Venture capital is the fuel that powers America’s innovation economy, propelling high-tech, high-growth companies from Apple to Uber. Suburban corporate campuses and office parks have long been the world’s leading centers for venture capital investment. But that is changing, according to research I have been conducting with my colleague Karen King and Martin Prosperity Institute research team.
Using new, more fine-grained data from Thomson Reuters, recently we were able to identify venture capital investments in startup companies across the U.S. in far greater detail than in previous studies. Today, I summarize the key findings of our latest report, which tracks venture capital investment and startup activity across U.S. metros.
The upshot of our current research is this: Venture capital investment and startup activity in the United States are extremely concentrated, or spiky. The top ten metros alone account for more than three-quarters (77.6 percent) of all venture capital investment across the United States, while the top 20 account for more than 88 percent. Venture capital investment is found in just half of America’s 366 metro areas.
The geography of venture capital investment
The map below, by MPI’s Isabel Ritchie, plots the geography of venture capital investment across U.S. metros. The biggest dots are in the Bay Area and across the Bos-Wash (Boston-New York-Washington) Corridor. There are also relatively large clusters of venture capital investment in Los Angeles and Southern California, the Pacific Northwest, and Texas metros such as Austin, Dallas, and Houston. On the map, you can see how tightly clustered and concentrated venture capital investment is across the U.S.
The table below shows the 20 metros with the largest amounts of venture capital investment in startups. San Francisco tops the list with $8.5 billion in venture capital investment, or roughly a quarter of the national total. This is almost twice as much as Silicon Valley—centered in the San Jose metro—with $4.9 billion, or 14.5 percent of the total. New York takes third place with $3.3 billion, or 10 percent, edging out the Boston-Cambridge metro with $3.2 billion, or 9.5 percent. L.A. and D.C. both attract more than a billion dollars in venture capital investment, while San Diego, Seattle, Dallas, Chicago, and Atlanta each attract more than $500 million. Philadelphia, Austin, Denver, Miami, Minneapolis-St. Paul, Raleigh-Durham in the North Carolina Research Triangle, Houston, Santa Barbara, and Baltimore round out the top 20 metros.
|Metro||Venture Capital Investment (in millions)||Share of U.S. Total|
|San Francisco-Oakland-Hayward, CA||$8,468||25.26%|
|San Jose-Sunnyvale-Santa Clara, CA||$4,865||14.51%|
|New York-Newark-Jersey City, NY-NJ-PA||$3,335||9.95%|
|Los Angeles-Long Beach-Santa Ana, CA Met||$1,695||5.06%|
|San Diego-Carlsbad, CA||$944||2.82%|
|Dallas-Fort Worth-Arlington, TX||$734||2.19%|
|Atlanta-Sandy Springs-Roswell, GA||$514||1.53%|
|Austin-Round Rock, TX||$475||1.42%|
|Miami-Fort Lauderdale-West Palm Beach, FL||$329||0.98%|
|Minneapolis-St. Paul-Bloomington, MN-WI||$309||0.92%|
|Houston-The Woodlands-Sugar Land, TX||$251||0.75%|
|Santa Barbara-Santa Maria-Goleta, CA||$250||0.75%|
Venture capital is even more concentrated by mega-region, or clusters of metros such as the Bos-Wash Corridor. Just three mega-regions account for more than three quarters of venture capital investment across the U.S.—the San Francisco Bay Area, which includes San Francisco, San Jose, and several smaller metros, accounts for over 40 percent (40.2 percent); the Bos-Wash Corridor takes in more than a quarter (27.8 percent); and Southern California—spanning L.A., San Diego, Santa Barbara, and Oxnard—accounts for almost ten percent (8.8 percent).
Controlling for metro size
Of course, it stands to reason that large places would attract more venture capital investment and generate more high-tech startups simply because of their bigger populations and larger economies. To control for this, we tracked venture capital investment on a per capita basis. The map below charts the geography of venture capital investment per person across U.S. metros. There are still very big dots in the Bay Area and along the Bos-Wash Corridor, but we can now see that a number of smaller metros across the nation perform relatively well.
The table below lists the top 20 metros for venture capital investment on a per capita basis. San Francisco and Silicon Valley again top the list, this time in reverse order. Now Silicon Valley (San Jose) bests San Francisco with $2,534* in venture capital investment per capita compared to San Francisco’s $1,875*. Boston-Cambridge secures third place ($683), and Santa Barbara takes fourth ($574).* New York falls from third to 19th*. Established tech hubs such as Austin, San Diego, Seattle, and Durham-Chapel Hill also make the list.
Still, a number of smaller metros move up considerably. And not just noted ones such as Boulder, Colorado, with its significant startup cluster surrounding the University of Colorado. Instead, metros like Oak Harbor, Washington; Grand Forks, North Dakota (home of the University of North Dakota); Culpeper, Virginia outside of Washington D.C.; Fayetteville, Arkansas; and Worcester, Massachusetts, along the Route 128 Corridor, secure top spots.
So while venture capital investment is clearly clustered and spiky, it’s also true that smaller places—especially those surrounding research universities—can generate significant startup activity and attract considerable venture capital investment for their size. That said, it’s important to note that because this detailed data is for one year only, some of these places may have seen a single investment drive their high per capita amounts.
|Metro||Venture Capital Investment per Capita*|
|San Jose-Sunnyvale-Santa Clara, CA||$2,534|
|San Francisco-Oakland-Hayward, CA||$1,875|
|Santa Barbara-Santa Maria-Goleta, CA||$574|
|Oak Harbor, WA||$340|
|San Diego-Carlsbad, CA||$294|
|Austin-Round Rock, TX||$252|
|Grand Forks, ND-MN||$239|
|Durham-Chapel Hill, NC||$218|
|New York-Newark-Jersey City, NY-NJ-PA||$167|
|Santa Cruz-Watsonville, CA*||$167*|
Investment in dense, diverse, talented metros
So what factors shape the geography of venture capital investment? To get at this, we ran a correlation analysis of the economic, demographic, and social factors associated with these investments across metros. (As usual, I note that correlation does not equal causation and points simply to associations between two variables.)
Technology and talent
Venture capitalists have long invested in cutting-edge technology, so it comes as no surprise that venture capital investment is concentrated in the most innovative, high-tech metros. There are significant positive correlations between venture capital investment and both innovation, measured by patents (0.56), and high-tech industry (0.66).
Venture capital tends to follow talent as well. We find considerable positive correlations between venture capital investment and both the share of adults who are college grads (0.56) and the share of workers who are members of the creative class—spanning science and tech, business and management, and arts and media (0.53).
Jobs and education
The findings get more interesting when we look at the associations between venture capital investment and specific types of occupations. As you’d expect, venture capital investment is positively associated with concentrations of science and technology workers (0.47). We also find an even stronger association between venture capital investment and business and management occupations (0.54).
I have long pointed to a connection between high-tech innovation and places with cutting edge artistic and music scenes. And yet some critics have countered that art, music, and cultural creativity have little to do with tech entrepreneurship. On this score, we find a positive correlation between venture capital investment and workers in arts, music, design, media, and entertainment occupations (0.44).
Mayors, urban leaders, and economic developers—especially in older Rustbelt cities—like to argue that investment in higher education and medical complexes (so-called “eds and meds”) have additional benefits beyond providing education and training and generating local jobs in the form of high-tech spinoff companies. But we find no statistically significant association between venture capital investment and the share of workers in eds and meds.
I have also long argued that venture capital investment, high-tech innovation, and startups are drawn to places that welcome diversity and therefore attract a broader base of talent. A considerable share of America’s high-tech startups, after all, are founded by immigrants. In fact, the Silicon Valley venture capitalist John Doerr famously said that we should “staple a green card to the diploma” of foreign-born students who graduate from our top engineering programs. Indeed, our analysis finds a positive correlation between venture capital investment and the share of adults who are foreign-born (0.31), and an even stronger association between this investment and the gay and lesbian share of the population (0.41), an indicator of the overall social openness and tolerance of an area.
Even though significant clusters of venture capital investment can be found in smaller college towns, the preponderance of it flows to large, dense cities and metros. There are significant positive correlations between venture capital investment and both the population size (0.62) and density (0.53) of metros. Venture capital investment is also positively associated with the share of commuters who use public transportation (0.42), a proxy for density, and negatively correlated with the share of commuters who drive to work alone (-0.30), an indicator of urban sprawl.
Housing and wages
There is growing concern, especially in San Francisco, that tech workers, startups, and venture capital investment are key contributors to rising housing prices, gentrification, and growing inequality. Protests have erupted over the private buses that shuttle tech workers from San Francisco to the corporate campuses of Silicon Valley. Our evidence here is mixed. We find that venture capital investment is significantly correlated with higher housing costs (0.52). It is also correlated with both wage inequality (0.49) and economic segregation (0.42). These two factors are driven by the large gap between highly-paid knowledge and creative class workers—who are concentrated in these places—and much lower-paid service workers, along with a declining share of blue-collar workers. Venture capital investment is in fact negatively associated with the share of workers in blue collar jobs (-.31).
But we find a more modest association between venture capital investment and the share of income devoted to housing (0.25) and overall income inequality, as measured by the Gini coefficient (0.12). Part of the reason is that venture capital is associated with more affluent metros with higher concentrations of college grads and knowledge workers, who drive up housing prices and contribute to inequality. Venture capital investment is in fact positively associated with three key indicators of more affluent metros: average wages levels (0.57), per capita income (0.51), and economic output per capita (0.42).
Marrying innovation and equality
My previous research has found that housing burdens in tech and knowledge hubs like the Bay Area, Boston-Cambridge, Seattle, and others fall heaviest on the less advantaged working and service classes. While knowledge workers and members of the creative class make more than enough to cover the costs of housing in these places, service and blue-collar workers are falling further and further behind.
So long as America’s economy continues to be driven by knowledge, talent, and innovation, we can expect venture capital to concentrate in a select few metros with the size, density, openness, and diversity to support it. Unfortunately, this contributes to the growing economic gaps both between and within our cities and metros.
Still, it makes little sense to seek equity by undermining the innovative dynamic of venture capital investment and high-tech startups, which contribute to productivity and generate jobs and employment. The much better path is to use the proceeds from innovation and economic growth to upgrade service jobs and provide more affordable housing, while increasing the minimum wage in these metros to 50 or 60 percent of the median wage. It’s time for our nation and its cities to focus on lifting up the bottom of the workforce and population, before populist efforts to cut off the innovative top gain more traction.
*CORRECTION: This post has been updated to reflect corrections to the MPI report, which listed per capita sums in millions instead of hundreds, and misplaced the decimal point for L.A.'s per capita investment. The report's conclusions remain the same.