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California's Venture Capital Appeal Keeps Growing

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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When venture capitalists invest, they tend to do it in California. Of the $140 billion disbursed by VCs in the U.S. during the past three years, $78.4 billion went to the Golden State, with the vast majority of that going to Silicon Valley (including San Francisco). To be precise, 47 percent of all U.S. VC investment from 2013 through 2015 went to the Bay area.

These numbers are gleaned from the latest quarterly MoneyTree Report released Friday by PricewaterhouseCoopers and the National Venture Capital Association. Here’s how California stacked up against the next 14 states.

The future is already here, novelist William Gibson has been saying for decades, it just isn’t very evenly distributed. Venture capital is a bet on the future, and wow it sure isn’t evenly distributed. In fact, California’s outsized share has been growing over the past two decades.

This would seem to be evidence of what economists call agglomeration economies, “the benefits that come when firms and people locate near one another together in cities and industrial clusters.” The Bay area has built on a computer boom starting in the late 1960s to become the global center of the company-starting industry, branching out into new sectors such as media, lodging and transportation. Despite endless traffic congestion, dizzying real estate prices and high labor costs, the investments keep coming.

It is true that venture-capital investments aren’t always great indicators of future growth. There was that weird thing the VCs did in 1999 and 2000, for example:

The VC boom of the past three years has been the biggest since the dot-com era, but it’s still nowhere near that level of craziness. Perhaps the VC industry has learned some things, and its assessments of companies’ prospects have become more reliable.

If so, venture capitalists’ choices may also say something useful about the relative economic prospects of the states where they put their money. It isn’t any kind of perfect correlation. The lofty real estate prices and high wages of the Bay area surely push a lot of the employment created by startups there out of the region, for example.

Still, it’s better to get more venture capital than less. The top 15 states for venture capital since 2013 have a lot of overlap with the top 15 in population, but the exceptions are worth noting: Colorado, Maryland and Utah make the VC list even though they’re not among the 15 most populous states; Ohio, Michigan and Arizona don’t make the VC list even though they are among the most populous. Utah is the biggest outlier -- it’s only the 33rd most populous state, but it comes in 10th for VC investment.

It is also instructive to look at trends over time in VC flows. Here are the next five states after California in 2013-2105 VC investment, and their share of overall U.S. VC investment since 1995.

The most dramatic story here is New York, which has emerged from the pack since 2010 to become a legitimate challenger for Massachusetts as the No. 2 state for VC investment. From 2013 through 2015 it even edged Massachusetts out by $77 million. Meanwhile, Texas has lost significant ground since the late 1990s and early 2000s.

Venture capital investment in New York state is concentrated in and around New York City. Massachusetts investment is almost all in metropolitan Boston. Together, the San Francisco Bay area, metropolitan New York (which includes parts of Connecticut, New Jersey and Pennsylvania ) and the Boston area (which includes parts of New Hampshire and Rhode Island) appear to account for more than two-thirds of VC investment in the U.S. Add in the Los Angeles area, and it’s close to three-quarters.

Outside the U.S., the only VC cluster that rivals these top four at the moment is Beijing, which leaped into second place worldwide (after the Bay area) in 2014 and appears to have gained more ground in 2015. Beijing’s rapid rise shows that it is possible to break into the ranks of top VC magnets, but those ranks remain small. Economic activity and innovation, urban scholar Richard Florida wrote in the Atlantic magazine a decade ago in opposition to the then-regnant meme that the world was flat, is growing increasingly spiky -- concentrated in a limited number of vibrant urban clusters. It sure looks that way in the venture capital numbers.

  1. Yes, five northeastern Pennsylvania counties are considered part of the New York-Newark, NY-NJ-CT-PA Combined Statistical Area.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net