Good news! Funding is by far one of the biggest challenges for startups, but there’s an issue of supply and demand happening across the US. Beginning in 2009 with the Great Recession (when a lot of people were “forced” to finally start the venture they’d been dreaming of after being laid off), startups have popped up across the country.
According to big investors like Brad Feld and Steve Case, it’s a wise move to bet on startups outside of Silicon Valley these days. That’s good news for startups outside of the notable startup hub, because you’re going to need capital whether you’ve set up shop in Palo Alto or El Paso.
Ian Hathaway of the Harvard Business Review recently analyzed information on early stage ventures and startups that had a focus on high growth. Of course, this meant those who had secured venture capital funding.
By using 381 US metro areas and considering data from 2009 through 2014, then filtering it down to “first fundings” only, Hathaway found that, "yes," a few popular cities are still the startup leaders when it comes to venture-backing. However, there are a number of dark horses in the running.
The Early Worms
Across the country, Hathaway also found that early-stage venture capital funding is growing. In fact, the average growth spurt is 150 percent from 2009 to 2012 alone. That figure plateaued in 2013 and 2014. In the past two years, total early-stage investments have hovered between the six and eight billion mark, and it’s important to note that dollars invested increased at a slower pace than the total number of deals.
This is likely because more companies needed less money to actually get up and running. The average deal size in 2009 dipped down a bit in 2010-2013 before rising again last year.
Clearly, there are more companies getting more initial funding from venture capitalists. However, what does this mean from a geo-targeted perspective? Overall, there have been more cities receiving more funding since 2009.
However, even in major metro areas, there was a 75 percent increase in how many startups secured early-stage funding from 2009 to 2014. Even better, the types (categories) of ventures funded each received more funding in the past five years. There are now more metros and more types of ventures getting funding than ever before.
Busting the Silicon Valley Bubble
There is progress all around, but Hathaway still notes a huge disparity when you consider hubs like Silicon Valley. This is true in early-stage deals, too. In fact, 83 percent of cities secured five or less initial venture capital fundings.
The top five percent of cities are still getting over five of every six available first-round dollars. The good news is that, slowly but surely, there is still a decrease happening when it comes to first-round deals in the top five percent of cities (and given the other figures, these dollars are beginning to be dispersed in other, lesser known cities.)
According to Hathaway, “growth-focused startups are spreading throughout the country geographically,” but there are still some hurdles to address. There are still disparities. This doesn’t mean smaller cities will be ready to take on the New York's, or other large city opportunities, such as the Silicon Valley and Los Angeles - anytime soon, but these small cities are getting a bigger piece of the pie.
Plus, as an entrepreneur, remember that it also pays (literally) to focus on what a location can give you in terms of tax savings, cost of living perks, and access to niche markets and industries—not just how it ranks on the venture capital funding scale.