In old-school, brick-and-mortar business, success is all about location, location, location. And what goes for local restaurants and mom and pop shops also applies to the rarified world of venture-backed startups, particularly when it comes to the “venture-backed” part.
It shouldn’t come as any surprise that the amount of money an early-stage startup ends up raising will vary depending on a number of factors. Geography is certainly one of them. And, spoiler alert, ventures on the coasts tend to raise more than their land-locked counterparts. But you probably already knew that.
Crunchbase News has looked at regional differences in VC investing before. Our reporting has established that most investors (except for corporate VCs and family investment offices) are inclined to make investments inside their own states, and that this tendency is most pronounced at seed and early-stage. In a follow-up analysis, we found significant regional variation in how far from home investors are willing to venture with their deal-making. As it happens, VCs based in the West are the least likely to make deals with companies outside the region.
Here we find that the fundraising gap between coastal regions and more inland locales is particularly pronounced at earlier stages of the venture life cycle, when being able to raise more can result in a lasting competitive edge.
Early-Stage Venture In America
In the map of the U.S. below, we display the amount raised in the average (mean) early-stage venture deal struck in 2018.1 For more information about the definition of early-stage venture we’re using here, check out the Methodology notes at the end.
We then segmented the early-stage round data by U.S. Census-defined regions and “divisions” (PDF) of states. (So, if you have an issue with how your state is categorized, politely take that up with the Feds.)
The figures reported below are based on the current state of Crunchbase’s dataset at the time of writing, and they may shift slightly as more rounds are added to Crunchbase.
The data presented here includes rounds from all industry categories, a detail that we’ll touch on when we cover the Northeast, specifically New England.
Note: Alaska and Hawaii, though not shown on the map above, are classified by the Census Bureau as Western states in the Pacific division of the U.S. The handful of companies headquartered in Hawaii and Alaska were included in the averages.
Crunchbase data indicates that the nationwide average early-stage venture round grew over 20 percent between 2017 to 2018, from an average of $9.95 million to more-or-less exactly $12 million. The nationwide average Series A round grew by a massive 47 percent, whereas the average Series B round increased by a comparatively paltry seven percent.[bctt tweet=”Crunchbase data indicates that the nationwide average early-stage venture round grew over 20 percent between 2017 to 2018″ username=”jason_rowley”]
Series A figures may be skewed by a relatively small number of very large rounds that are labeled “Series A” but don’t fit the usual mold. These include over $200 million for each Series A deal struck by real estate upstarts Bungalo and Ribbon, several big life sciences rounds, and a $250 million Series A round raised in July by robotic process automation company Automation Anywhere (to say nothing of the $300 million the SoftBank Vision Fund invested in the company in November). There were a number of large Series B rounds, too—half a billion for full-stack autonomous vehicle startup Zoox, notably—but there are fewer rounds that lie quite so far outside the average at this stage of investment.
Many of those outlier rounds were raised by Silicon Valley companies, so we’re going to start our region-by-region analysis with the West. Then we’ll jet across the continent to the Northeast, continue with a penultimate stopover in the Midwest, and conclude in the South. The story on the coasts is the one you’ve probably heard before—big rounds, dominant markets, the usual—but early-stage deal size data points to some interesting trends in the South and Midwest.
The Western region of the U.S. is beautiful and mostly empty, save for the coasts. Home to tech centers like the SF Bay Area and Seattle, entertainment industry hubs like Los Angeles and Las Vegas, and a blossoming legal cannabis industry throughout most of the region, the early-stage startups headquartered in the West tend to raise more than the national average.
And that gap is growing. In 2018, the average early-stage deal in Western states was 18.2 percent higher than the national average, the biggest such gap since at least 2008. To the extent that early-stage rounds are getting bigger over time, startups in Western states are leaders in that trend. This being said, it’s mostly a coastal phenomenon among Pacific states.
For this and the charts that follow, we display individual data points for each calendar quarter and a two-period simple moving average to show trends over time.
Early-stage deals struck with companies in Pacific states (which, lets face it, are heavily skewed toward California) clocked in at an average of $15.25 million—more than triple that of some other divisions of states elsewhere in the country. That’s up 27 percent from 2017’s average of $12 million. But, again, deal size growth appears to be a somewhat localized phenomenon.
On average, companies in Mountain states experienced zero change in early-stage deal size between 2017 and 2018, but the number of reported rounds is up from the prior year. (Recall that more back-dated deals get added to Crunchbase over time, so 2018 may shape up to be an even better year for Mountain state deal volume than currently-available numbers suggest.)
Startup markets in several Mountain states are on the rise, notably in Utah. Back in June 2018 Crunchbase News profiled the startup and venture ecosystem in Utah, months before SAP acquired Provo-based Qualtrics for $8 billion. The Qualtrics exit, which occurred shortly before the customer satisfaction tracking platform company was set to go public, was the largest for a Utah-headquartered, venture-backed company since Adobe acquired Omniture for $1.8 billion back in 2009.
Since 2015, companies headquartered in the Northeast have tended to raise bigger early-stage rounds than the national average.
Though both the Mid-Atlantic and New England saw gains in average early-stage deal size, startups in states like New York, New Jersey, and Pennsylvania bagged the lion’s share of the growth. In those Mid-Atlantic states, early-stage deals grew, on average, by 22 percent since 2017.[bctt tweet=”Since 2015, companies headquartered in the Northeast have tended to raise bigger early-stage rounds than the national average.” username=”jason_rowley”]
New England’s growing startup ecosystem, which is largely centered around the Boston metro area, plays host to a good number of life sciences companies and high-tech ventures spun out of universities like MIT and Harvard. Early-stage rounds raised by New England-based companies grew by six percent, on average, between 2017 and 2018. Companies in New England raise bigger early-stage rounds, on average, than everywhere else in the U.S. besides the Pacific coast.[bctt tweet=”Early-stage rounds raised by New England-based companies grew by six percent, on average, between 2017 and 2018. ” username=”jason_rowley”]
Part of this has to do with the industry mix alluded to earlier. It costs a lot of money for a pharmaceutical or medical device product to pass regulatory muster, so life sciences companies often need to raise huge amounts of money up front before their product can hit the market. It’s an upside-down version of stereotypical Silicon Valley-style tech startups, which are cheap to build and launch but very expensive to scale into sustainable businesses.
Midwestern startups lag behind the national average when it comes to early-stage deal size, and the area doesn’t appear to have benefited from the big check trend playing out elsewhere.
Annual averages for the region as a whole have mostly stagnated in a range between roughly $6.1 million and $6.5 million since 2015. The Midwest is the only region to experience a decline in reported average transaction size in 2018, shrinking by three percent since the previous year.[bctt tweet=”The Midwest is the only region to experience a decline in reported average transaction size in 2018, shrinking by three percent since the previous year.” username=”jason_rowley”]
Declines were mostly localized, though. The West North Central division (yes, that’s the official Census Bureau name), anchored by entrepreneurial hubs in places like St. Louis, MO and the Twin Cities in Minnesota, experienced the biggest drop in average early-stage deal size from 2017 to 2018. The average early-stage deal shrank by 14 percent in these states, though some markets likely faired better than others. Meanwhile, in the East North Central division, which includes states like Illinois and Ohio, average deal size grew by three percent.
When it comes to deal size, Southern startups trail other regions but hew closer to the national average than the Midwest does.
Depending on which part of the South we’re talking about, 2018 was either the best of times or the worst of times for companies raising early-stage funding. But, on balance, 2018 shaped up to be pretty good for Southern startups.
However, for folks in East South Central states like Kentucky and Mississippi, early-stage rounds in 2018 were ten percent smaller, on average, than 2017’s cohort. This being said, reported early-stage deal volume doubled for this division, so even though it experienced the second-biggest decline in early stage deal size, this blip comes out in the wash. And there’s some good news.
On a percentage basis, early-stage rounds grew the most in two divisions:
- Averaging roughly $9.1 million in 2018, the average size of early stage rounds grew 46 percent from 2017 in the West South Central region (which is dominated by large Texan markets like Austin and Dallas, as Crunchbase News covered in-depth earlier this month).
- Similarly, companies based in South Atlantic states like North Carolina, Virginia, and Georgia, inked early-stage deals that were 33 percent larger than 2017’s totals, on average. That’s the second-fastest growth rate from 2018.
There is no one-size-fits-all number for early-stage startups to shoot for when hitting up VCs for cash. Some of it depends on cost of living (all things being equal, $5 million will go farther in Saint Louis than San Francisco, for example), but it mostly depends on the unique capital needs of the business in question. Judiciously allocated, $5 million can fund a team of engineers and salespeople at a SaaS business for a few years. At a hardware upstart, that $5 million might cover an early production run and all the shipping. In life sciences, it barely covers a down payment on tens of millions of dollars’ worth of clinical trials and regulatory paperwork.
It’s also worth noting that raising more money is not necessarily a good thing. Crunchbase News documented a slight but statistically significant negative correlation between raising more money and generating better exit multiples. In another analysis, we found that the tendency of Midwestern startups to raise less outside money results in consistently higher valuation multiples at exit, even if the exits were smaller and fewer in number.
In early-stage venture, regional variation isn’t just perceived, it’s quantifiable. But success, broadly defined, is probably less dependent on the size of check founders get investors to sign and more about how the proceeds are spent after it’s cashed.
We’re using the same definition of “early stage” that Crunchbase formulated before Crunchbase News was started. It’s the same definition Crunchbase News has used in its quarterly reports on the state of the venture capital market.
These are the round types and conditions that get included in “early stage:”
- All Series A rounds.
- All Series B rounds.
- Venture capital transactions of unknown series between $1,000,001 and $15,000,000.
- Equity transactions of undisclosed type between $1,000,001 and $15,000,000.
- Equity crowdfunding transactions between $5,000,001 and $15,000,000.
- Convertible notes between $5,000,001 and $15,000,000.
- Convertible notes with unknown dollar amounts.
Here, we’re using the same definition of “early-stage” as Crunchbase News’s quarterly reports. Just over half of the deals aggregated below are labeled as Series A or Series B rounds, but we’re also including smaller deals from other round types.↩