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 clearly not the next 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. And within these markets, who are the biggest regional winners and losers?
First, we analyzed whether Silicon Valley has 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 going back to historical levels. YoY funding has actually increased 3% and dollars are trending upward over the past two quarters.
The Q3’12 drop in Silicon Valley VC tech financing did, however, prompt a slight dip in deal and dollar share versus the the other aforementioned tech hubs. As shown below, Silicon Valley deal share has fallen since Q3’12 before increasing 400 basis points from Q1’13 to Q2’13.
Funding share has seen a larger drop off. Between Q3’12 and Q4’12, funding share in Silicon Valley tumbled from 66% to 50%. The 54% funding share in Q2’13 was 600 basis points lower than that of the same quarter last year.
Given Silicon Valley’s recent dip in share, has any other market stepped up to pick up the slack and effectively steal share? The charts below show deal and funding share for all seven of the major U.S. tech hubs, highlighting Silicon Valley’s consistent dominance in VC financing. While Silicon Valley’s wide financing gap from the rest of the pack makes it a little hard to tell, the only market that is able to muster an upward trend is New York which has increased its deal and funding share over time (more on that below).
But apart from New York, geographic markets from SoCal to Texas have had a difficult time in growing their share of venture-backed tech businesses. The winners, losers and static tech markets by deal and dollar share are detailed below.
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.
Meanwhile, New York’s funding share accelerated after Q3’12, the same period in which Silicon Valley funding share dipped. Funding share over the past three quarters has been at or near historical highs despite a slight fall in Q2’13 and has gone hand in hand with more VC investment dollars overall into the state on a sequential and year-over-year basis.
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.
Colorado’s share of tech deal and dollars has remained very flat since Q2’10, as shown in the charts below.
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%), despite what may look like several growth spikes in second chart below.
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 recently called out Boston investors writing about Dropbox (emphasis added)
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.
While deal share has slowly trended downward in Texas (only 4 more tech deals were completed in the state YoY), 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.