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San Francisco has been the king of early stage venture capital financing and tech IPOs in recent years. Specifically, from 2010 to 2020, the city saw its startups secure a little over $31 billion in early stage venture capital funding (meaning funding rounds that are $15 million or less) and experienced multiple tech IPOs, including Slack, Pinterest and Cloudflare.
Those tech IPOs were accompanied by higher real estate prices in San Francisco. Before major upcoming IPOs, homeowners in the city held off on listing their properties so they could maximize their chances of selling to new millionaires.
San Francisco is a prime example of how early stage funding is a strong indicator of where future tech IPOs are likely to occur and how future tech IPOs are a good indicator of a city’s future real estate price growth.
Think about it with this analogy—consider each early stage funding round as a lottery ticket. While some early stage funding rounds don’t pan out to IPOs and exits, some do. The more early stage funding rounds (“lottery tickets”) exist in a city, the more likely that there will be more “winner” startups there ten years down the line.
And while many investors, executives and companies have recently left San Francisco, the city won’t be overtaken as the tech capital of the nation any time soon, if ever.
What The Data Tells Us
As a realtor driven by big data, I regularly collect and analyze this type of information. For my most recent analysis, I dove into the numbers behind early stage venture capital funding between 2010 and 2020 in the United States.
First, let’s zoom out and look at the aggregate amount of early stage funding raised by startups between 2010 and 2020 in each state. California was the clear winner with almost $99 billion, far eclipsing New York. Massachusetts came in third, and Texas in fourth.
Not surprisingly, the city-level data on early stage venture capital funding from 2010 to 2020 mirrors the state-level data. San Francisco was the leader, with New York City coming in a close second. Boston and Austin followed.
Digging deeper into the city-level data and looking at the number of early stage startups that raised money in different cities each year between 2010 and 2020, San Francisco and New York City still came out on top—New York City just barely edged out San Francisco in 2010, 2011 and 2018.
Why Silicon Valley And San Francisco Won’t Lose Their Tech Influence Anytime Soon
Moving into the 2020s, Silicon Valley and San Francisco will continue to remain influential tech hubs, with San Francisco remaining the nation’s tech capital. To better understand why, let’s look at the percentage change in early stage funding between 2010 and 2020 by city. The fastest-growing cities were Chicago, Los Angeles and Boston, but San Francisco still saw meaningful growth.
Interestingly, but not shockingly, San Jose, the capital of Silicon Valley, lost a significant amount of momentum. Young founders have historically preferred San Francisco over San Jose because San Francisco has more career and nightlife options. However, as of late, San Jose has seen an influx of several solid startups being founded there, such as Zoom. I predict that San Jose will gain traction in the 2020s, largely driven by Google’s development plans near the SAP Center, which will push more talent toward the city.
Silicon Valley and San Francisco didn’t become the nation’s main tech hubs overnight and won’t stop being the nation’s main tech hubs overnight. When we look at the city-level data from 2010 to 2020, we see that it takes quite a long time for early stage funding to grow in any city.
While Austin and other emerging cities are attracting tech companies and talent, it will take quite some time for them to vie for the spot of the nation’s tech capital. In particular, San Francisco has a few things going for it that will continue to put it on top.
First, there’s a powerful local tech ecosystem in San Francisco and the surrounding area. Many of those startup founders are second-time founders, older or both. They already own property and have a vast professional network. They’re anchored to the Bay Area and don’t have the resources or desire to relocate to another part of the country to start a company. Think about it—if you’re a founder, would you rather stay in the Bay Area and hire people you worked with at other tech companies to become your first several employees, or move to another state and try to hire strangers?
Additionally, it’s easier to get funding when you’re physically closer to the people who can give it to you. The venture capital hub for software businesses is on Sand Hill Road. Yes, all venture capital meetings and dealings are currently happening on Zoom. And some venture capitalists, like Palantir’s Joe Lonsdale, have even left Silicon Valley. However, most venture capitalists have remained on Sand Hill Road and won’t be relocating.
Hasn’t Zoom Changed Everything?
If investors remain near San Francisco, so will founders. Naturally, many employees will, too, despite the popularity of remote work.
Some departments of tech companies, like marketing and recruiting, don’t need to interact with the development and product teams as much. They can work from anywhere and continue to advance professionally. Entry-level employees on development and product teams at most tech companies can also work from anywhere and still make professional strides. But for employees in middle management on the development and product teams at middle-to-large startups like Twitter, it’ll be much harder to move up to upper management while working remotely. For those roles, getting face-to-face time with superiors is key to getting promotions.
Additionally, according to an IBM Institute for Business Value survey, fewer Americans want to work from home. In August, only 50% indicated that they wanted to primarily work from home—a 15% drop from July.
And what’s more, large companies have already started to express that they want workers to return to the office. Most notably, Google CEO Sundar Pichai recently made it clear that he supports a hybrid model that would have employees spend part of their work weeks at the office. Back in September, Netflix CEO Reed Hastings told the Wall Street Journal that he thinks not being able to “get together in person” is a “pure negative.”
Emerging Tech Hubs
Despite the prevalence of Zoom calls and remote work, early stage venture capital funding in 2020 still favored San Francisco. The investments in startups in San Francisco decreased from 2019 to 2020, but by far, the city remained the early stage funding capital of the US.
Other cities, however, are definitely on the path to becoming tech hubs. If I were to bet on which ones, I’d say Austin, Denver, Boston and Atlanta. All of those cities are home to or are close to good higher education institutions that produce the top talent that startups want to hire. They also have plenty of real estate space for offices.
All four cities already have robust tech startup scenes with unicorns, including RigUp (Austin), Ibotta (Denver), Flywire (Boston) and Kabbage (Atlanta).
Furthermore, large companies are already relocating their headquarters or opening their second headquarters in Austin and Denver. For instance, Oracle is moving to Austin, and Tesla is opening an HQ2 there (other parts of Texas are becoming the new homes to major corporate headquarters, too, namely Charles Schwab and Hewlett Packard Enterprise); Palantir moved to Denver and most large tech companies already have a strong presence in Colorado.
The tech scenes in other cities will likely continue to grow as well. Los Angeles will be particularly interesting to observe over the years. Many of the issues that plague San Francisco also plague Los Angeles, such as rampant homelessness, high state taxes and a highly regulated environment for startups. Yet, Los Angeles has several things going for it that give it an edge over San Francisco, including entrepreneurs and creatives from a greater variety of fields, substantially cheaper property prices and arguably better nightlife.
Time will tell if any of them will become the nation’s new tech capital. For now, though, that distinction goes to San Francisco.
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