April 03, 2020
Fundraising Startups

Median Startup Valuations Are Up to 32% Higher in the Pacific and Northeast Regions

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In our prior reports, we discussed why improving gender and ethnic diversity in startups (particularly in founding and executive teams) and venture capital firms (particularly around investing general partners) are important for the overall innovation ecosystem, as well as just making good business sense.

We wanted to go one step further to understand the impact that geography has on a startup’s team composition and their ability to raise funding from venture capital (VC) firms. This topic has become more relevant in recent years with the “Rise of the Rest,” where high-tech hubs have sprung up across the country.

We analyzed data from 90,000 venture-backed startups in the United States going back to 2000. These firms had a total of 400,000 employees, including founders, executives, employees, and members of the boards of directors.

Terminology

Key Takeaways

regions

Figure 1. The geographic segments used in our analysis.

VC Dollars Raised by Region

dollars

Figure 2. Venture Capital investment by region, 2001-2018.

What does the data say?

Why does it matter?

How Is Team Diversity Correlated with Region?

Regions2

Figure 3. Venture capital investment rounds, 2000 to 2018, segmented by ethnic and gender diversity of founding teams.

What does the data say?

Why does it matter?

These findings are consistent with other sources, including a recent McKinsey report that found companies with the most gender diverse executive teams were “21% more likely to outperform on profitability and 27% more likely to have superior value creation”.

The Case for Investing Outside of the Coasts

Percentage Difference Dollars Raised compared to Pacific and Northeast regions combined.


Percentage Difference Equity sold compared to Pacific and Northeast regions combined.


Figure 4. Regions outside of the Pacific and Northeast have larger discounts in median VC dollars raised compared to the resulting equity ownership.


What does the data say?

In order to more accurately represent this difference, we simulated a $1,000,000 equity investment in each region at their median ownership. The results are shown below in Figure 5.


region equity

Figure 5. Factoring in the lower valuations, a dollar of venture capital buys 1.5–2.5x as much equity in non-coastal regions when compared to the coast.


What does the data say?

Conclusion & Discussions

In this research report, we looked at venture capital rounds across different U.S. regions from 2001 to 2018. Our findings are consistent with other reports. For instance, Martin Prosperity Institute found that “half of all venture capital in American goes to just two places: the San Francisco Bay Area and New York” metro areas.

A recent Citylab report found that four cities—San Francisco, San Jose, New York City, and Boston—accounted for 72% of all 2017 VC investments. Moreover, San Francisco, New York, and Boston were at the top of the list for the largest increase in VC funding from 2006 to 2017. What this means is that these particular regions—and specific cities in those regions—are growing their lead over the rest of the country. 

This imbalance impacts the entire startup ecosystem. We found that All-Male Founding Teams in the Pacific region alone closed 38,000 deals, that is twice the number closed by Female Founding Teams (19,000) in all regions combined.

Similarly, All-White Founding Teams in the Pacific region alone closed 58,000 VC rounds, more than 7 times all Ethnically Diverse Founding Teams (8,000) in all regions combined.

There is startup talent to be found throughout this country, but the data shows that we are not tapping into select areas as well as we could.

The status quo is problematic because the data shows that venture investors are making highly correlated bets in particular regions, industries, and teams. As a result, we see innovation in one narrow part of the startup ecosystem, while other areas remain underinvested and undervalued.

We also find that, all else equal, investors willing to make an investment in non-coastal regions receive larger equity ownership, thus requiring a lower bar at exit to achieve a strong realized multiple (RM).

The difference between the Southeast and coasts, for the same check size, is 2.5x more equity ownership. Assuming a similar exit, this translates into millions of dollars.

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Methodology

Disclaimer for data: “Crunchbase’s dataset is constantly expanding, but there are gaps. A company may not have all the founders and chiefs listed on its Crunchbase profile or have the complete details regarding the executive’s education listed in detail.”

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