Silicon Alleys Vanishing Act

The rise and fall of New York's Net industry

Tourists gawking at the Statue of Liberty will soon have another piece of New York history to digest: The Flatiron Building and the district that used to be called Silicon Alley.

Depending on whom you listen to, Silicon Alley, the epicenter of the citys Internet business, is either dead or has gone through a cleansing experience to emerge humbled but stronger.

Either way you slice it, the partys over.

"There is definitely a Sunday-morning sensibility, no question about it," says Jason Chervokas, a venture partner at Primedia Ventures and a co-founder and editor of, a news service that has chronicled Silicon Alley since 1995. "We will be having "1990s Nights" soon: People will be wearing iron-on tattoos and surfing the Web."

To many onlookers, this is not just a New York thing. The demise of the Silicon Alley looks a lot like part of the Internets broader deterioration. "[The New Economy] was a fraud," says Michael Wolff, an early Silicon Alley entrepreneur-turned-author.

That was not the attitude that was on parade a year ago, When Nasdaq was still bending the 5,000 mark and Silicon Alley was bursting at the seams. Many Alley start-ups, now castigated for bad business plans and lack of vision, were dazzling the nation with their stock market valuations: 24/7 Media;;;;; and

The Internet as the enabler of everything new, hip and creative had taken New York by storm. Silicon Alley companies threw lavish parties and produced instant millionaires with huge initial public offering share-price pops. Plus, the Net seemed to unleash an entrepreneurial wave the likes of which the city had not seen since the previous century, when the shipping and financial industries first put it on the map as countrys top urban economy. In the mid-1990s, droves of the citys young abandoned established industries to stake a claim in the new, virtual turf.

New York has never really developed a class of technical elite on par with Silicon Valley. Instead, the Net was used as a medium to enable businesses, ideas and concepts that originated in the citys other prominent industries -- advertising, financial services, publishing and so on.

Silicon Alley insiders attribute the craze to a unique combination of political and economic factors. The 1987 market crash created a recession that cost the city hundreds of thousands of jobs and pushed down the cost of commercial real estate. Many young, creative people found themselves in dead-end jobs. A body of programmers working in the back offices of banks saw stock options dangling in front of them for the first time.

The boom was visible. Historically, Silicon Alley started around the citys first skyscraper, the Flatiron Building, though real-estate agents say it quickly outgrew its birthplace and extended north into the Garment District, west into Chelsea, and south into Greenwich Village and beyond.

Indeed, APBnews -- a crime news site that has now laid off its entire staff -- set up its newsroom all the way at the southern tip of Manhattan in the financial district, and more than one dot-com braved the old garment factories that most other businesses shied away from. At the height of the boom, dot-coms paid between $60 and $80 per square foot for any space they could find between Wall Street and Midtown.

Then, America Online announced it was buying Time Warner. It was a deal, Primedia Ventures Chervokas says, that "was a bursting of the bubble, in terms of the valuations self-delusion."

The Collapse

AOLs decision to merge with the old-line media company in January 2000 caused many to question to valuations of dot-com companies. The seeds of doubt blossomed when Nasdaq began its nearly yearlong slump in April and dozens of pre-IPO Alley players saw their public offering dreams evaporate.

Then came the funding crunch, which resulted in massive layoffs and bankruptcies that started in September and have continued since.

Its a laundry list of misery: Entertainment network filed for Chapter 11 protection; its assets recently were acquired for $2 million by INTV, another New York Internet company. Lou Dobbs started 2001 by firing 22 people. 24/7 Medias chief financial officer quit and the company laid off 100. Streaming player fired half of its staff. Career site, whose investors include Esther Dyson and Rockefeller & Co., canned one-third of its staff. The New York Times Co. laid off 17 percent of its online staff. Even the Alleys de facto conference room, coffee shop Eureka Joe, closed.

While statistics for Net company layoffs in New York are not available, according to outplacement firm Challenger, Gray & Christmas, Silicon Alley was caught in a nationwide wave of dot-com contraction that left a total of 41,515 unemployed last year. Ironically, AOL TimeWarners move to New York after the merger resulted in 725 people laid off from the AOL division as a part of a larger company restructuring.

Top dogs who leave Alley ventures dont seem to have much trouble finding new jobs. Executive recruiter Bonnie Halper, who works at, says she has no trouble placing people on a chief information officer level, especially if they dont have a problem taking a title cut for a job at a larger company. The people hit hardest by the dot-com recession, according to Halper, are the Alleys rank and file, who might have less than two years of professional experience under their belts.

You dont need to tell that twice to Cynthia Rauschert, formerly a Web designer at the Internet division of 100 Percent Girls, a teen-age fashion retailer. The site was shut down in September, after just one month of operation, when investors panicked and the company closed both the site and the retail chain. Since then, Rauschert sent her résumé to 213 prospective employers and has received only three responses. At 30, the New Jersey native had to move back in with her mother.

"I know my work doesnt suck, so it must be really tight out there," she says.

With hundreds like Rauschert on the street, others are getting wary of the "hows it going" comments thrown their way at parties as probes at their business longevity. "People dont have the courage to ask directly how HipGuide is doing, but what they really want to know is whether we will survive the storm," says Syl Tang, president of the city directory. Her company, which makes money through company-specific promotions, is going to make it, she says.

Tang and others, trying to hold on to their businesses as the world around them is collapsing, feel the roller-coaster ride will have a happy end.

"I think, in some ways, a belt-tightening is good because it makes people realize that they are running a business and they have to be building companies, not just get themselves straight to the IPO," says Alice Hemming, organizer at New Yorks Pink Slip Party and the president of temporary work force firm The Hired Guns.

Hemmings opinion seems predominant inside the Alley, or what remains of it: Many believe that, just as its rise has been overhyped, the news of its demise has been greatly exaggerated. New companies are still launching, and people are still getting hired to do Internet-related jobs.

Real-estate agents, however, are renting out emptying lofts and business suites to lawyers and doctors. Even among Alley survivors, the realization is setting in that, while the Internet has taken root in New York and elsewhere, Silicon Alley as a geographically specific new-media phenomenon might be a thing of the past.