Where Is the Money in Venture Capital?

Silicon Valley still dominates, but venture capital investments happen all across the country. Yale SOM’s Olav Sorenson explains why the geography of VC is changing.

Histories of Silicon Valley usually begin in a Palo Alto garage in 1938, where Hewlett Packard was born. But the Silicon Valley of today probably owes more to the formation of Fairchild Semiconductor nearly twenty years later. Believed to be the first venture capital-backed company, it created the template that would turn the peninsula between San Francisco and San Jose into the world’s center for high technology.  The list of VC-funded companies to come out of Silicon Valley describes the recent history of technology: Intel, Apple, Sun Microsystems, Google, Facebook, and many more.

Today, the San Francisco Bay area still dominates venture capital, accounting for roughly 40% of investments in the U.S. But within that region, the pattern is changing; urban San Francisco now outperforms suburban Silicon Valley. And over the last couple of decades, other urban hotspots have emerged. New York City and the Boston area, two relative newcomers, now claim 20% of venture capital investments.

Olav Sorenson, Frederick Frank ’54 and Mary C. Tanner Professor of Management at Yale SOM, credits the rise of New York and Boston to the fact that each area now possesses the three necessary factors for robust venture capital: an anchor university, a community of venture capitalists, and a startup culture. Silicon Valley has long had all three. New York and Boston have historically had the universities and the money, but they lacked the right culture to inspire a lot of startups. When that changed, Sorenson said, venture capital took off. “It’s very hard to have a thriving community if you don’t have every one of” these factors, he said.

Because venture capital flourishes within a community of investors, academics, and entrepreneurs, it has remained mostly confined to centralized hubs, even as those hubs pop up across the country. Just 28 of the 3,140 U.S. counties account for 80% of VC investments made over the last five years. More than $50 billion of that investment occurred in the Bay Area, while New York and the Boston area saw $11.3 billion and $12.7 billion in investments. But smaller circles of investors exist all over, funding local ventures. Over the same period, New Haven County saw $586 million in investments; Boulder County, Colorado, had more than $1 billion; and the Research Triangle of North Carolina had more than $1.3 billion. For Sorenson, the robustness of these smaller hubs owes a lot to the fact that most venture capitalists invest chiefly where they live. “Social networks play a really important role at the early stages of a business,” he said. “Venture capitalists typically only invest in businesses that are close to their offices.”

One innovation that is starting to change the equation is crowdfunding. While the total investment coming from crowdfunding sites is tiny compared to venture capital, those sites offer entrepreneurs who don’t live near established centers a chance at some funding. “It’s a small piece of the puzzle right now,” Sorenson said. “But if you look at some of the successful campaigns on Kickstarter and Idiegogo, they’ve been coming out of places like Salt Lake City, Utah, and Boise, Idaho—places that do have engineers and some talent but do not have local venture capital communities.”

Frederick Frank '54 and Mary C. Tanner Professor of Management