Emerging Tech Hubs: IRR Overtaking Silicon Valley

The Expanding Landscape of Tech Innovation in the U.S.

Technological advancement is no longer concentrated in a single region; its distribution is broadening throughout the United States.

Recent data indicates a shift in startup activity. Of the five highest-funded startups established in 2020, a significant majority – four in total – were founded outside of the traditional Bay Area epicenter.

Movement of Venture Capital

Influential venture capitalists, including Keith Rabois from Founders Fund, David Blumberg of Blumberg Capital, and Joe Lonsdale of 8VC, have relocated from the Bay Area. Their destinations are newly prominent tech centers.

AngelList identifies these emerging hubs as Austin, Texas; Seattle; Denver; Portland, Oregon; Brooklyn, New York; Nashville, Tennessee; Pittsburgh; and Miami.

Growth and Investment Returns

The number of startups operating within these developing markets is experiencing rapid growth, as evidenced by AngelList’s data. Consequently, they are securing a larger share of venture capital funding.

AngelList conducted a comparative analysis of startup performance. They contrasted companies based in emerging tech hubs with those located in Silicon Valley, utilizing Internal Rate of Return (IRR) as a key metric.

For the purposes of this analysis, AngelList defines “Silicon Valley” as encompassing San Francisco, Palo Alto, Mountain View, Oakland, San Mateo, Berkeley, Redwood City, Menlo Park, San Jose, Santa Clara, Sunnyvale, Burlingame and San Carlos.

IRR and TVPI Performance

The data reveals that startups in emerging tech hubs demonstrate an aggregate IRR of 19.4% annually on AngelList’s syndicated deals. This surpasses the 17.5% annual aggregate IRR observed for syndicated deals in Silicon Valley.

Furthermore, Total Value to Paid-In (TVPI) – a return multiple adjusted for fees – is marginally higher for AngelList investments in emerging hubs (1.67x) compared to Silicon Valley (1.60x).

This signifies that for every $1 invested in startups situated in emerging tech hubs, the investor’s portfolio now holds a value of $1.67. In contrast, Silicon Valley startups yield a portfolio value of $1.60 for each $1 invested.

This analysis is based on a substantial sample of approximately 2,500 syndicated deals facilitated through AngelList, spanning from 2013 to January 1, 2021.

Factors Driving the Shift

Investors cited several contributing factors to the rise of these alternative tech hubs. These include more favorable tax environments outside the Bay Area, a reduced cost of living, and a broader talent pool facilitated by the changes brought about by the COVID-19 pandemic.

Blake Commagere, a serial entrepreneur and angel investor who transitioned from Silicon Valley to Texas in 2020, explained, “Historically, the best opportunities for tech careers and company launches were concentrated in Silicon Valley, attracting significant talent.”

He continued, “The advent of remote work has diminished this advantage, and considerations like the cost of living are increasingly influencing decisions about where to establish a company.”

Commagere also noted, “A funding round of $10 million provides considerably more leverage in an emerging tech hub than it does in Silicon Valley.”

Company Relocations

Ryan Bethencourt, the founder of Wild Earth, a plant-based dog food company, relocated his business from Berkeley, California, to the Raleigh-Durham region of North Carolina last year.

Bethencourt’s decision was prompted by the burgeoning startup ecosystem he observed in the area. “I perceived this as the new frontier for startups focused on biotechnology,” he stated.

As a General Partner, he added, “I’ve already been able to invest in several companies located near me.”

Growth in Deal Activity Across Emerging Tech Centers

Syndicated deal counts on AngelList within developing markets have experienced a substantial surge, increasing by 144% over the past five years. In contrast, Silicon Valley saw a more moderate rise of 77% in syndicated deals during the same timeframe.

This accelerated growth in deal volume within these emerging centers is leading PitchBook to forecast a decline in Silicon Valley’s portion of venture capital deals.

Specifically, projections indicate that in 2021, Silicon Valley’s share will dip below 20% for the first time on record.

The increase in deal flow has directly correlated with a rise in venture capital investment in these burgeoning tech ecosystems.

For example, venture funding for startups located in Texas increased by 28% in 2020, reaching a total of $5 billion. Similarly, Florida-based startups secured $2.8 billion in venture capital during 2020, a significant jump from the $1.8 billion raised in 2019.

Despite nearly 40% of all venture capital being directed towards Silicon Valley companies in 2020, expectations are for a more balanced allocation of capital in the near future.

“We are witnessing a consistent trend of new funds being established with a focus on regions beyond the Valley,” explains Taylor Davidson, a General Partner based in Pittsburgh.

Davidson, who co-manages the Possibilian Catalyst Rolling Fund on AngelList, adds, “Both entrepreneurs and investors are leveraging the strategies proven effective in Silicon Valley, but are adapting them to suit their specific local contexts.

This adaptation is expected to facilitate the success of companies across the USA in securing funding and scaling their operations.”

Disclosure

The charts and graphs included are strictly for informational use and shouldn't be the basis for investment choices. The information presented is current only as of the date specified.

Any projections, estimations, forecasts, targets, or opinions expressed are subject to change without prior notification and may contrast with the views of others.

Important Considerations

This document is intended solely for informational and discussion purposes, not as a recommendation for investment or any other type of advice. It does not represent an offer to buy, sell, or hold any security, nor does it imply any transaction.

Formal offering materials, detailing all risks, minimum investments, and associated fees, will accompany any such offers.

AngelList Returns Data

AngelList returns data incorporates investments from institutional and professional investors who benefit from privileged access to deals and information. Consequently, their returns may significantly differ from those experienced by other investors on the AngelList platform.

The AngelList returns presented here are current as of January 1, 2021. Valuation events occurring after this date, even if learned about later, are included as is standard practice.

All other data within this presentation reflects information available as of January 1, 2021. We are not obligated to provide updates or revisions to reflect changes in actual or anticipated returns.

Risk and Performance

Past performance does not guarantee future results. There's no assurance that any current or future fund will replicate the exposure to, or the quality of, startups found in existing AngelList funds.

Venture fund investments, including those through AngelList, carry a substantial degree of risk and are appropriate only for sophisticated, qualified accredited investors.

Valuation Methodologies

Investment values for unrealized returns are calculated using the methods outlined below. For early-stage companies, valuations are typically adjusted to reflect the most recent priced funding round.

Companies without a new priced round since the last valuation are held at that previous mark or their initial cost. Investments may be marked down, but never up, at our discretion – a common industry practice.

Later-stage companies exceeding a $100 million valuation, with investments estimated at over $10 million, undergo third-party valuation if 24 months have elapsed since the last investment.

Smaller investments in later-stage companies are valued using the same methodology as early-stage companies. Early-stage company valuations do not currently factor in liquidation preferences or other non-financial terms that could impact returns.

While AngelList believes its valuation sources and company updates are reliable, we do not independently verify their accuracy. The valuations presented are calculated by AngelList based on available data as of the presentation date and have not been subject to a third-party audit.