Silicon Valley is the 800 lb. gorilla of tech venture capital and tech-related exit activity. And for just as long, it has been the leader in other areas such as life sciences and clean tech / energy / advanced materials. But is the Valley (including the Bay Area) losing some of its dominance in these other areas and becoming a region with less sector diversity and ultimately one which is more reliant on tech VC?
Anecdotally, there seems to be some chatter that the Valley is shying away from hard problems in favor of easier to solve problems (“building apps” seem to be the preferred pejorative term. Also see Why Silicon Valley Funds Instagrams and Not Hyperloops and The Stanford Startup and the MIT Startup as two recent views). Of course, folks love predicting bubbles and the demise of Silicon Valley regularly so this could just be more of the same.
But what does the actual data say? Is the Valley focusing on tech at the expense of healthcare and energy / clean tech / advanced materials investments?
In our earlier research, we found that it was Massachusetts, not Silicon Valley, that led the country in terms of aggregate exit valuation of VC-backed healthcare exits and was tied with the Valley in terms of number of large healthcare exits. And according to CB Insights venture capital database, there appears to be a clear tech vs. non-tech financing shift happening in SIlicon Valley today.
The chart below highlights Silicon Valley’s funding share across tech and non-tech sectors since 2009. While non-tech (healthcare, energy, industrials, etc.) categories captured 1/2 of Silicon Valley funding share in 2009, its share of venture funding has effectively been cut in half in the first three quarters of 2013 and has shown a steady decline over the years. Meanwhile, internet and mobile companies have increased their funding share from a combined 36% in 2009 to 60% in 2013 to date.
The shift becomes even more clear when analyzing Silicon Valley deal share over the same period. In 2013 YTD, four out of every five venture deals went to emerging tech companies in SIlicon Valley, a jump of 2,000 basis points from 2009.
But is the shift due solely to increased investment by VCs into Silicon Valley tech firms or are fewer deals and dollars actually going to non-tech categories? If healthcare and energy / clean tech are staying level in terms of absolute deals and dollars invested while tech is growing, that might be less alarming than if tech is growing and they’re actually declining.
Below we look at the VC funding trend in the two most significant tech sectors (internet and mobile) as well as the two largest non-tech sectors (healthcare and energy). On the funding front, there has been a clear flight of VC dollars away from energy and healthcare. As shown in the chart below, Silicon Valley energy companies took nearly $1.8B in 2011, but then saw funding fall 50% in 2012. At the current run rate, it will be a five-year funding low for Silicon Valley energy companies. Healthcare funding in the Valley is also on pace for a five-year low, and has fallen 15% in absolute dollar terms from 2009 to 2012.
Within SV tech, internet funding levels saw a massive jump in 2011 with several large fundings to companies including now-public Twitter and IPO Pipeline candidate Dropbox. And at the current run rate, SV internet companies are on pace for a five-year high of over $5B in 2013. Mobile funding in the first three quarters of 2013 nearly matched that in all of 2012 and was 35% higher than 2009 so like the internet sector, it continues to climb.
On the deals front, Silicon Valley energy companies have seen deal activity fall nearly 35% from 2010 to 2012. And it doesn’t look to be getting better anytime soon with energy deals in Silicon Valley barely registering in 2013. Healthcare deals in the Valley have dropped as well. After 130+ healthcare VC deals in in 2009, 2010-2012 have seen a decline in healthcare sector deal activity. In good news, there have been 90 in the first three quarters in 2013 so the downward trend will be stopped if Q4’s rate of activity continues.
When looking at tech, we see significantly increasing deal activity. The mobile sector has taken nearly 1 in every 5 deals in SIlicon Valley in 2013 YTD which is in line with mobile having its biggest quarter ever in Q3 2013. And due to an explosion of early-stage deals to leaner mobile software and app-based companies, SIlicon Valley mobile deals in 2013 are on pace for the highest deal tally in five years at the current run rate. Internet deals in the Valley also continue unabated, jumping 167% from 2009 to 2012. VCs have already completed more internet deals in the first three quarters of 2013 than in all of 2011 thanks to booming seed deal activity.