Venture

How Northern California’s Reality Distortion Field Is Reflected In Startup Funding

The San Francisco Bay Area 1 may be best understood as one giant reality distortion field. People live on top of earthquake faults. Many are billionaires; the rest barely afford rent. It is always 60 degrees in some microclimate. And every week, another multi-billion-dollar company crops up that sounds either hare-brained, impossibly risky, or both.

Amidst all this, California ranks anywhere from mediocre to last place for business friendliness. Yet three of the five most valuable American tech companies are headquartered in Northern California. And while it seems like a terrible place to set up a manufacturing hub, the nation’s most prolific electric carmaker wasn’t deterred.

The region’s startup culture is particularly singular, spawning category leaders in industries (ride-hailing, e-cigarettes) that barely existed a decade ago. A staggering seven out of the estimated ten most valuable U.S. unicorns are headquartered here.

Can it persist? I hear a lot of sensible arguments from sensible people about why Northern California is poised to lose its entrepreneurial edge to other places that offer lower taxes, a more pro-business environment, youthful talent, and so on. Yet Crunchbase data shows continued robust investment for the Bay Area across stages and sectors. Personally, I think one simply has to accept that sensible has never been Northern California’s specialty.

So, for all the San Francisco Bay Area fans and haters out there, here’s a bit of data to put the region’s recent startup sector performance in perspective. We look at funding, exit, and valuation data for the past year that supports the notion that the distortion field is alive and well.

Startups Securing Really Big Funding Rounds

Over the past year, we’ve written a lot about the global rise of supergiant funding rounds of $100 million and up. In the U.S., we’ve seen these massive rounds crop up across regions—but nowhere have they been so numerous and concentrated as Northern California.

In 2018, startups in the San Francisco Bay Area raised $21.5 billion across 87 supergiant funding rounds. That’s nearly dhalf the investment total for the entire United States, with $44.6 billion invested across 191 supergiant funding rounds.

There’s no dominant sector for Northern California’s supergiant funding rounds. However, we do notice a bias toward companies developing technologies addressing two very broad themes: reducing the need for human labor and providing people faster and easier ways to get what they want.

We’ve put together a list of the twelve of largest Bay Area venture rounds since 2018 here.  Some of the more notable companies in the region securing really big rounds include augmented reality game developer Niantic, grocery delivery service Instacart, robot-made pizza delivery service Zume, scooter upstart Lime, and payments technology provider Stripe.

Older Startups Sustaining Enormous Valuations, Exiting

One other area where Northern California stands out is the concentration of super-valuable unicorns.

The Bay Area is home to seven of the ten or so most valuable venture-backed, private companies: Uber, Airbnb, Palantir, Stripe, Juul, Pinterest, and Lyft. Altogether, they represent a collective private valuation of well over $200 billion. Of those, all but Palantir are headquartered in San Francisco itself, a documented unicorn production mill.

With several of the top Bay Area unicorns expected to go public in the next few quarters, investors are also hopeful they’ll see some big exits too. Uber and Lyft have already filed confidentially for IPOs, while Pinterest and Slack are reportedly close to submitting paperwork.

Meanwhile, let’s not forget the big exits that already happened this past year. On the M&A front, by far the largest was Microsoft’s $7.3 billion purchase of San Francisco-based software development platform GitHub. As for IPOs, Bay Area-based software unicorns Dropbox, DocuSign, Pivotal, and Zuora all made it to public this past year and managed to sustain multi-billion-dollar market caps.

Yet another sort-of exit came from e-cigarette pioneer Juul, which sold a 35 percent stake to tobacco giant Altria last month for $12.8 billion. While it’s not a full acquisition, it’s more money than any U.S. venture-backed M&A deal this past year.

Early And Offbeat Areas Thrive

Besides generating lots of unicorns, the San Francisco Bay Area has sustained its enormous lead among U.S. metro areas in seed and early-stage funding.

The region attracted $1.2 billion in reported seed funding in 2018, spread across more than 600 known rounds of rounds of $100,000 or more. That’s more than 30 percent of the total reported seed investment for the entire United States for rounds of that size.

The Bay Area startup generation machine is also managing to produce highly valued companies in spaces for which the region isn’t well known as a talent hotbed.

Take AllBirds, a maker of trendy wool shoes that pulled in a $50 million round last fall. San Francisco, where the company is based and started up, isn’t well known for footwear entrepreneurialism. Or look at Bolt Threads, headquartered in nearby Emeryville, California, which has raised over $200 million to develop high-performance, environment-friendly fabrics.

Of course, not all those offbeat wagers work out well. One well-known example is Juicero, the failed developer of a cold-press juicing system that raised nearly $120 million before shutting down following reports its pricey machines didn’t do much.  

Big Exits And Big Flops

This brings us to our next point about the Bay Area’s indefatigable startup machine. While the region hosts the biggest success stories, it’s also home to the venture industry’s most notorious flops.

Silicon Valley, after all, is the locale that brought us Theranos, the fallen blood-testing unicorn that once boasted a $10 billion valuation before its long history of fraudulent practices came to light. The Palo Alto company officially closed its doors in September.

Other big flops this past year include San Francisco-based Munchery, the meal delivery service that shut down this week after raising $125 million, and Shyp, a package pickup and delivery service that folded after securing $60 million. Drone upstart Airware also folded late last year after pulling in $118 million.

So, in conclusion, there are plenty of reasons to write off the Bay Area as a startup hub that’s past its prime. Investors attach crazy valuations to pie-in-the-sky companies that lose tons of money, traffic sucks, and there is no affordable housing.

And yet, the region’s entrepreneurial engine continues to chug along, and for now, no other American cities come close to catching up.


  1. Crunchbase relies on the metropolitan statistical area (MSA) to determine the boundaries of the San Francisco Bay Area