The article originally appeared at Harvard Business Review
Startups have seemingly never been more popular, particularly in the U.S. Perhaps there’s something in the American spirit that appeals to striking out on your own, or perhaps it’s that Internet connectivity and cloud computing have theoretically made it possible to create and grow scalable businesses from most anywhere. Investors like Steve Case and Brad Feld are betting on companies outside Silicon Valley, predicting that “the rise of the rest” will geographically level the entrepreneurial playing field and make startup communities more prevalent throughout the country.
But what do the numbers say? Are startup hubs really forming all over the U.S.? To begin to answer this question, I analyzed data on a small subset of early-stage entrepreneurial ventures that are focused on high-growth — those receiving venture capital funding. I aggregated venture capital deals for each U.S. metropolitan area — 381 in this case — annually between 2009 and 2014, looking only at “first fundings,” or initial rounds of professional venture investment (those most closely associated with starting-up).
This analysis demonstrates that while a handful of well-known cities continue to dominate the landscape of early-stage venture-backed entrepreneurship, a non-trivial amount of catch-up by other cities has occurred.
The chart below shows the number of first funding rounds by venture capitalists, and the total dollars invested. It confirms the fairly well known fact that early-stage venture capital deals are booming — the number of first fundings increased 150% between 2009 and 2012, before plateauing in 2013 and reverting some by 2014.
Nominal dollars invested increased less quickly than did the number of deals, as companies required smaller investments to get off the ground. The average deal size trended down each year from 2009, until shooting back up again in 2014.
So, more companies are receiving initial funding from venture capitalists, but back to the question at hand: how is this boom distributed geographically?
The next chart shows the share of U.S. metropolitan areas by the number of first fundings received annually in 2009 versus in 2014. The data show a sharp increase in the share of cities that receive at least some first-round venture capital. Two-thirds of the metro areas received no first-round venture deals in 2009. Five years later, that figure fell to slightly more than half.
Furthermore, the share of metropolitan areas receiving first fundings increased for each of the deal count categories. Not only are a substantial number of metros going from zero early-stage deals to one deal, but a fair number are expanding from one deal to a few, and from a few to many.
Despite this progress, venture capital remains highly concentrated in a handful of metropolitan areas, and early stage deals are no exception. Even in 2014, the vast majority of cities – 83% – received five or fewer initial VC fundings. Because of that, a closer look at the very top of the distribution is necessary.
The chart below plots the share of first funding deals and dollars that go to the top 5% of metropolitan areas for such venture deals. It is clear that there is a tremendous amount of venture capital activity in just a small number of cities. About seven of every ten early-stage deals, and more than five of every six first-round dollars is goes to the top 5% of cities.
There is also some divergence between the share of first funding deals and dollars over this five-year period. Though subtle, there is a clear decrease in first-round deals going to the top 5% of metros over time, while simultaneously there is an increase in the share of investment dollars going to the very top of the distribution — particularly in the last two years.
This suggests that early-stage deals are larger in the leading venture capital cities, and raises the question: why are average deal sizes in the major venture capital cities getting so much larger since 2012? I don’t have the answer, but it does warrant further exploration.
To recap, the data tell a pretty clear story that seems to confirm the “growth-focused startups are spreading throughout the country geographically” narrative — venture capital first fundings are reaching more regions throughout the United States, and those that previously received at least some venture capital appear to be getting more early-stage companies funded.
While the substantial majority of first funding venture capital continues to go to a small number of metropolitan areas — even truer when measured by the amount of capital invested — the bottom of the pyramid is broadening and a number of cities are getting in on the action.
These cities will not rival Silicon Valley or even New York or Boston any time soon. Still, this is a welcomed development in my view. The presence of businesses in a region that achieve very high growth can broadly boost income and employment opportunities, not just for those directly involved, but for all participants in the local economy.