When looking at the venture capital industry in the US, the same three locations consistently pop up: New York, Boston and San Francisco. Over the past 10 years these urban areas have accounted for 79% of all venture capital fundraising activity within the US. While these cities may have had a monopoly on venture capital fundraising over the past decade, together they account for only 8% of the population in the US, representing the largest (New York), 10th largest (Boston) and 13th largest (San Francisco) cities in the country. Recently there has been a movement to look for innovative and exciting start-ups in areas historically underserved by venture capital, and this blog will examine where that search has begun.
New York, Boston and San Francisco are often considered the capitals of finance, education and technology respectively within the US, and are arguably over-saturated with venture capital. Relative to the populations for these respective areas, funds based in New York have raised nearly $2,200 per resident, Boston over $7,200 per resident and San Francisco nearly $38,000 per resident. While many impressive companies have launched out of these cities – such as Uber in San Francisco, WeWork in New York and Wayfair in Boston – it may come at the expense of entrepreneurs in other areas of the country, especially Middle America.
Looking at the 15 largest urban areas in the US, as seen in the table below, Middle America (consisting of the Southwest and Midwest states) stands out as an undervalued demographic when it comes to venture capital: residents in Houston, Detroit and Phoenix have all raised under $100 per person in venture capital fundraising. Houston and Detroit especially stand out from this group: along with a relatively low number of venture capital firms located in Houston, the city has also recorded the lowest amount of venture capital deal value per person at $18. Detroit is not much further ahead of Houston, receiving only $56 in venture capital deal flow per resident.
Some venture capitalists have identified this problem and view it as an opportunity – perhaps the most high-profile of these is Rise of the Rest fund, which coupled an impressive roster of LPs with a well-publicized bus tour of the Rust Belt with the aim of finding promising start-ups in these undervalued areas.
We have already seen several unicorns built in areas generally underserved by venture capital: Detroit-based Duo Security, whose seed investors include Michigan-based Resonant Venture Partners, recently achieved a $1.17bn valuation. Phoenix-based Carvana went public in early 2017, and its current share price is nearly double its listed equivalent. Florida, the fourth-largest state by population but only 20th in terms of venture capital fundraising over the past 10 years, has also housed unicorns: Magic Leap (AR/VR), Fanatics (E-commerce) and JetSmarter (Transportation).
As the industry continues to develop and the largest markets become increasingly saturated, venture capital will inevitably have to evolve and cast a wider net to source new deals. Early entrant venture capitalists that decide to move early and establish a fund based in these cities may develop an advantage over their competitors by gaining access to unique deals at better value than opportunities that may arise on the coasts.