“With
the exception of New York, major venture hubs have shown little progress in
dethroning Silicon Valley as the place for tech VC. Massachusetts and Texas are
losing ground while everyone else is flat,” according to CB Insights, a New
York based database firm.
As the legendary Larry Bird once said to the other
NBA players in the 3-point shot competition: you guys are all shooting for
second place. You know that, don’t you?
From CB Insights: “Silicon Valley has long dominated
the spotlight for promoting and financing the growth of emerging tech
companies. And so when you’re the 800 lb gorilla in an area, there will be
others who aspire to knock you off of your perch. And so we see lots of
breathless proclamations from other cities and regions that they are the “next
Silicon Valley”. Chicago threw its hats in the ring during Groupon-mania but it is not the Silicon Valley as the data
shows. And a quick Googling of the term “the next Silicon Valley” shows
Seattle, Los Angeles, Bangalore, Tel Aviv and even the Brooklyn tech triangle
(yes – really) have all thrown their hat into the ring thinking they could be
contenders.
“But if we look at the data, we can answer if there
has been any shift from Silicon Valley to other markets in reality or if this
is all just talk. Specifically, we’re going to look at a few other venture hubs
namely SoCal (LA & San Diego), Colorado, Massachusetts, New York, Texas and
Washington.”
Has Silicon Valley seen a decline in tech sector
deal activity over time? Not the case. Tech sector deal levels in H1 2013
topped those of H1 2012 by 10% and H1 2011 by nearly 21%, respectively. On a
year-over-year basis, Silicon Valley tech deal activity has grown 19%.
And while Silicon Valley’s VC funding to tech
companies saw a notable dip between Q3’12 and Q4’12, it has since picked up going
back to historical levels. Year over year funding has actually increased 3% and
dollars are trending upward over the past two quarters.
But with the exception of New York, geographic markets from SoCal to
Texas have had a difficult time in growing their share of venture-backed tech
businesses.
In the race for second place, CB Insights recognizes
the following winners, placeholders, and losers.
Winner: New York
New York’s share of tech deals has grown steadily
over the past three years and has stayed near 20% for each of the past three
quarters. This has been spurred by a few things. Many of NY’s
largest venture-backed exits have taken place since 2010 so it’s a region
with some momentum. At the same time, a strong core of investors has emerged to
back New York-based cos. For example, Spark
Capital and Union Square Ventures, both top-tier firms, have co-invested in
NY-based Kitchensurfing, Skillshare and Tumblr among others and continue to be
active in the market.
Static: SoCal
While tech funding and deals in the region has grown
8% and 18% on a year-over-year basis, SoCal has little to show in terms of
overall growth or decline by share of deals and dollars versus other geographic
markets.
Static: Colorado
Colorado’s share of tech deal and dollars has
remained very flat since Q2’10.
Static: Washington
Washington’s share of tech deals has hit over 5% in
just four of the past 13 quarters, while funding share drifted above 5% just
twice (with a high of 7%).
Loser: Massachusetts
While Mass. has taken the #2 spot in VC funding
across all sectors in four of the past five quarters, its share of tech deals
versus the given geographic markets has fallen over time and hit below 10% in
each of the past two quarters. Funding share in Mass. is more mixed, but
average and median deal share has trended at 9% since Q2’10.
Paul Graham of Y Combinator recently called out
Boston investors, writing about Dropbox. “Because the best investors are much
smarter than the rest, and the best startup ideas look initially like bad
ideas, it’s not uncommon for a startup to be rejected by all the VCs except the
best ones. That’s what happened to Dropbox. Y Combinator started in Boston, and
for the first 3 years we ran alternating batches in Boston and Silicon Valley.
Because Boston investors were so few and so timid, we used to ship Boston
batches out for a second Demo Day in Silicon Valley. Dropbox was part of a
Boston batch, which means all those Boston investors got the first look at
Dropbox, and none of them closed the deal. Yet another backup and syncing
thing, they all thought. A couple weeks later, Dropbox raised a series A round
from Sequoia.”
Loser: Texas
While deal share has slowly trended downward in
Texas (only 4 more tech deals were completed in the state year over year,
funding share has seen a steeper decline. Between Q4’11 and Q1’12, funding
share fell 600 basis points and then another 400 basis points the following
quarter. Since then, funding share to the Texas tech market has remained at or
near historical lows.
Angel investors should recognize that the analysis above
is based primarily on Venture Capital (not Angel) funding and that angel group
results, as shown in the GUST reports, may differ significantly. But the current
CB Insights report, available here, is based on substantial data as expressed
in a fine series of graphs.
