The U.S. venture capital industry enjoyed a record-breaking year in 2021, with eye-popping numbers for deal-making, exit and fundraising value. That includes $329.9 billion invested across an estimated 17,054 deals and $774.1 billion in annual exit value created by VC-backed companies going public or being acquired.
Behind those industry numbers, a notable dynamic is developing around deal location. Increasingly, VC activity has expanded beyond Silicon Valley, prompting tech hubs to emerge in surprising places. A decade ago, cities such as Denver, Co., and Tampa, FL., lacked strong reputations as technology centers—but that’s changing as investors target deals in different regions. According to Pitchbook, more than 1,145 VC firms have been founded outside of the Bay Area, New York and Boston since 2011. Before we take a closer look at some of the cities leading this trend, let’s explore factors that have shaped it.
Investments have soared in cities not traditionally known as tech-deal hotspots, and several factors are fueling that shift. With VC dry powder at an all-time high, investors feel greater freedom to explore a wider range of opportunities. Attractive returns have boosted the participation of non-traditional investors in VC transactions, including mutual funds and sovereign wealth funds.
The pandemic also helped enable tech hubs to thrive throughout the country, as remote deal-making became the new normal for investors. In addition, many tech founders and workers sought quality-of-life improvements during the pandemic lockdown—which often meant moving away from Silicon Valley to more affordable cities. That’s reflected in a recent Brookings Institution report showing that smaller cities have seen steady growth in new tech jobs, while those job figures have fallen for traditional tech hubs. The changing investment numbers around smaller tech hubs also tell a compelling story. In 2011, less than $3 billion of Bay Area capital was invested outside the Bay Area, New York and Boston. Ten years later, that figure reached more than $13 billion.
In 2021, VC firms outside the three major hubs raised more than $21 billion. It marked a record year and a dramatic increase over fundraising activity a decade earlier when that number was about $3 billion. Although the number of funds launched decreased in recent years, the excess capital raised reflects growing confidence in the ecosystem.
Now that we’ve established a clearer picture of what’s driving this shift, let’s learn more about three cities at the forefront of this thriving group of smaller tech hubs:
Regional investors are showing increased interest in finding local companies with breakout potential in smaller cities. In addition, COVID-19 has created lasting changes to the way people choose where to live. The rise of remote work has convinced entrepreneurs and tech workers that the major tech hubs are no longer the default option. They don't have to choose between the work they love and a community they love. One emerging hub that’s benefited from this trend is Salt Lake City. Its tech status has grown significantly during the past decade, and as of 2021, capital levels were above $250 million. Another example is a city we mentioned earlier: Dallas. That city has seen a tremendous uptick in start-up activity over the past two years, reaching well above the $1 billion mark.
The pandemic has created more flexible thinking around the locations tech workers prefer, and VCs’ abundant dry powder has encouraged deal hunting beyond the traditional tech hotspots. These factors combined have helped fuel the rise of smaller tech hubs with enormous potential. Hubs outside of the Bay Area, New York and Boston should not be ignored because there is tremendous talent in regional cities that investors can leverage to generate healthy returns.
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