Jan 15, 2020

Venture capital slowly seeps outside of Silicon Valley

Adapted from Pitchbook; Chart: Axios Visuals

Venture capital investment is seeping out from Silicon Valley to the rest of the country, but the West Coast still dominates the market by a wide margin.

Why it matters: Venture capital investment can play a crucial role in building fast-growing, tech-based economies like those of the Bay Area, Seattle, Austin, New York and Boston. But VC investors don't typically stray outside those markets to look for the next big thing.

By the numbers: Last year, the Bay Area's proportion of overall U.S. venture capital investment fell to the lowest point since 2013, according to year-end data from Pitchbook and the National Venture Capital Association.

  • The proportion of West Coast deal value also slipped to around 50% of the country's total, down from 62.3% in 2018.
  • Meanwhile, deal counts and values crept up or stayed steady in every other region between 2018 and 2019.
  • Philadelphia, Chicago, New York City and Washington, D.C. saw incremental upticks in the number of deals in 2019. Higher year-over-year growth was seen in Seattle (10.6%) and San Diego (8.4%).

The big picture: The majority of U.S. venture capital funding goes to California, New York and Massachusetts — and 2019 was no different.

  • "[O]ne of my predictions last year — that we’d see an increase of VC going to 'rising' states — proved to be wrong," AOL co-founder and Revolution CEO Steve Case wrote in a recent Medium post.
  • The amount of VC investment going to just three states (California, New York and Massachusetts) actually increased from 75% in 2018 to 78% in 2019.
  • Case says he's sticking with his prediction for the coming year, based on the rising cost of Silicon Valley (as well as the start of the backlash against against it) and the multi-billion-dollar exits in "rising cities."

What's happening: Investors with Silicon Valley roots are branching out and raising funds in places they see as having untapped potential.

  • Last week, J.D. Vance launched a new VC firm called Narya Capital and raised $93 million for its debut fund, which is targeting a total of $125 million, and will be headquartered in Cincinnati. Big Silicon Valley names are limited partners — including Peter Thiel, Marc Andreessen and Eric Schmidt.
  • The mission is similar to Case's Rise of the Rest Seed Fund, where Vance was previously managing partner. The new fund's strategy is to invest in Series A rounds for startups in mid-sized cities like Salt Lake City, Raleigh and Atlanta.

When Mark Kvamme moved to Ohio from Silicon Valley to start Drive Capital eight years ago, "people literally thought I was crazy," he said. "One investor even told me, Ohio is where venture capitalists go to die."

  • Drive now has $1.2 billion under management has invested in more than 40 companies, including Root Car Insurance and Beam Dental.
  • Ohio's venture capital investments have more than doubled since 2013.

Still, there's a reason the Bay Area remains dominant: Its high concentration of talent, entrepreneurs and customers, along with the lion's share of capital thanks to blockbuster IPOs creating new wealth to reinvest.

  • Investors agree that, even though there are some shoots of progress in other regions like the Midwest, it will take four or five successful exits and more local institutional investors to kickstart the investment engines.
  • "We have to have multiple billion dollar exits, and those will beget new companies," Kvamme said. "It takes time."

The bottom line: "The days of VC's hiding in a bunker in Silicon Valley are coming to an end," said Roy Bahat, head of Bloomberg Beta, a venture fund backed by Bloomberg LP. "If we want to realize the full potential of technology, we need people everywhere making it."

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