Diversity Venture

More Opportunity Than Capital: Venture Dollars Spread Throughout the US

Editor’s note: This article is part of Something Ventured, an ongoing series by Crunchbase News examining diversity and access to capital in the venture-backed startup ecosystem. Access the full project here.


Nearly $161.5 billion of venture capital poured into U.S.-based companies last year, as the private markets and tech startup ecosystem had another banner year.

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While the country as a whole saw new highs reached in venture, so did states such as Washington, North Carolina and Minnesota — not just in the amount of capital raised by private companies in those states, but also in terms of the percentage of total venture capital dollars in the country, Crunchbase data shows.

In fact, while the holy trinity of the startup world — California, Massachusetts and New York — still made up 73.1 percent of venture funding in the U.S. last year, 14 states saw at least $1.5 billion roll into companies headquartered there, according to Crunchbase numbers.

That number is up from 10 states in 2019, and only a half dozen just five years ago.

“I really think we are at a shake-the-snowglobe moment,” said Steve Case, founder of Washington, D.C.-based venture firm Revolution, which focuses on investing outside the major hubs of Silicon Valley, New York and Boston. “There are more investors looking at all areas now.”

The numbers — most agree — do not spell disaster for the coastal states that are used to dominating the venture capital market.

Instead, many sees the further distribution of venture dollars as a general maturation of the tech and startup ecosystem in several so-called “secondary markets” that are now spawning second- and third-generation companies — similar to what Boston and Silicon Valley have done for decades now — and entrepreneurs waking up to the idea that a successful company can be started anywhere as tech talent increases and reaches across the country.

“I don’t think you’ll ever see the Bay Area recreated,” said Mike Smerklo, co-founder and managing director at Next Coast Ventures in Austin. “There are only five or seven places like it in the world — like London or Hong Kong.”

In fact, both California and Massachusetts saw their total percentage of venture capital increase. The Golden State jumped from 48.8 percent of total funding in the U.S. in 2019 to 52.2 percent last year, however both are a drop from the 57.2 percent the state received in 2018. Massachusetts similarly jumped from 8.2 percent of U.S. venture investment in 2019 to 9.9 percent last year.

“Sure, there are geopolitical issues pushing people away, but more than that — and COVID has accelerated this — entrepreneurs are just realizing they have choices,” said Smerklo, whose firm invests mainly in Austin, but also looks at investments in growing markets like Miami, Minneapolis, Nashville and others outside of the big three.

Case said he does not presume places like Silicon Valley will wither, but rather that there also is room for investments elsewhere. “Those (historically large venture markets) may become less dominant in the next 10 to 20 years than they were in the last 10 to 20 years, but the fall of Silicon Valley is overblown,” he said.

“There are just new cities … more investment opportunities,” Case added.

Growth in The Great Lakes State

No state has seen its venture money increase in the last five years as much as Michigan. Venture dollars in the Wolverine State have spiked nearly 886 percent since 2016, growing from around $300 million to about $3.1 billion last year, Crunchbase numbers show.

“We are seeing incredible deal flow and have for more than two years,” said Martin Dober, senior vice president at Invest Detroit and managing director of its venture capital arm, ID Ventures.

“We did about three times the amount of investments in 2020 than we did in 2019, and that was in the midst of a pandemic,” Dober said.

Dober has a unique perspective on the venture market in the state: Before joining Invest Detroit, he worked at the Michigan Economic Development Corp. trying to push the startup scene and attract investment — including venture — to the area.

“It’s definitely grown since then,” said Dober.

Until about a decade ago, most venture money the state saw went to startups focused on life sciences — typically those in Ann Arbor and the research that goes on at the University of Michigan, Dober said. In more recent years, that has changed as enterprise B2B software sees about as much capital as life science startups, he said.

In addition, even consumer-facing tech has gained a foothold in the market — with some large rounds to show for it. Detroit-based sneaker and streetwear marketplace StockX raised a $110 million Series C round in 20109 and a $275 million Series E last year at a $2.8 billion valuation. After its most recent raise this year, the company is now valued at $3.8 billion.

Those dollars are part of the reason Michigan saw a significant spike in investment in 2019; watching dollars grow from about $400 million in 2018 to $3.3 billion the following year.

The state also is starting to see big exits, such as Cisco buying Ann Arbor-based Duo Security for $2.35 billion in 2018.

Those larger rounds and bigger exits are starting to bring out-of-state money to Michigan as companies there look for more growth funding and VC firms start looking outside the typical market for investment, Dober said.

“There definitely are a lot of firms looking for deals outside the Bay Area,” he said, adding that firms are starting to realize — especially through the pandemic — they do not need to be as close to some of their portfolio companies as in the past.

Dober said the state is attractive because while talent is cheaper, there is a lot of it in the state. He sees both homegrown talent, as well as some anecdotal evidence of people coming in from California, New York and other places — partly  due to the pandemic. That cheaper quality of life causes valuation to remain lower than in a market like Silicon Valley.

“I’m not going to say it’s the next Silicon Valley, but it’s definitely growing,” Dober said. “When you look at the state, Ann Arbor is still the center of it, but you see companies coming from elsewhere. You now have a lot of companies coming out of Detroit.”

The Tar Heel State

Michigan is far from the only state to see a significant jump in venture money. North Carolina has witnessed the second-largest increase, jumping nearly 410 percent in the last five years — growing from $800 million in 2016 to $4.1 billion in 2020.

“We’re talking to more firms than ever,” said Jason Caplain, general partner at Bull City Venture Partners in Raleigh, North Carolina. “We are seeing a huge influx of interest.”

Due to its Research Triangle — anchored by North Carolina State University, Duke University, and University of North Carolina at Chapel Hill — North Carolina was always known to investors, but mainly as a life sciences and biotech hub.

But IT, software and even gaming seeds started to be planted in the 1990s with the founding of Epic Games and open-source software giant Red Hat in the state.

“I would guess 10 years ago, it was 3-to-1 concerning biotech to other technology investments,” said Lister Delgado, founder and managing partner at IDEA Fund Partners, also in Raleigh. “Now it’s more like 50/50.”

As those companies matured, tech giants such as Google and Apple have opened up large operations in the area, bringing in more talent and more potential founders of the area’s next Red Hat — which itself was acquired by IBM in 2018 for $34 billion.

“I don’t think this overtakes the Valley,” Caplain said. “I actually hope this becomes something different.”

Despite the influx of new capital, Caplain points out not much comes from North Carolina firms. While the state had a sprouting of new firms, some of the older venture and growth firms closed up shop around the time the Great Recession hit, leaving only a handful of firms, said Caplain. He said he’s seen numbers that show up to 80 percent of the venture money that goes to companies in the state comes from out-of-state investors.

“Investors from New York and California definitely are coming here,” said Delgado, adding that firms in the state are raising larger funds to compete on increasing valuations. Just last month, Epic Games completed a $1 billion round of funding — valuing it at $28.7 billion — from Sony, Fidelity, T. Rowe Price, BlackRock and others.

“There used to be a thesis of investing in the Southeast and Atlanta because you would get better value,” he said. “But you are seeing crazy valuations at times.”

Deep in the heart

No state has grabbed more headlines concerning the geographical diversification of the tech industry than Texas, as the Lone Star State has welcomed long-time Silicon Valley-based stalwarts such as Hewlett Packard Enterprise and Oracle, and even more recent companies like Palantir inside its borders.

However, the state also has attracted a growing amount of venture funding. In 2020, Texas companies received about $4.4 billion, a slight bump from 2019 and good enough to make it the fourth-largest venture market, with its venture funding more than doubling in the last five years.

“There definitely is an increasing level of interest and the diversity has increased as far as the different kinds of technology now being supported,” said Morgan Flager, managing partner at Austin-based Silverton Partners, which has more than $500 million under management. Companies in the state make up about 70 percent of the firm’s investments — with about 40 deals in Austin alone.

Flager said that while a decade and a half ago Texas was known for semiconductors and enterprise software, it has become a hub for internet software, fintech and healthcare IT solutions. Just last month it welcomed its newest unicorn when insurance startup The Zebra closed a $150 million Series D, valuing the company at more than $1 billion.

“I think what you are seeing is a very strong net migration,” said Flager, referring to both public and private companies that have come to Texas seeking a better tax situation and business environment than California.

That migration, in addition to a significant technology history with companies like Dell and former semiconductor company Trilogy, could lead Texas’ venture capital numbers to move more materially in the next few years, Flager predicts. He added the state is seeing very competitive seed and early-stage funding rounds, which could mean the large growth rounds currently being handed out in California or New York may head south.

“I do think some places will take money away from” California, New York and Massachusetts, he said. “Bigger numbers are a lagging indicator.”

While they say everything is bigger in Texas, Flager said just how big companies can get is the question.

“I think there’s a question of limitation here. You can build a $1 billion company, but can you build a $10 billion company?” he said.

With the state seeing billions of dollars in exits every year, and more talent and money available than ever before, Smerklo said the vision of what can be built in Texas may be changing.

“I think expectations have expanded,” he said. “I do think the mindset has changed.”

The Great Northwest

Following just after Texas in terms of total venture dollars going to companies in the state comes the home of Amazon and Microsoft — Washington. While companies in the state received just 2.7 percent of all venture capital invested in the U.S. in 2020, that number equates to over $4.4 billion — more than 2.5x what the state received in 2016 — and places it fifth in dollars.

“We are the cloud capital of the world,” said Tim Porter, managing director at Seattle-based Madrona Venture Group, which just recently closed two funds totalling more than $500 million.

Washington, like many states receiving more venture money, is anchored by two of the largest tech companies in the world — Amazon and Microsoft, both of which have been there for decades — and has watched talent planted there flower into founders of other large unicorns.

“There’s a vibrant ecosystem around all things cloud here — a rich, multigenerational ecosystem,” said Porter, whose firm is about 80 percent focused on the Northwest area from approximately Portland to Vancouver.

Zillow, Redfin, Tableau and F5 Networks are just some of the companies that have blossomed into their own large public companies in the Northwest. Large tech giants like Google have also opened up campuses in Seattle.

“Over the last five years, since about 2016, a lot of companies have built in Seattle,” Porter said.

The Seattle area in general has been able to ride the “megatrends” of cloud, e-commerce and gaming when it comes to cultivating its tech ecosystem, Porter added. Those trends also have brought more out-of-town investors to Seattle and boosted valuations, he adds.

“For sure, valuations have gone up,” he said. “There are more firms hunting up here and doing deals.”

Although there may be more investors eyeing deals, the number of financings in the state nearly mirrored the national trend of decline witnessed last year. While across the U.S. the number of deals dropped about 11 percent in 2020 compared to the previous year, Washington realized a nearly 13 percent dip in 2020, with 358 deals getting done compared to 409 in 2019.

However, valuations boosted the overall deal size, especially in later growth stages — as witnessed by Seattle-based Highspot raising $200 million at a $2.3 billion valuation.

“Seattle is just at the center of a lot of trends,” Porter said. “I’m not saying we are going to be as big as the Bay Area, but there is a lot of innovation here.”

Investors looking for a peach

Not surprisingly, another fast-growing state in the venture capital landscape has one of the fastest growing metros in the U.S.

The venture money going to companies in Georgia has more than doubled in the last five years, Crunchbase figures show, growing from about $800 million in 2016 to $2 billion last year — a more than 142 percent jump.

Mark Buffington, co-founder of Atlanta-based BIP Capital and Panoramic Ventures, does think the increasing competition in Georgia points to a shift in both the world of tech and venture.

“I am seeing a general exodus out of places like California, Illinois, New York,” said Buffington, who has invested in more than 80 companies.

Earlier this year, Buffington and entrepreneur and investor Paul Judge launched Panoramic with a $300 million fund that focuses on diverse investments in new emerging tech hubs — from Florida to Minnesota and as far west as possibly Nevada, while bypassing New York and Silicon Valley.

Since that time, Buffington said he has watched a handful of new venture firms start funds in Atlanta and expects that number will continue to grow.

Georgia — and Atlanta in particular — has a long and varied history with venture. With the dotcom boom in the late 1990s, firms popped up to take advantage of the hype. When the bust hit a few years later, many firms disappeared, but the city fared better than some because the fledgling health care IT industry was able to survive and keep the area’s tech scene alive, Buffington said.

That scene continued to emerge through the years as schools like Georgia Tech produced talent and the growing metro attracted others. Those factors led to enterprise and SaaS companies like SalesLoft and Calendly springing up, although the area is best known for large fintech unicorns including Kabbage and Greenlight.

With that success, Buffington said, capital has flowed in and investor attitudes have changed. Instead of growing a startup and then looking for a good exit, investors are now more willing to wait and see if they can build the next Kabbage. That is bringing more large rounds to the area and helping boost venture dollar numbers, Buffington said.

Those growth rounds also are bringing in out-of-state venture money, with some trying to form syndicates to try to get in on deals, he added.

“I see a lot more collaboration among funds,” said Buffington, adding that with the geographically growing tech market, it’s hard for venture firms to have feet on the ground everywhere.

“There’s so much good opportunity and investment to be had,” he said.

Opportunities and what comes next

Buffington compares Atlanta to where the Bay Area was in the late 1980s or 1990s.

It was around that time the internet emerged and Silicon Valley companies started layering on features such as search and then social networking — causing the area to become what it is today.

Just as the Bay Area was able to build off that momentum — with large companies in essence giving birth to the next generation of successful tech startups — many of the so-called “secondary markets” will be able to do something similar, Buffington predicts.

“We see these hot spots where this momentum has been gained; whether it’s Austin, Atlanta, Minnesota,” he said. “I suspect you’ll continue to see that. I suspect that’s how these regional hubs develop — through generations.”

With the further distribution of venture money into states like Colorado, Florida and Minnesota, many wonder what the lasting impacts of the recent pandemic may be to the venture and tech world as it stretches further around the country.

“This will accelerate because of the pandemic,” said Case, who has invested in companies in more than 80 cities.

Case, who co-founded internet provider AOL1 in the mid-1980s, also points to the early days of the internet, when California took advantage of an opportunity to build on top of the new “information superhighway.” Now more areas are seeing opportunities they can take advantage of and create their own tech economies.

Case points to an area like Indianapolis — not often thought of as a tech hub — but with a growing tech community thanks in large part to Salesforce’s2 $2.5 billion buy of ExactTarget in 2013. Indianapolis now houses the sales software giant’s second-largest office — behind only its San Francisco Salesforce Tower building  — and startups have sprung up around the tech space.

“The question is: What will these cities do with this opportunity?” he said. “There’s still lots of work to do — just like those early days of the internet.”

Illustration: Dom Guzman


  1. AOL is an investor in Crunchbase. It has no say in our editorial process. For more, head here.

  2. Salesforce Ventures is an investor in Crunchbase. It has no say in our editorial process. For more, head here.

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