residents and 750,000 new jobs over the next 25
years. Vehicular congestion will continue to grow as Manhattan-bound
traffic moving through the region increases by more than 20% over the
next two decades.
Technology may provide a partial
answer to both the growing infrastructure and the traffic congestion
tribulations. Low cost sensors can be integrated into roads, bridges,
tunnels, and buildings to provide real-time, cost effective monitoring
of conditions. Engineers can use the data gathered from the
sensors to make intelligent decisions concerning repair
priorities. Currently, engineers conduct costly manual and visual
inspections that often reveal less than optimal information about
infrastructure conditions. On many occasions, repairs are scheduled on
intervals, based on assumptions about conditions. Unfortunately
with such an approach, resources are not allocated efficiently because
infrastructure conditions often will deviate from those
assumptions.
Similar sensors also have the
power to reduce inventory costs. Construction materials
constitute a large portion of total costs in construction projects,
oftentimes 50 to 60% of total project costs. The management of these
materials, especially at the inventory level, is extremely
important.
Managers can use the Internet of
Things (IoT) to manage inventory and reduce downtime that is often
caused by a lack of supplies and long lead-times. With the modern
trend towards just-in-time (JIT) inventory, this capability is becoming
increasingly useful. IoT technology can alert managers when resources
are getting low and when reinforcements are needed.
Transportation companies can make
use of technology to reduce costs as well. Logistic ecosystems
consist of many players and dynamic parts. Materials and inventory are
transferred between manufacturers, suppliers, distribution centers,
retailers, and consumers. Such increasingly complex supply chains
demand an agile and informed supply network to keep inventory lean,
fresh, and versatile.
One type of beneficial technology
is radio-frequency identification (RFID) chips and tags. By putting an
RFID chip in a pallet or container, managers can tap into a cloud
network and identify the precise location of ingoing and outgoing
materials, products, and equipment. By allowing devices to communicate
with each other, the IoT will help supply chain managers save fuel
costs, manage warehouse stock, ensure temperature and environmental
stability, and identify any supply chain inefficiencies.
One NYC-based start-up known as
“Where’s My Concrete” provides intuitive, cloud-based dispatching
software to the concrete industry. The technology implements real-time
dispatch data so that customers can locate delivery trucks as they
approach a jobsite. Built-in analytical tools permit users to
evaluate driver performance and generate trucking efficiency
metrics.
Other innovative technologies
support human-to-human communication. FieldLens, located in the
Flatiron District, developed a mobile communication tool that allows
members of a project to evaluate performance, generate reports, and
analyze construction site conditions in real-time from a mobile device.
With this technology, every conversation, task, and change related to
the project is conveniently organized and stored in one easy-to-access
location.
In regards to traffic congestion,
technology can maximize the utility of existing infrastructure.
Intelligent transportation systems are used to describe a range of
different technologies that interact with each other to provide
innovative services. This includes smart cars, smart highways,
active traffic management technology (ATM), autonomous intersection
management technology, and big data to make more intelligent traffic
management decisions.
New York City plans to retrofit
thousands of government vehicles with smart technology in an attempt to
reduce traffic accidents, automobile pollution, and overall congestion.
The federally funded initiative involves integrating trucks, buses, and
taxis with intelligent devices the size of a Smartphone to alert
drivers about potential upcoming collisions, traffic jams, and other
hazards, such as crossing pedestrians or large potholes.
Technology is also changing
transportation factors in the city in other ways. In the last several
years, the ubiquity of mobile phones and the rise of new platforms for
getting and giving rides increased the complexity of NYC’s
transportation system. For-hire vehicles (FHVs)—yellow and green taxis,
livery cars, traditional black car services, and the fast-growing
app-based car services such as Uber and Lyft—are an important part of
the City’s transportation mix. The way these services are offered
today, however, is dramatically changing and impacting the overall
transportation sector.
Founded in November 2011, Hailo
is a Smartphone app developer that puts passengers in touch with
licensed taxi drivers. It also helps drivers get more passengers when
they want them. Already, the start-up has a network of 50,000 drivers
and more than 1 million passengers and is intended to continue growing.
Financial Technology
The financial sector is considered by many to be the
traditional backbone of the NYC economy. Although this sector only
accounts for approximately 5% of all city jobs, that percentage is
still considerable. Moreover, the average salary of each worker
is extremely high. The sector employs approximately 165,000 people
annually who report an average annual W-2 wage of $404,800. This
number is significantly larger than the next highest earning per capita
industry, which is the professional and technical services industry,
where an average annual W-2 wage is $122,000.
Trading in stocks and bonds,
commodity contracts, and other financial investments comprise a large
portion of the financial services industry. Although the industry
experienced widespread success over the past 8 years, the job count
remained relatively stagnant. In 2009, the industry employed 165,000
workers. In 2014, the industry employed 165,300, an increase of
only 0.2% over the course of five years.
This lack of employment growth
exists despite considerable success on Wall Street. During that time
period, the industry became increasingly automated and technology
oriented. To a large degree, this reduced the need for human workers.
The financial industry suffered a
near-collapse following the 2007 Great Recession. As a result,
the industry was faced with several key challenges. While the
government demanded increased capital requirements and greater consumer
protection, the market demanded modern technologies to be able to meet
the standards of an increasingly digital and online economy. What
made these challenges even more of a burden was the fact that they had
to be solved at the lowest cost possible.
Searching for a solution, the
industry turned to emerging technology companies to provide products
and services necessary to meet the demands of the post-recession
economy. One particular industry segment, commonly referred to as
FinTech, answered the call.
Financial Technology (FinTech) is
a line of business based on software that provides financial services.
Financial technology companies are generally start-ups founded with the
purpose of disrupting incumbent financial systems and corporations that
rely less on software.
There are a number of FinTech
start-ups in NYC. One, EQUITYZEN Inc. in Union Square, is a
start-up that encourages other start-ups by providing a mechanism by
which start-up employees are paid equity compensation. Their
proprietary product, the “Liquidity Manager,” is seamless and simple
technology that permits users to keep track of company communications,
organize legal templates and documentation, and most importantly,
connect with investors. Now, accredited investors can gain access
to pre-IPO companies and proven start-ups, something that was
traditionally very difficult to accomplish.
Gust is a similar FinTech company
that connects start-ups with the largest collection of worldwide
investors. On the website, 11,000 New York start-ups that are seeking
investors are listed. Entrepreneurs have the difficult task of tracking
down investors who are not only interested but right for the business.
These entrepreneurs must provide investors with the necessary
information to make informed investment decisions. Gust simplifies this
process by bringing entrepreneurs and investors together in a common
interface. Now, connection and collaboration is easier than ever before.
Orchard Platform in Gramercy Park
provides access debt financing. The start-up offers originators an
integrated platform that empowers them to be more efficient and
intelligent. The company currently has about 40 employees, 15 having
engineering and/or computer science backgrounds. Companies such
as these, with engineers that develop software solutions, are excellent
candidates for generating R&D tax credits.
Professional, Technical, and Business
Services
One of
the most popular small business start-ups in New York City focuses on
professional, technical, and business services. These start-ups, and
their larger, more established counterparts, comprise of the largest
industry in NYC. Businesses in this industry provide a number of
accounting, consulting, analytical, marketing, and technical services
to other entities or businesses.
Because many businesses rely on
the services that this industry provides, it is closely tied to the
health of New York City’s corporate sector. The average annual wage in
the industry is almost 44% above the New York City average for 2014.
This is projected to grow 28% through 2022. Between 2009 and 2014, the
industry grew rapidly, gaining more than 28,000 jobs. As the City’s
economy continues to expand, this category is expected to grow 21% by
2022.
The most disrupting force in the
professional services industry is the increasing use of automation
software. The use of software enabled services is a critical component
to any successful business in this industry. Not only does it lower
operating costs, improve accuracy, and boost worker productivity, but
it is also the most practical way to bridge the skills gap and shortage
of qualified workers in many businesses.
Software development costs are
usually eligible for R&D tax credits. If the activity is
eligible, the start-up developing the product will be entitled to the
tax credit. Additionally, integration of software is also
eligible for R&D tax credits when the process rises to a certain
level of technological sophistication. Here, the start-up or software
developer will be entitled to credit if it is involved in installing
the software. Most projects for large customers are technologically
sophisticated enough to qualify for the credit. For software to
flourish within the complex environment that these businesses operate
in, the software must be integrated into the existing system.
This integration work is complex and technical, and constitutes a large
percentage of professional services work in many professional services
businesses.
Troops Inc. in Union Square is a
mobile-software start-up that plans to give professionals an artificial
intelligence-powered mobile-sales assistant. Although the company is
trying to release as little information as possible until the product
debut, it says it will revolutionize customer relationship management
technology (CRM) by first becoming mobile.
Founded in 2014, Clubhouse
Software in Gramercy Park develops online project management tools that
enable companies to estimate, plan, build, and track a team’s workflow.
These project management tools feature a filtering system that creates
visibility across teams, projects, and workspaces that enable users to
jump across projects, epics, columns, and filters.
SeamlessDocs is another New York
City-based start-up that intends to reinvent the document conversion
process with a cloud service that quickly transforms PDFs and printed
forms into HTML Web docs, complete with e-signatures. Adding to the
convenience, one of its greatest features is the ability to automate
and archive forms in real time. This makes searching documents an
easier and quicker task.
Technology
New
York City’s economy is in the midst of a rapid technology
transformation. The Internet, mobile technologies, social media, and
big data instigated a wave of innovation that fostered thousands of new
start-ups and re-invented the city’s traditional industries.
These industries are becoming more deeply intertwined with technology.
Advertisers, fashion experts, finance professionals, realtors, and
other entrepreneurs are leveraging advances in computer science,
automation, big data, and artificial intelligence to bring innovation
to consumers in the form of goods and services. Of the 291,000 jobs
comprising the NYC technology ecosystem, over half of those jobs are
within non-tech industries. These 291,000 workers comprise of over 7%
of the cities’ workforce. This percentage is even more than the 5% of
workers in the financial sector.
Indeed, the city is home to some
of the nation's fastest growing technology sectors. From 2003 to 2013,
the NYC technology ecosystem grew 18%, adding approximately 45,000
jobs. This increase helped the city’s economy grow by 12%, which is 3
times more than the United States’ total economic growth during the
same time period.
Recently, the NYC technology
ecosystem surpassed Boston as the number two hub in the nation, only
second to Silicon Valley. New York City is also outgrowing almost every
other market in the U.S. by surprisingly large percentages. Whether it
is in the Financial District, Upper West Side, Harlem, or anywhere in
between, the New York City neighborhoods are flourishing with
entrepreneurial activity.
I.
Silicon Alley: The term Silicon Alley is a metonym for the
sphere encompassing the New York City metropolitan region’s high tech
industries, including the Internet,new
media, telecommunications, digital media, software development,
biotechnology, game design, financial technology (fintech), and other
fields within information technology supported by the area's
entrepreneurship ecosystem and venture capital investments.
The
term Silicon Alley is derived from California’s established Silicon
Valley. Since 2003, Silicon Alley has seen a steady growth in the
number of start-ups. It has joined the ranks alongside Silicon Valley
and Boston, as one of the three leading technology centers in the
United States. As of 2009, New York's Silicon Alley became the start-up
leader in advertising, new media, and financial technologies, such as
MediaMind, Shutterstock, DoubleClick IAC, meetup.com, and a slew of web
2.0 companies. As of 2013, Google's second largest office was located
in New York City. Start-ups have a lot of potential should they pursue
entrepreneurial ventures in NYC.
Conclusion
New York City is a prime location for start-up
businesses. Most start-ups perform one or more activities
pertaining to research and development efforts. When they engage
in these efforts, they may be eligible for federal and state R&D
tax credits that are available to stimulate innovation.
