The creation of hundreds of Internet-related companies in a few square miles of lower Manhattan was neither foreordained nor inevitable.

Regional economics, technological developments, human resource characteristics, and individual initiatives helped created an opportunity space for Silicon Alley to emerge.

Silicon Alley’s indigenous population? Brainy math-and-music types with impressive liberal-arts educations, mostly upper-crust backgrounds, and birthdays in or around 1966.

New York and Los Angeles are becoming the driving force in the Internet Industry for a very simple reason: they are the talent and media capitals of the world.

t was happening before the dot-com fever of 1999 and the April 2000 crash. Before anyone had heard of Doubleclick or Jupiter Communications; before Razorfish was a multinational firm. In the mid-1990s, a new industry was emerging in the lofts and officer towers of downtown Manhattan. Of course, the larger world didn’t notice Silicon Alley until it had created 250,000 full time jobs, revenues of $17 billion, and thousands of new business entities. But once venture capital money started moving into the city in 1998, and the bull market triggered a rash of local dot-com IPOs in 1999, New York was on the New Economy map. And while many area firms have suffered in the recent correction, Silicon Alley is still a remarkably vital force.

Why did Silicon Alley arise in Manhattan in the late 1990s?

There are compelling academic theories that account for the emergence of regional “hot spots.” Economists note the proximity to resources and customers. Sociologists delve into regional cultures of entrepreneurship. But while these analytical tools can explain the existence of regional clusters of similar firms, they neglect the complex dynamics that give rise to regional clusters and their idiosyncratic characteristics.

My research focuses on how managers make sense of their “economic” world, and how this sense-making influences decisions about how to go about their business. In recent years, of course, a large number of people in my NYU neighborhood seemed to be starting Internet-related businesses. So I began to wonder why such clustering would occur when the businesses in question were, by definition, not constrained by geography.

My conclusion? The creation of hundreds of Internet-related companies in a few square miles of lower Manhattan was neither foreordained nor inevitable. Rather, it was the product of a unique set of events and individual characters, and the intricate, non-linear interactions between them. Indeed, Silicon Alley is what we call a “complex adaptive system.” Understanding the components and dynamics of such a system can help shed light on the rise of Silicon Alley.

What makes systems adaptive and complex? First, these systems have a property called aggregation. This means that complex large-scale behaviors can emerge from the aggregate interactions of less complex agents. For example, the interactions of firms in the U.S. in the aggregate result in the overall characteristics of the U.S. economy. An emergent aggregate property of the U.S. economy is the gross domestic product.

Aggregate properties are the result of nonlinear interactions among agents. So, for example, the pool of venture capital (VC) available to new firms in New York City is not just the sum of VC1 + VC2 + …VCn. Rather, the decisions of venture capitalists to consider New York firms and the amount they will invest is influenced by, among other things, what other VCs are doing. Thus, VC spending in NYC is the multiplicative interaction of distinct variables, not the sum.

Complex systems also require inputs of energy and resources like cash, human effort, and raw materials. The emergence of Silicon Alley depended on significant effort by individuals and the organizations they created. As the tireless work of early “evangelists” helped legitimize New York as a new media center, interest and resource flows from consulting firms, law firms, and venture capitalists followed. Once such resource flows interact, a complex system will often exhibit positive feedback effects, in which, for example, investments in dot-coms produce ever more investment in dot-coms.

inally, complex systems are made up of different types of actors. The pioneers in Silicon Alley came from a wide variety of professional backgrounds and industries, including advertising, graphic design, publishing, digital technology, software development, visual and performing arts, and journalism. As these people interacted, professional boundaries and definitions defined by traditional media and traditional industries began to fall away.

n December 1994, Mayor Rudolph Guiliani introduced the Lower Manhattan Revitalization Plan. He formed a task force, called the New York Information Technology District Commission (NYITDC), which included Deputy Mayor Fran Reiter, Con Edison, the New York City Partnership, the Alliance for Downtown New York, KPMG Peat Marwick, IBM, NYNEX, Brooklyn Polytechnic University, and Columbia University.

The NYITDC conducted a study that recommended the formation of a technology district and center in downtown Manhattan. The technology center required a building in which to showcase New York information technology. In June 1995, Carl Weisbrod of the Alliance for Downtown New York called Bill Rudin and offered to do the project at 55 Broad St.

Mr. Rudin, the scion of a powerful real estate family, was aware of the new media start-ups that were locating around the Flatiron and Soho neighborhoods. The Rudins accepted the risky project, which was announced in June 1995. It was not easy convincing new media tenants to move downtown. Most new media entrepreneurs viewed the Wall Street area as an unhip, starched-shirt ghost town. Nonetheless, new tenants were attracted by the cheap rents and excellent wiring. In September 1995, online CD retailer N2K (now part of CDNow) became the first tenant at the new Technology Center. And in October of 1995, Governor Pataki signed legislation for the Mayor’s plan in front of 55 Broad Street. The event, broadcast over the Internet, was the first ever cyber-bill-signing.

Local government and commercial property owners thus played a key role in creating the environment in which new media start-ups thrived. But they did not “cause” Silicon Alley to happen. For during the same time, regional economics, technological developments, human resource characteristics, and individual initiatives helped created an opportunity space for Silicon Alley to emerge.

In the mid-1990s, there were significant numbers of unemployed New Yorkers. Among their ranks were graphic artists from advertising firms as well as Wall Street traders. Coincidentally, the Internet became accessible to large numbers of people with the evolution of the hypertext markup protocol, the tcp/ip protocol, and the Web browser. In fact, Alice O’Rourke, the current president of the New York New Media Association, has suggested that the preponderance of smart, creative, unemployed people in New York apartments, with desktop computers, phones, and time on their hands, helped trigger the city’s dot-com boom.

In 1994, Brian Horey, a local venture capitalist, founded the New York New Media Association (NYNMA), a non-profit trade association – so that “we could stop flying to California every other week to do business.” Since 1994, NYNMA’s membership has grown to 7,000 individuals representing 2,500 companies. NYNMA members work in such diverse fields as broadcasting and publishing, web site development, design, entertainment, education, and professional and financial services. Their firms range from one-person shops to Fortune 500 corporations. NYNMA formalized networking among new media participants by holding regular Cybersuds meetings at clubs such as the Roxy.

Another group in the emerging community has been called the “Early True Believers.” They are, in New York magazine’s words, “the closest thing Silicon Alley has to an indigenous population…they’re brainy math-and-music types with impressive liberal-arts educations, mostly upper-crust backgrounds, and birthdays in or around 1966.” Throughout the early and mid-1990s, this informal group held social networking events called “CyberSlacker parties.” Many of the friends and attendees went on to found Silicon Alley stalwarts such as MTVi, Feed, Razorfish, Pseudo.com, StockObjects, Nerve, and the Silicon Alley Reporter.

Beyond social networking, these actors moved quickly to spread the word about the possibilities for new media business and about how and why New York was both different and “the place to be” for new media. They sponsored and organized “events” – conferences, seminars, parties, etc. that would draw both “true believers” and newcomers together. In March 1997, the Global Community Sandbox opened at 55 Broad Street. The image of a sandbox is that of converging and shifting and blurred boundaries among its components. This exemplifies the interaction among actors with different backgrounds that meet at the Sandbox to share ideas. These interactions are also exemplified by advertisements for the Silicon Alley 1998 conference, which looks like a Venn diagram illustrating the interaction of different “sets” of people and businesses.

second vehicle was online publication and communication. In 1995, two entrepreneurs started @NY – The New York Internet Newsletter, an online publication dedicated to news about Silicon Alley (atnewyork.com). It is important to note the lexicon used in New York to refer to Internet based businesses. New media (not e-commerce) means exactly that – new forms of media. New York is a major media center, with a large number of media firms, ranging across the realms of publishing, entertainment, journalism, broadcasting, cable, and advertising. Thus, many of the first start-up businesses were media firms. This was particularly significant for the growth of Silicon Alley because media itself is a vehicle for communication and information diffusion.

Silicon Alley pioneers also used traditional media to spread the word about new media. In 1996, a local entrepreneur started a print publication to cover both business and social aspects of Silicon Alley, called the Silicon Alley Reporter, which moved to nationwide distribution in mid-1998. In December 1996, another pair of entrepreneurs launched a second print publication devoted to Silicon Alley, called the AlleyCat News.

Old and new media played an important role in facilitating the legitimacy of Silicon Alley. New media advertising abounds on the pages of old media print publications and old broadcast media. Opinion leaders in the media also use their positions to shape the cognitive understanding of the emerging field. Each publication not only provides information, but also contributes frames of reference, interpretations, and evaluations. The information they provide is not “value-free.” The choice of what appears in the publications and what does not, in and of itself, frames what is important and what is not.

For example, many New York publications began to publish lists of Silicon Alley firms or people that they identified as being important or deserving of media attention. Crain’s New York Business in 1997 published its “Top Cats” list of “players shaping Silicon Alley.” @NY created the @NewYork.com 25, a group of companies “who distinguished themselves in some important or innovative way in 1997.” The attention and legitimacy produced by these lists can be very powerful. And the publications have a great deal of discretion in deciding whom to reward with such recognition.

The manner in which information is communicated by the media also influences the perceived “identity” of Silicon Alley. Much of what is written focuses on what makes New York new media distinctive. As the editor of the Silicon Alley Reporter put it in 1998:

“New York and Los Angeles are becoming the driving force in the Internet Industry for a very simple reason: They are the talent and media capitals of the world. Sure, content and community are going to take longer to play out than the tools to make them. Right now, L.A. and NYC may be on the bottom of the food chain by the Red Herring’s and Upside’s standards because we don’t have the immediate revenues that make myopic venture capitalists drool. But there’s no place on the food chain I’d rather be. Would you rather have made the camera that shot Citizen Kane, or make Citizen Kane?”

Silicon Alley is unique, but the fundamental processes that have facilitated its emergence are not. Because Silicon Alley is so close to home, it is a good place to start to learn about complex adaptive systems. The regional agglomeration we now know of as Silicon Alley is the aggregate outcome of a wide variety of events and actions over the course of several years. The actors involved have been diverse, and yet have engaged in extensive interaction and collaboration. The outcomes of these interactions have been difficult to predict, however. What if Brian Horey had not founded the New York New Media Association? What if legislation to create a business development district in downtown Manhattan had not passed? What if New York had not been in a recession when the World Wide Web came online? What if local entrepreneurs had not gone out of their way to evangelize the potential of New York new media? It is impossible to know what would be the same and what would be different. This is a key feature of complex adaptive systems. Small changes in variables, even energy and enthusiasm, can yield large differences in the way a system evolves.

Theresa K. Lant is associate professor of management and organizational behavior at Stern.