- It's become ever more expensive for venture capitalists to invest in California-based startups.
- So VC are increasingly investing in startups based in states other than California.
- Colorado, Pennsylvania, and Florida all have emerging startup scenes and could benefit from the trend.
When searching for startups to invest in, venture capitalists are increasingly casting their eyes outside of California — a trend that could benefit some states that were previously far from tech's center.
The number of funding deals outside of Silicon Valley's home state has been on the rise for years, noted PitchBook in its 2018 VC Outlook. That number is likely to increase in 2018, spreading the wealth to more areas of the country.
"With it becoming more expensive than ever to finance startups in the region, 2017 saw a growing proportion of deals and capital flow to developing VC hubs in mid-America," wrote analyst Joelle Sostheim in the report, PitchBook released last week. She continued: "Geographically diverse investments tend to be less expensive for VCs while still offering competitive performance."
Among the states or areas that stand to benefit from more investments are those with established or developing tech scenes, including New York; Massachusetts; Washington, D.C.; Texas; and Illinois, according to the report. Other states that could see an investment boom are those with emerging startup sectors, including Colorado, Pennsylvania, and Florida. Those latter states could be boosted by their educational systems, their expertise in particular tech sectors, and their "growing track record" of startup successes, PitchBook reported.
As the number of investments in other states has grown, the number of California deals has shrunk by 16% in the last two years, according to the report.
But it's not guaranteed the trend will continue. Other states' startup scenes are less well developed than that in the Golden State, and that may limit how much money venture capitalists may be willing to put into them.
"Time is money, and many VCs may see sourcing investments from external hubs as not worth the cost," Sostheim said in the report. "It takes time for ecosystems to develop, and some may be too undercapitalized or underresourced to offer a substantial enough pipeline for investors to commit."