Silicon Valley VC Funding Declines to Decade Low

Shifting Venture Capital Landscape: A Decline in Bay Area Dominance

In 2014, over 40% of all U.S. seed and early-stage venture capital funding was directed towards startups located in the Bay Area.

However, this trend has significantly altered in recent years. A new report, “Beyond Silicon Valley,” collaboratively produced by Revolution and PitchBook, reveals a decreasing proportion of U.S. VC investment flowing to Bay Area startups.

Recent Trends in VC Funding Distribution

As of 2021, approximately 27% of U.S. venture capital dollars have been allocated to Bay Area startups. This marks the lowest percentage in over a decade, despite projections indicating a record year for overall venture funding nationwide.

Steve Case, CEO and Chairman of Revolution, was consulted regarding these findings, offering insights into the evolving dynamics of the venture capital ecosystem.

Case leads Revolution’s suite of funds, including the Rise of the Rest Seed Fund, which exclusively invests in companies outside of Silicon Valley. Since its inception in 2014, the platform has supported 194 companies across 89 different cities.

Increased Investment Beyond Traditional Hubs

2021 is shaping up to be a record year not only for total funds raised but also for venture capital firms based in the Bay Area and New York City investing in startups located outside their immediate regions.

As recently as 2017, over 50% of early-stage Bay Area funding remained within the region. Currently, that figure has decreased to 37%, as highlighted in the Revolution/PitchBook report.

Over the past two years, at least $11 billion of capital originating from the Bay Area has been invested outside of the three primary tech ecosystems. This contrasts sharply with a decade ago, when that amount was under $3 billion.

“Investing solely within one’s own backyard risks missing opportunities to support the groundbreaking companies of the future, which are increasingly dispersed across the country and globally,” Case explained to TechCrunch.

Record Out-of-Region Investment Figures

Bay Area and NYC-based VCs have already deployed $24.1 billion in investments outside of the Bay Area, NYC, and Boston this year. Approximately $13 billion came from Bay Area investors, and $10.7 billion from New York-based VCs, a significant increase from the $4 billion invested in 2011.

The question then becomes: where is this capital being directed?

Cities like Austin and Miami have garnered considerable attention, ranking among the top 10 recipients of funding from Bay Area and NYC investors between 2011 and 2021. However, the city leading the way may come as a surprise: Los Angeles.

Startups in Los Angeles collectively received $42.2 billion in seed and early-stage investment (Series A or B) over the 10-year period, with participation from both Bay Area and New York City investors.

Regional Investment Preferences

West Coast investors demonstrated a tendency to favor cities on the West Coast, with Seattle securing the No. 2 position and Denver ranking No. 5. Conversely, East Coast investors showed a preference for cities east of the Mississippi River, with Philadelphia holding the second rank.

Growth in the Number of Investors

The number of investors has also increased substantially. The report indicates that there are now more than 3,000 active investors located outside of the Bay Area, New York, and Boston, a rise from 1,000 in 2011.

This growth includes over 1,400 new institutional VC firms established outside of these three regions, increasing the likelihood of investment in local and regional startups.

“This is arguably the most compelling data point in the report,” Case stated to TechCrunch. “The near tripling of these firms over the last decade is quite significant.”

“Successful companies require initial seeding, leading to the emergence of iconic Fortune 500 companies. Similarly, fostering venture capital in diverse regions is crucial for backing companies within those areas.”

Record Capital Raised Outside Major Tech Hubs

2021 is projected to be a record year for capital raised by VCs outside the three major tech hubs, totaling $21.4 billion compared to just over $3 billion a decade ago.

Emerging Startup Communities

The report identified 12 cities with burgeoning startup communities: Denver, Dallas, Minneapolis, Kansas City, Nashville, Philadelphia, Phoenix, Raleigh-Durham, Salt Lake City, St. Louis, Tampa Bay, and Washington, D.C. Cities like Seattle, Austin, Chicago and Los Angeles were excluded due to their already established momentum.

Each city possesses unique potential, Case noted, and most offer entrepreneurs a crucial advantage: a lower cost of living and reduced business expenses, providing founders with greater financial flexibility.

For instance, Nashville is rapidly becoming “the VC epicenter of the South,” driven by its strong healthcare sector and the growth of family offices, angel networks, and institutional funds.

The Research Triangle Park in North Carolina is attracting entrepreneurs due to the talent pool generated by nearby universities (UNC-Chapel Hill, Duke, and NC State). The presence of established corporations like IBM, Cisco, GlaxoSmithKline, and Fidelity, alongside new entrants like Google Cloud, further solidifies the region’s status as a tech hub.

“The momentum we’re witnessing now is just the beginning,” Case concluded. “While this report demonstrates progress, substantial work remains to create a level playing field for innovation, entrepreneurship, capital, and talent, ultimately enabling more entrepreneurs to succeed in more cities.”

Revolution’s investment strategy has yielded positive returns, with the firm backing numerous unicorns based outside of NYC, Boston, and the Bay Area, including Detroit’s StockX, Austin-based ZenBusiness, Atlanta’s STORD, and Chicago’s Tempus and Uptake. Successful exits from Revolution Growth include BigCommerce (Austin) and Sweetgreen (LA), while the Rise of the Rest Seed Fund has seen exits from Kentucky’s AppHarvest, Iowa City’s Pear Deck, and Kansas City’s Backlot Cars.