Silicon Valley is the Only Relevant Market for Venture Capital

“New York is an irrelevant market for us as a venture capital firm.”

At a recent dinner in NY hosted by our friends at Lowenstein Sandler, a Silicon Valley-based VC made this comment to kick off our dinner conversation. While the comment was made at least partially to stir the pot, the sentiment behind it was real.  From his perspective, allocating his own and his firm’s time to NY or any market outside of Silicon Valley was a waste because in his view, the best dealflow is in Silicon Valley and so it stands to follow that the biggest exits will come from the Valley as well. (NY’s first VC-backed $1 billion exit clearly wasn’t enough to impress him.)

After hearing the comment, we wondered if this was more VC anecdote dressed up as data (see here, here and here for examples of those) or whether there was some truth to this.

Here’s the TL;DR version (TL;DR = “Too Long, Didn’t Read”)

His thesis appears to be borne out by the data. Among the largest exits in tech, Silicon Valley dominates its regional peers. A look across the major venture hubs – Silicon Valley, SoCal (LA & San Diego), Massachusetts, and New York among others – reveals that Silicon Valley companies make up over 1/2 of the largest venture-backed tech exits and the lion’s share of value as measured by exit valuation.

The Underlying Data

Below is a chart highlighting exit valuations of the top 50 largest VC-backed exits since 2012.  As can be seen, Silicon Valley dominates in terms of aggregate valuation of VC-backed exits as well as the number of exits.  The Valley’s significant edge will only increase with Twitter’s soon-to-come IPO.

Silicon Valley is the 800 lb gorilla when it comes to exit activity, taking 52% of the largest exits since 2012.  Trailing behind the Valley are New York, Massachusetts, SoCal, and Illinois, which collectively account for 28% of the Top 50 exits since 2012.  The market with the highest number of the largest exits behind Silicon Valley is New York with five exits.  Beyond these markets, exits from other states make up the remaining 20%. (Note: The category “Other” includes Washington, Connecticut, Texas, Indiana, Maryland, Virginia, New Jersey, and Pennsylvania, all of which have two or fewer exits in the Top 50 since 2012.)

The gap between these regions and Silicon Valley is even starker when you look at the aggregate exit valuations for the Top 50 tech exits. Silicon Valley companies that rank on the list contribute a whopping 86% to the aggregate exit valuation of these Top 50 exits. Facebook’s IPO in May 2012 makes up an immense amount of the total.  If you take out Facebook from the tally, Silicon Valley’s share of exit valuations remains at 54% which is still miles ahead of any other region.

Another interesting data point is whether Silicon Valley companies generate higher exit valuations per dollar invested.  This statistic can be thought of as a measure of “value creation” from an investor’s perspective.  The total funding versus the exit valuation for the Top 50 tech exits since 2012 is plotted on the graph below. Since a trend is not easily discernible by looking at the scatter, the table below highlights the “value creation” ratio for each market below.  The ratio is defined as exit valuation divided by funding raised prior to exit. As you can see, Silicon Valley tops the chart. (Note: Facebook is not included in the scatterplot given its exit valuation outlier but is in the table below)

To ensure the 2012 to current period was not an anomaly of some kind, we looked at the Top 50 venture-backed tech exits in 2011 to see if Silicon Valley’s share of the largest exits was increasing or decreasing over time, and as the graph below shows, Silicon Valley’s share of exits has actually grown modestly going from 48% to 52%. In 2011, its share of exit valuations stood at 42% and this grew as highlighted above to 86% in the more recent period in question.  If we disregard Facebook, however, Silicon Valley companies still captured 54% of the value created which represents an increase in share of 1200 basis points.

Silicon Valley clearly wins when it comes to its volume of exit transactions and valuation share so perhaps all other markets are meaningless? On the other hand, 48% of the largest tech exits are occurring outside of the Valley in a fairly eclectic group of markets so is ignoring these markets really optimal for any VC?  Let us know what you think in the comments.