Silicon Valley’s status as the world’s most powerful VC hub is under threat from home working, rising competitors and regulation. AltAssets’ Karin Wasteson explores why the San Francisco Bay is losing its shine, and where the new opportunities are for venture capital investors.
During the pandemic, tech workers – taking advantage of the work from home revolution – left California in large numbers. The median rent for a studio apartment in San Francisco fell 35% in November 2020 year-over-year, according to data from Realtor.com.
Subsequently, the number of companies relocating out of California to other US states in the first six months of 2021 equaled twice the rate seen in 2020, as shown in a report by the public policy think tank Fraser Institute.
“Migration from Silicon Valley has been happening for decades. I would say that the pandemic accelerated that development, because suddenly using the tech tools that we are using for virtual meetings today became an everyday reality,” said Vinit Nijhawan, managing director at MassVentures, a Massachusetts-based VC firm whose primary objective is regional economic development.
Nijhawan believes that there isn’t really any decentralisation in terms of where VC firms are located per se going on in the US though. “The reasons why people move has a lot to do with personal circumstances,” he noted.
“Certainly Silicon Valley is the centre of gravity for venture in the US and globally,” said Liam Donohue, who leads all healthcare investments focusing on early-stage companies at Boston-based VC firm .406 Ventures.
In fact, 63 percent of entrepreneurs and VCs still view Silicon Valley as the world’s most important hub for innovation, but only 45 percent expect that to still be the case in five years’ time, reflecting a shift to a more multifaceted ecosystem globally, according to the “Techstars 2023 State of Innovation Survey.”
“With today’s investors being able to source deal-flow worldwide and entrepreneurs able to build global businesses from anywhere, it is not surprising to us that we are seeing the potency of a single technology hub, such as Silicon Valley, recede,” said Maëlle Gavet, CEO of Techstars.
Meanwhile, Boston’s total venture capital investments hit $22 billion in 2021, meaning Massachusetts has recently become one of the top five startup states in the US.
Boston traditionally tended to make a lot of bets in telecom infrastructure back in the day, while Silicon Valley backed consumer internet.
“Boston kind of lost its way in the mid-2000s. Part of the reason we founded 406 ventures 18 years ago was to take advantage of the funding gap [in Boston], particularly in the early stage,” explained Donohue.
“In the past four or five years we’ve seen lots of activity in other parts of the country where there’s historically been very little venture. There is a lot more venture being done in other cities now, like Austin, Miami, Chicago and New York, which didn’t have much of a venture industry 25 years ago,” said Donohue.
He continued: “Covid accelerated it, but it has a lot to do with technology infrastructure, the fact that great entrepreneurship exists in other cities outside of Silicon Valley, with potentially more reasonable valuations, and less competition for labour, or talent.”
Texas is increasingly becoming a tech hub in its own right, with Austin being a “Silicon Hills” alternative. Attracted by low state taxes, and access to technology data centers and other favourable amenities, firms are increasingly looking at operating from there.
Companies including Uber, Airbnb, Yelp, Dell, and Oracle have already relocated to, or are opening new offices, in Austin.
Elon Musk chose to relocate to Texas in 2020, dryly citing that California had become the state of “over-regulation, over-litigation, over-taxation.”
“Austin, Texas, seems like an interesting place to be if you have more of a generalist approach. For Fintech or Adtech, New York is hard to beat,” added Donohue.
“What makes a hub is an overlay of talent base, business community and an industrial ecosystem,” said Whitney Haring-Smith, managing partner at Anzu Partners.
Anzu Partners has a few people on the ground in Silicon Valley, but not an actual office. The VC firm’s main offices are in Boston, Tampa, Washington DC and San Diego, as well as some remote employees in Chicago, Atlanta, and other cities.
“The more we invest in local regions the more we get to know those ecosystems and the opportunities there and that further grows our presence and understanding,” said Haring-Smith.
Focusing mainly on industrial and tech as an investor, Haring-Smith thinks that when it comes to healthcare, Minneapolis is strong for medical device, Boston is strong for enterprise healthcare, and Chicago is strong for manufacturing tech.
London-born serial entrepreneur Charmaine Hayden is a founding managing partner at Goodsoil VC, a firm that invests primarily in tech-enabled African startups.
The cross-continent investor has her own take on intersectional diversity, inclusion and decentralisation when it comes to early stage investing.
“When we think about diversity, it’s good to have a 360 degree perspective on issues that affect the globe, so we need to get input from all the people that may be affected and the best way to do that is to incorporate that person in the growth, opportunities and the talent pools,” she said.
Hayden says she’s definitely seeing a shift away from traditional centralised models of VC funding, or the way that people go about setting up a VC fund today.
“VC is no longer just Silicon Valley making investments prior to the still quite nascent and early stage European investment cycles. I recently met someone who just set up a VC fund in a remote suburb of Paris. Funds are being set up in other, non-traditional pockets of the world over the past decade or so.”
She continued: “There are also other key aspects, such as peer-to-peer, crowdfunding, more region-specific, or sector specific decentralisation, for example governments establishing local funds to support startups across different regions and sectors.”
Hayden is seeing a reversal in priorities: whereas investors previously would be sector agnostic and geography specific, the trend is shifting towards being the other way around.
“I think we will increasingly see the rise of decentralisation when it comes to venture capital. People have become more agnostic in their geography, the way that VC firms are set up globally and how they deploy capital.”
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