For the better part of a half-century, the epicenter of venture capital in the United States has been located about 30 miles south of San Francisco, in the heart of California’s Silicon Valley. In Menlo Park alone, you can find more than 40 venture capital firms scattered along a two-mile stretch of a single street, according to an article written by Jared Bloom, a graduate of University of Virginia Darden School of Business.
The concentration of venture dollars on Sand Hill Road is no surprise, according to Bloom. After all, if you want to make money investing in startups, then you have to go where the entrepreneurs are. And for decades, this meant proximity to the first generation of successful tech startups — many of which are located between San Mateo and San Jose.
Yet Silicon Valley’s grip on startup success is beginning to loosen, he suggests. Companies like Snap, Flatiron Health, SendGrid, Duo Security, Qualtrics and Shipt have proven that where you put your headquarters does not determine your destiny. Founders are building successful companies — and achieving massive exits — in Los Angeles; New York; Denver; Ann Arbor, Michigan; Provo, Utah; Birmingham, Alabama; and everywhere in between.
“The universe is definitely expanding,” University of Virginia Darden School of Business alumnus Jonathan Ebinger (MBA ’93), a general partner at BlueRun Ventures recently said. His firm, which made the first institutional investment in PayPal in 1999, now includes Atlanta’s Kabbage, San Diego’s Verve and New York City’s Jackpocket, among its most promising investments.
Capital and Talent: A Matter of Supply and Demand
Last year was a banner one for venture capital, with more new funds raised than in any year in history. But more capital means more competition, which has led to a growing gap between the amount of capital looking to be deployed in startups and the number of investment-worthy companies in Silicon Valley. With too much cash chasing too few companies, founders outside of the Bay Area are gaining attention.
“If you raise a venture fund, especially here in the Valley, there are probably five people in the same building who have raised just as much money,” says Ned Hooper (MBA ‘94), managing partner of Centerview Capital in Palo Alto, California. “You need to understand your differentiation as an investor to put your money to work.”
But this decentralization of the startup world doesn’t just create opportunities for founders who don’t want to move out West. It also gives venture investors access to a broad pool of companies with massive untapped potential.
“If you look at the metrics, the return multiples for Midwest startups are higher than West Coast startups,” says Nick Moran (MBA ’08), the founder and general partner of New Stack Ventures, a seed fund based in Chicago that invests exclusively outside of San Francisco and New York City.
As Moran explains it, focusing on undercapitalized cities like Chicago offers his fund an opportunity to invest in companies at more attractive valuations than you’re likely to find in the hyper-competitive, hype-driven Silicon Valley bubble. “This gives these companies more runway, less pressure, and the ability to achieve higher returns for their investors and their employees, if they end up being successful,” he says.
Kristin Gunther (MBA ’09), a principal investor at Washington, D.C.-based Revolution Growth, which is specifically focused on companies outside of the Bay Area, says that a startup located outside of the San Francisco orbit can actually be a competitive advantage for founders looking to build successful companies. With less competition for top talent and a lower cost of living, founders in emerging tech hubs often have an easier time building out high performing teams that are likely to stick around, she says. A founder in Omaha, Nebraska, for example, will likely have her pick of top engineering talent from local universities.
“What I hear from some of these companies is that their employee base is more loyal and stable, and that’s a big advantage for them,” says Gunther. “In fact, a number of our companies have been able to convince senior-level people to leave San Francisco and join companies in more affordable markets.”
Tech May Live in the Valley, but ‘Tech-enabled’ Knows No Borders
This trend toward a more distributed tech ecosystem seems likely to endure, but only if entrepreneurs outside of the Valley continue to launch companies and find the support they need. According to Hooper, this shouldn’t be a problem.
“A lot of startups being built today are not traditional tech companies; they’re tech-enabled businesses,” he says. “This means that founders’ focus is business-model innovation, and that experience and expertise is more geographically diverse.”
This is why, he believes, you’re seeing media and entertainment startups thrive in New York City. Similarly, you might expect to see automotive startups emerge in Detroit or health care startups in Nashville. As these new markets mature, Gunther expects them to be fortified with burgeoning local ecosystems. As soon as one company has success in a particular market, she argues, the next entrepreneur instantly has access to better talent, more resources and deeper networks. And this is how new startup hubs are born.
“It’s been really exciting watching these ecosystems mature,” says Gunther. Ebinger, whose investing career dates back to the first dot-com boom, agrees. But he also offers a few words of advice for communities that see themselves as the next great startup hub.
“The key is not to chase the ghosts of ’90s Silicon Valley but for these communities to take advantage of their own unique assets,” he says. “There are many reasons to be optimistic about innovation outside Silicon Valley, as long as we’re ready to expect the unexpected.” Which, after all, is what a venture capitalist is paid to do.