For the most part, venture capital is a local business, particularly at the earliest stages of new company formation and growth.
It’s also lopsided, with the bulk of returns coming from a tiny minority of investments. There are only going to be so many Googles, Facebooks, and Ubers in each generation of startups.
And then there’s that William Gibson quote: “The future is already here—it’s just not evenly distributed.” In this way, the startup game is again skewed: geographically.
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Whereas the balance of power is shifting on a global scale, as emerging venture markets come online and mature, the situation is considerably more static within the world’s largest VC market: the U.S.. Spoiler alert: the West and Northeast regions dominate the U.S. market, so says an analysis of nearly 96,900 VC rounds pulled from Crunchbase. It’s been that way for a long time, and will probably continue to be that way for the foreseeable future.
In the U.S. startup market, there’s always something new under the sun, but the landscape doesn’t change much.
With China’s market cooling off and the rest of the world on the rise, the global venture capital market is dynamic, evolving from a unipolar system driven largely by Silicon Valley in the U.S. to a multipolar one as the American model of venture finance spread abroad.
On a global scale, the U.S. and China have lately been the centers of gravity in the startup market. However, with a startup slump in China, U.S. companies regained their historical position as the global leaders in venture fundraising, raising roughly half of the reported capital in Q2 2019. Companies in the rest of the world raised a little over a third of the reported dollar volume. Startups outside the U.S. and China account for a growing percentage of the venture deal volume totals as well.
Let’s see just how skewed startup investment activity is in the U.S. and how the balance of power between its regions has shifted (or not) over time.
America, The Land Of Startup Static
But before we get to that, a quick geography refresher. Below, you’ll find a colored-in map of the U.S., segmented into regions according to the classification rules established by the U.S. Census Bureau. (Hawaii and Alaska, though not pictured in the map, are included in the West.)
Long-established startup hubs in the Northeast and on the West coast drive the majority of deal and dollar volume in the U.S. And that hasn’t changed much over time. Startup funding activity rose over the past decade, but it lifted all regions pretty equally.
Measures of money invested over any given period of time are kind of “lumpy” (a few supergiant VC rounds can really swing things) so we’ll focus here on deal volume, which is subject to much less volatility, in our exploration of the U.S. VC market. We aggregated deal data from over 11 years worth of venture capital investments in U.S. startups, representing nearly 96,900 funding rounds, and segmented the data by U.S. Census region. See the plot below.
It’s easy to see a couple of trends. First: for the most part, there isn’t much fluctuation in the relative share of deal volume over the past decade following the financial crisis.
Second: the Midwest trails every other U.S. region when it comes to its share of total deal volume. Over the past decade or so, startups based in the West accounted for roughly 47.8 percent of deal volume; Northeastern upstarts raised 24.8 percent of the deals; Southern startups raised just over 17.8 percent of the deals; and Midwestern startups raised roughly 9.6 percent of the deals.
If that sounds disproportionate to you, it’s because it kind of is.
Combined, the West and Northeast account for 72.6 percent of all U.S. startup investment deal volume over the course of a decade-plus, despite accounting for roughly 41.1 percent of the U.S. population, according to the 2017 American Community Survey, the most recent U.S. Census data available at this time.
Remember, this is just the deal volume data. Because startups in the Midwest and South, on average, raise smaller rounds than their coastal counterparts at every stage of the funding lifecycle, the corresponding dollar volume stats are even more skewed.
In the decade following the financial crisis, startups in the West raised roughly 57.2 percent of the total reported VC dollar volume. Northeastern startups netted 25.2 percent of the haul, leaving just 12.1 percent of reported dollar volume for Southern startups and a rather diminutive 5.5 percent left for the Midwest.
Doing More With Less, Locally
We found a significant negative correlation between valuation multiples on invested capital (MOICs) and total capital raised, meaning that raising less pays off in the long run. We also found that startups in the South and Midwest delivered better exit multiples than their Western and Northeastern counterparts.
Regional patterns in VC deal-making is a bit of a recurring topic for us.
In prior analysis, we found that angel investors are second only to government-backed investment offices in a rank of investor types most likely to invest in startups within their own state. More often than not, seed and early-stage startups will rely on an investor from the same state (and often from the same metro area) to lead their rounds; however, for a late-stage round (Series C or later) companies are more likely to venture out of state to secure a lead. In other words, a fledgling startup is more likely to stay under the wing of a local investor, but will seek capital from sources further afield when it’s time to scale nationally or worldwide.
In other work, we found that Bay Area investors are the most likely to invest within their own metro area (understandable, given the concentration of entrepreneurial and investing talent) whereas over half of the ties between investors in Chicago and Minneapolis are with companies outside the Midwest entirely.
It’s the local nature of the VC business that’s likely to keep ecosystems like the Bay Area, New York, and Boston entrenched for a long time to come. These cities will no doubt continue playing host to large, vibrant startup communities for the foreseeable future, but the best deals may yet be found elsewhere.
Companies with unknown locations, companies outside the U.S., and companies headquartered in U.S. territories like Guam and the U.S. Virgin Islands were excluded from this dataset. Although the District of Columbia is not technically a state, it is counted by the U.S. Census Bureau as part of the South, and rounds raised by D.C. companies were included in totals for the South.
Illustration: Li-Anne Dias