Progress bar
Insight

Venture Capital beyond Silicon Valley

Insight 11 July 2022

Venture Capital beyond Silicon Valley

Regional VC hubs in smaller cities are gaining momentum

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:

  • Denver, Co.: This city is one of the fastest-growing venture markets in the country. It’s located in a state that ranks seventh in the nation for total amount of VC deals, with more than 500 new investments each year and $4.3 billion in capital deployed. The Denver-Boulder area ranks as a leading start-up community, with VC investments skyrocketing in recent years along with start-up support services such as tech-focused law firms, according to a recent WSJ article. Denver’s tech success has also benefited from the entrepreneurial support of local politicians, as well as local university tech incubators. Investors recognise the region’s potential— in 2021, the amount of capital coming into Denver exceeded $1 billion. In addition, several new unicorns emerged in the state in 2021, including Sondermind, DispatchHealth, JumpCloud, and Hotel Engine.
  • Tampa, FL.: Thanks to industry leaders CompTIA and SmartAsset, this city is gaining prominence as a national tech hub. Tampa thrives with a growing ecosystem of shared workspaces, incubators and networking opportunities where tech entrepreneurs can connect with investors. Tampa Bay companies raised roughly $354 million in 2021 across 59 deals, according to Pitchbook. That’s a significant jump from the previous year, which brought in $258 million across 60 deals. Several tech firms in the Tampa Bay Area have recently reached $1 billion valuations, including security awareness training firm KnowBe4, SaaS security platform ReliaQuest, and blockchain company Pocket Network.
  • Dallas, TX: This city is the fourth largest venture capital market in the U.S. and is located in a state that draws plenty of investor attention. In 2021, Texas startups attracted more than $10 billion in venture capital, up 123% from $4.4 billion in 2020. Some of the largest VC firms include Capital Creek Partners, Seed Round Capital, and Silverton Partners. In 2018, Silverton led seed financing for Billie, a direct-to-consumer brand providing high-quality shaving and body care products for women. Silverton was the company’s first institutional investor— and that deal paid off in 2021 when Billie was acquired by consumer products company Edgewell for $310 million in an all-cash transaction.

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.

How Sanne can help

We provide institutional quality solutions that investors have grown to rely upon while delivering a boutique approach. By outsourcing fund administration to us, private equity fund managers benefit from reduced costs and risk, increased efficiency and optimised operations.

Our team of private equity experts can provide you with full coverage of your private equity fund accounting, investor servicing and regulatory reporting requirements. Contact us to learn more about Sanne’s private equity services.

For additional information, or to discuss any of the topics highlighted above, please get in touch with David Fowler or Stacey Relton directly.

Let's talk...

Private Equity
Background image
Stacey J. Relton Head of North America - Dallas
Card link - Go to a specific page
Background image
David Fowler Global Co-Head of Product - Private Equity - United Kingdom
Card link - Go to a specific page
Background image
Maria Von Horvath Managing Director - Dallas
Card link - Go to a specific page
Swiper Scrollbar

Other insights from Stacey J. Relton

Image
Insight 8 September 2022
Connect Issue 32 - North America Edition
Card link - Go to a specific page
Image
Insight 31 August 2022
Emerging US tech hubs take off: PEI keynote interview
Card link - Go to a specific page
Image
News 11 July 2022
Sanne shortlisted in two categories at the HFM US Services Awards 2022
Card link - Go to a specific page