May 21, 2018
Jason D. Rowley is a venture capital and technology reporter based in Chicago.
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Access to talented folks and smart capital certainly makes the process of starting up a company easier, and it may increase the likelihood that a startup will survive long enough to raise some money and build a sustainable business.

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But does location have any bearing on the other end of the startup lifecycle, when founder and investor equity is looking for an exit by way of an initial public offering (IPO) or acquisition? It’s an important question for executive and investor stakeholders alike, and that’s what we’ll try to tackle here.

Crunchbase News has previously explored regional investment patterns and factors affecting exit performance. Our analysis of these trends include when startups are most likely to get acquired, whether time in the market or capital raised deliver better returns to investors, and, most recently, what might be driving up multiples on invested capital (MOICs) over time. But our investigations of startup location and exit performance have, to this point, been separate and apart from one another.

With all this in mind, let’s see what shakes out when startup exit metrics and location information collide.

Middle Figures Of Money In And Money Out

Before getting into the multiples themselves (the nature of which we discuss in a note at the end), let’s take a look at the median amount of capital raised by companies that found exits across the four regions of the contiguous United States, as defined by the U.S. Census Bureau.

We’re using a very special subset of Crunchbase data, only analyzing startups with reasonably complete funding histories and known valuations at time of exit. To be counted as “complete,” startups with recorded pre-Series A (seed, angel, convertible note rounds) or Series A rounds of known size, for which the size of any subsequently-raised venture round is also known, are included. This results in a fairly small dataset that is analytically sound.

In the table below, you’ll be able to find the median values for total equity funding raised and valuation at exit, subdivided by the regional location of companies’ headquarters. It’s sorted in order of the most exits to the fewest.

Spoiler alert: these initial findings may be enough to figure out which regions may do better than others on the valuation multiples front. Prior analysis from Crunchbase News found that bigger exits (higher valuations at exit) are better exits, in that they tend to deliver higher MOICs than exits of lesser size. In that same article, we found that companies that raised comparatively smaller amounts of money tended to produce a more favorable ratio of valuation to invested capital.

So it may not come as a surprise that the U.S. Midwest stacks up quite favorably against other regions of the country. For the smaller set of Midwestern companies that found an exit, they tended to raise the least amount of money while simultaneously achieving the highest median exit value.

In order to produce a more conservative measure of median MOICs from the past decade’s worth of exits, we’re excluding all the companies with only one recorded round of funding, which contained several high-flying outliers that skewed overall results materially upward. The resulting medians and sample sizes from this more cautious approach can be seen in the map below.

Despite having the fewest recorded exits in our dataset, the Midwest nonetheless produced consistently better exits (from a MOIC standpoint) than other regions of the country. The South also faired well. Considering the sheer number of exits, the West is basically a cross-section of the country as a whole, with its median exit multiple coming in at pretty close to the nationwide average between 2011 and 2017. (MOICs over time can be found in the first chart of our last deep dive into exit data.) The Northeast performed below the national average for reasons that might require further exploration.

Median MOIC Metrics By Metro Area

We’ve taken a look at a decade of exit multiples through a regional lens, so let’s drill down one layer deeper and see how different metro areas stack up against one another.

In the table below, we’ve ranked metro areas with twenty or more exits in our dataset by the median MOIC. To reduce noise when possible, exits for companies with only one recorded funding round are excluded.

If you’re surprised that Chicago ranks at the top here, you’re not alone. Heck, I’m from Chicago and am a bit of a local patriot, but I wouldn’t have guessed the Second City would rank first in any VC metrics. Now, for the record, Chicago ranks lower, but still near the top, of a ranking of cities with twenty or more exits when you include companies with only one known funding round. But we excluded those companies for a reason: there’s a high likelihood these startups are missing later funding information, and they are most likely to produce crazy outlier ratios of 150x or more.

Crunchbase News is not the only publication to find Chicago at the top of the MOIC heap. Back in March, Pitchbook released a report which also found Chicago in the number one spot. And although their multiples are overall higher than ours, our ranking is directionally similar. As mentioned before, we took a more conservative approach to our calculations; we also used a different date range (exits occurring between 2008 and May 2018, compared to their 2010-2017 range); and no doubt there are differences between what each dataset covers. But, regardless, the similarity of these two studies’ findings is worth noting.

MOIC Methodology: The Multiple Is The Metric

For our purposes here, we looked at the ratio of the amount of total equity funding a technology startup has raised from angels and VCs to the valuation of the company at time of acquisition or IPO.

This multiple on invested capital is a reasonable, if admittedly imperfect, proxy for whether a startup was a financial success or failure for its biggest shareholders. Obviously, the relationship between a company and its investors can be complicated and various deal terms like liquidation preferences, seniority, and anti-dilution protections can affect the financial outcome of individual investors in material and not-always-intuitive ways. Accordingly, we can’t really derive more granular metrics like each investor’s internal rate of return or the ratio of distributed to paid-in capital (DPI), at least not in any scalable way.

But as far as a back-of-the-envelope way to compare startup exits through time and space, a simple division of terminal valuation by equity investment raised is decent enough. So that’s what we’ll roll with here.