Why Venture Capital Is Thriving beyond Silicon Valley

As more new innovation economies pop up around the US, First Republic Bank’s Kate McRoskey explains what's driving their success

How has the venture community gained momentum across the US?  
Venture capital is a collective, community-oriented business. There’s a network effect in this community: when entrepreneurial talent meets capital in one location, supported and nurtured by specialist service providers, this catalyzes what we call the ‘innovation ecosystem.’

This kind of community is by no means unique to Silicon Valley or New York, either. The market in Los Angeles has become a tremendous success for investing across the full venture stack. The idea that LA is just for micro investing has been blown out of the water by the growth and attractiveness of the local community. And the data supports this success: Preqin Pro has recorded $8.9bn worth of venture deals in 2021 for LA-based companies.  

There are push and pull factors driving interest in a particular location, such as lower cost of living and hiring talent, general competition, and more market space – even the weather can play a part. 2015-2016 was the tipping point for LA: GPs came down from the Bay Area to meet entrepreneurs, and local service providers took note and began to focus their business to support capital injection. The network infrastructure began to settle in and facilitated the take-off of LA’s innovation economy as a result.

In Miami, the tech ecosystem is really kicking off, with local government pushing for the city to become a major innovation hub. This sentiment is echoed throughout the US, in recognition of the potential for tech development to drive economic activity.

How has COVID-19 impacted this trend?  
COVID-19 was a clear catalyst for the migration away from major city centers, by reducing the friction around remote working and proving that it can work. But the long-term effects of this on the innovation economy are unclear – the network effect that has bred these successful communities has relied on physical proximity and interaction. That said, the democratization we are seeing post-COVID means that investors might continue to live and work in the urban areas, but they'll have access to more innovation around the rest of the country.  

Is this democratization here to stay?
It’s really a flywheel effect – once you have enough infrastructure in place to support an innovation economy, it becomes too interconnected to dissolve. Instead, more of these smaller venture communities may pop up around the country as the working world democratizes. But the network effect is still key: there has to be some critical mass to get these communities off the ground. COVID is helping to accelerate that exploration beyond Silicon Valley.

About Kate McRoskey
Kate McRoskey is a managing director based in Los Angeles, and focuses on private equity and venture capital relationships in Southern California. Her areas of expertise include financing and liquidity solutions to firm management companies, their funds and investment vehicles, general partners and principals.