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Silicon Valley's Big Move

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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It's not exactly news that startup activity has been migrating north from the office parks of Silicon Valley to the former factories and warehouses of San Francisco. But this, from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, is still pretty striking. The San Jose metropolitan area, where most of Silicon Valley is located, now ranks third among U.S. metro areas in venture capital investment.

I'll outsource for a moment to Richard Florida of the University of Toronto's Rotman School of Management, who called attention to this data Monday on Twitter:

1. San Francisco has more than THREE times the venture investment of Silicon Valley according to 2015 data. nvca.org/research/venture-investment/
2. Surprisingly Greater NY outpaces Silicon Valley with $7 billion compared to $6.2 billion. nvca.org/research/venture-investment/
3. Silicon Valley remains home to many large established high-tech companies, but startups appear to be migrating to urban centers.

The San Francisco-Silicon Valley divide isn't quite as clean as Florida makes it out to be. A few Silicon Valley cities -- most notably Menlo Park, birthplace of the Homebrew Computer Club, home of Facebook and headquarters of some of the region's (and the world's) most prominent venture capital firms -- are actually in the San Francisco metropolitan area.

Still, the shift that Florida describes is real. Of the 15 largest publicly traded tech and biotech companies in the Bay Area, 11 are based in the San Jose metro area and only one (Salesforce.com) in the city of San Francisco. But of the 15 most highly valued venture-funded "unicorns" (going by Fortune's latest list) in the Bay Area, just two are based in the San Jose area and 12 in San Francisco proper.

The last year that more VC money went to companies in the San Jose area than to companies in the San Francisco area was 2004. And over the past five years, what was a smallish gap in VC investment between the two areas has widened into a $15 billion chasm.

Now, one person's chasm could be another's bubble (and a third's egregiously mixed metaphor). The first-quarter 2016 MoneyTree data shows an 11 percent drop in VC investment nationwide compared with the same quarter last year -- and a 19 percent drop in the Bay Area -- which may signal the beginning of a big correction that will leave San Francisco with a lot of failed startups and empty office buildings. Venture capitalists have been known to get things wrong, en masse.

Then again, apart from the rise of San Francisco and New York, the regional VC rankings have remained quite stable over time -- implying that it's not all fads and fashion. The MoneyTree metro area rankings go back to 2000, and the same five areas have held the top five slots since then. New York, now the No. 2 area for venture investment, spent 2000 through 2010 in fourth place, behind Boston. Sixth place has gone to the Washington, D.C., area in 12 of those years, San Diego in three and Seattle in one -- and those three areas have never fallen out of the top 10.

On the whole, the metropolitan areas that get a lot of venture capital funding tend to do well economically. So do some metro areas that don't get much VC investment -- the twin Texan economic juggernauts of Dallas and Houston make exactly two appearances (Dallas, in 10th place in 2000 and 9th in 2005) on the top-10 list. VC investment isn't a perfect proxy for future economic success. But it is a bet on the future, and right now that bet is being directed toward some of the nation's most densely populated cities. Startup culture is increasingly for people who take the train or the bus -- or maybe a Lyft Line -- to work.

  1. It's from the spreadsheet listed at the very bottom of the page, titled "2015 Venture Investment by MSA."

  2. The San Francisco versus San Jose breakdown isn't available yet for the first quarter.

  3. I did a similar analysis in January of venture investment by state, which showed California's share growing over time and New York edging out Massachusetts for second place.

  4. No, I'm not going to attempt to quantify this. But the San Francisco, New York, San Jose and Boston areas have all been on an economic roll lately, and Los Angeles isn't doing too badly either.

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:
Zara Kessler at zkessler@bloomberg.net