Despite Pandemic, Hybrid Work, California Still Dominates Venture Market

In the midst of the pandemic — as venture dollars flowed freely and people were given more freedom to work where they chose — predictions swirled concerning the changing landscape of tech and where venture dollars could soon be sent.

However, even as the pandemic winds down, California still dominates the venture world — in fact, it now gets an even bigger slice of the venture dollars pie — with Massachusetts and New York following per usual, according to Crunchbase data.

Through the first three quarters of the year, California startups received nearly $54 billion in investment — making up 51% of the total funding market in the U.S., per Crunchbase data. The number puts the state on pace to receive $72 billion by year’s end.

In comparison, in 2019 — the last pre-pandemic year — the state saw about $67 billion in funding — or 47% of the market.

The same is true in Massachusetts and New York, which along with California make up a kind of “big three” of venture capital funding.

New York’s take of venture slightly dipped from 2019 when it received 13% of total U.S.  funding. Through the first three quarters of this year, it has received 11% — or about $11.4 billion.

However, conversely, Massachusetts’ numbers have gone up from 2019. That year, startups in the state received 8% of all funding in the U.S. Thus far through the third quarter, the state has taken in $10.4 billion — 10% of all U.S. funding.

No big changes

With very little change from before the pandemic in the big three, states like Florida and Texas — which were built up as the “places to be” in tech as people relocated — similarly saw little change in their take of venture dollars.

Florida remained dead even, taking in 2% in 2019 and the same through the first three quarters this year. Texas saw a slight dip, receiving 6% of all U.S. funding in 2019, but only 4% so far in 2023.

The numbers are interesting, but also come with several caveats as people in the industry point out.

First, less than half a decade isn’t a lot of time to change things that have been established for more than half a century. That is especially true in the venture world where other ingredients are needed for a successful startup ecosystem such as large research institutions and iconic, large tech companies — things that do not spring up overnight.

While the pandemic may have accelerated some things, it did not put them into hyperdrive. It would have been unrealistic for anyone to think anywhere would take a significant slice of Silicon Valley’s, New York’s or Boston’s share of funding in just a few years.

Many areas that did see a migration of tech talent and VCs are now undergoing a period of transition as things settle down into a new normal.

“I’m not surprised the numbers are down or remained flat,” said Saxon Baum, partner at Florida Funders, an investment firm that focuses on Florida and the Southeast.

“Some of what we saw in 2020 and 2021, it just couldn’t be sustained with people coming here,” Baum said. “Your dollar certainly doesn’t go as far here as it once did.”

A return to home

Secondly, the venture market has gone through a roller coaster ride since the pandemic, hitting all-time highs in 2021 and then seeing a significant slowing since the second quarter of last year.

The money that started to flood the venture market starting in 2020 has receded, especially as interest rates have risen and large crossover funds started to take their money somewhere else, said David Hall, a partner at Washington, D.C.-based venture firm Revolution, which focuses on investing outside the major hubs of Silicon Valley, New York and Boston.

In addition, Hall said the downturn in funding has prompted some VCs to readjust.

“I think you’re seeing a refocus on investing in your backyard,” he said.

“When the market is down, you really can do more when you are close,” said Baum, referring especially to helping portfolio companies through the downturn. “Probably more VCs look to invest in their backyard because it feels safer and you feel more in control.”

Don Butler, managing director at San Francisco-based Thomvest Ventures, has more than two decades of venture investing experience and agrees it is nice to have a collection of companies close by when a decline hits.

“You need faster movement in a downturn,” he said. “If you have to go from San Francisco to Austin to Seattle, that’s a lot of miles. That’s not fast.”

AI boom

Of course, another aspect of the startup market right now that has boosted California’s numbers for the last year-and-a-half or so is the AI boom.

“The AI revolution is definitely a factor,” Butler said. “There is a huge fear of missing out.”

Generative AI startups such as OpenAI, Anthropic, Character.ai and many, many more all call the Bay Area home, helping to significantly boost the Golden State’s numbers.

While other states also have AI startups, usually in the AI application space, no state has more startups related to modeling infrastructure and even the application layer.

The state also boosts the public company proxy for the AI industry — Nvidia — which itself has poured millions of dollars into AI startups of late.

Still strong

That is not to say just because other states have not sliced into the share of venture California, New York and Massachusetts own, they have not seen interest increase and do not have their own specialty sectors that are growing.

“I don’t think there’s any doubt these different ecosystems are growing,” Hall said. “One of the reasons is there’s more public dollars being used to help support these ecosystems.”

Hall pointed to the 31 “Tech Hubs” across the U.S. President Joe Biden unveiled less than a month ago as further proof of the tech landscape continuously expanding throughout the country.

“I really don’t think the number of opportunities have dropped off since 2012 here,” said Morgan Flager, managing partner at Austin-based Silverton Partners who has been investing in the state for 18 years.

While the money being thrown around is different than 2021, Flager said he still is seeing strong startups in the state with solid metrics.

In addition, he said fewer startups in Texas are having the same valuation concerns many startups in Silicon Valley see when facing their next round, since those valuations were lower to begin with in the state.

The biggest round raised in Texas so far this year went to Houston-based Axiom Space, which raised a $350 million round and highlights the state’s growing space sector. Other industries such as fintech, insurtech and health care also are expanding, Flager said.

The same can be said for Florida. Despite being hit hard by the decline in crypto funding, the state still has growing fintech, health care and cybersecurity sectors.

The cyber sector led to Florida’s biggest venture raise thus far this year — managed detection and response startup Deepwatch locked up a $180 million round of “equity investments and strategic financing” in February.

Those types of rounds show intense investor interest and keep most VCs busy regardless of where the startup is based.

“We’ll do our thing, Silicon Valley can have its own thing,” Flager said.

Illustration: Li-Anne Dias