Startup Success Outside Silicon Valley: Data from Over 200 Exits in 17 Cities
There’s never been a better time to build a company outside the Bay Area
By David Frankel, Managing Partner & Joe Flaherty, Director of Content & Community
The Bay Area has been the best place to build a startup for the last two decades. Some experts are questioning if that’s still true, but it’s clearly not the only place an entrepreneur can create a transformative company.
However, outside of New York and LA, discussion about startup geographies quickly tends to degrade into civic boosterism. To help nudge the discourse onto more empirical footing, we wanted to quantify the various startup hubs using exit value as the key metric.
Specifically, we looked at the last ten years (1/01/2009 to 8/1/2019) of M&A and IPOs with a focus on software/ecommerce startups (so no biotech, life science or energy-related companies are included). The result is 242 exits clustered in 17 cities and countries.
We recognize that looking at exit data is, by definition, a lagging indicator, and a single major IPO in the coming months could change the rankings dramatically. Imperfect as they are, exits are the most concrete measurement tool at our disposal.
This post isn’t meant to be an endorsement for one region over another; nor is it intended to be an academic paper. The values of the public companies on this list have waxed and waned over the years. In the case of private transactions, we know that valuations reported in the media often lack nuance around earn-outs. At best, this data helps provide a rough sense of scale for various startup geographies, but it’s far from the last word.
This dataset doubtlessly contains errors and omissions, and though it’s imperfect, we think it does a good job of demonstrating the breadth of innovation. We’re thankful to Brad Feld, Bryce Roberts, Laurent Amouyal, Avi Eyal, Gaurav Jain, and Jesse Proudman for reviewing our data regarding the geographies they know best, but any errors accrue entirely to us. We’ve made an effort to account for the significant outcomes, but if we’ve missed something, please let us know.
A key caveat
We decided to exclude Asian tech companies in this overview, a decision which will surely strike many as shortsighted. India holds tremendous potential, but so far, its story is more about funding than exits. Japan’s tech industry tends to reward existing players rather than upstarts. China’s absence is harder to defend, as it’s currently home to four of the top 10 highest-grossing companies on the internet. Its omission is further complicated because Chinese companies like Tencent are major acquirers of Western companies, like Riot Games and Supercell. Despite the sheer number of unicorns it has produced, the Chinese domestic market is more difficult for many operators and investors to enter. It’s also a bit more challenging to accurately evaluate given the highly synergistic relationship between the state and its startups. Again, this piece is not meant to be an authoritative study. Our focus is selfishly, and parochially, on the hubs in which we and our peers are most likely to invest.
To be clear, Silicon Valley is unrivaled
There’s no doubt that the Bay Area is home to the most successful startups in the world. For this exercise, we stopped counting at 20 Bay Area companies which collectively are worth over a trillion dollars. The point wasn’t to enumerate San Francisco’s dominance down to the penny, just to establish that it is in a league of its own. Still, there’s probably never been a better time to start and build companies outside of it.
To put the Bay Area’s preeminence into perspective, Uber alone has produced more tech exit value than any city or country. Even removing Facebook, The Bay Area startup scene has created 10X as much value as its next-largest competitors. “Silicon Slopes” and “Silicon Beach” are cute branding exercises, but the underlying comparison is non-material.
That said, the half dozen largest US tech hubs outside of the Bay Area have produced exits worth a combined quarter-trillion-dollars. Broaden your view to the top 17 geographies, and there has been over $500B worth of tech exits in the last ten years.
Boston is big (And surprisingly strong in consumer tech)
The narrative surrounding Boston is that a combination of Yankee thrift and bad policy (like non-competes) has turned Boston into a backwater, which has been superseded by New York, LA, and even Boulder or Austin. This isn’t remotely close to being true. Outside of San Francisco, Boston has more unicorns than any other geography — and as a reminder, this tally does not include life science startups.
It’s also important to note that the stereotypical view of Boston’s tech scene, that it’s a haven for “hard tech,” is mostly mistaken. Aside from iRobot, Kiva, and if you include 3-D printers, Formlabs, and Desktop Metal, the Boston metro area actually has enjoyed more success in the consumer space. For instance, three of the five best exits in Boston during this period have been consumer businesses: Wayfair, TripAdvisor, and CarGurus.
LA is home to tech’s blockbusters
If Boston bats for average, LA hits for power and is the only non-SF geography to spawn multiple double-digit billion-dollar exits in the form of Snap and The TradeDesk. It’s also impressive in that half of its top 10 companies are hardware/vertical ecommerce players, demonstrating a depth of technical expertise not usually attributed to the media-focused region. Mark Suster’s knack for spotting talent has led to an enviable portfolio, but I don’t know if he’s made a smarter bet than going #LongLA.
New York is a hard tech center?!
Boston isn’t the only city suffering under misapplied stereotypes. The most successful startup in NYC over the last decade isn’t a direct to consumer brand; it’s MongoDB, a database company. While the Tri-state area can count Etsy and Jet as wins in ecommerce, their other top successes include Liveperson, a leader in commercial AI, and Flatiron Health, a drug-discovery tool. Peloton, Casper, and Roman may very well prove that NYC is the best place to build a consumer product startup, but at present, it’s also a place where serious tech is built.
Seattle suggests anchor companies are overrated
One of the folk beliefs about what makes for a good startup hub is the presence of influential anchor companies. The theory is that large companies serve as spawning grounds for founders, recruiting pools for startups, sources of exec talent during the scaling period, and acquirers, or employers of last resort if the new enterprise fails.
Seattle challenges the validity of this hypothesis. Microsoft and Amazon are two of the five largest tech companies, and in recent memory, each one has had a market cap of over a trillion dollars. Despite having this wealth of financial and human capital, the region has produced 20% less exit value than LA or Boston over the last decade.
“Startup Nation” lives up to its name
It takes a healthy dose of chutzpah to call your country “Startup Nation,” but the Israeli tech community is doing everything it can to make the claim a reality. With a population just shy of nine million people, their startup output surpasses those of Germany and France combined.
Like Boston, Israel is substantially undervalued in this particular data set due to our exclusion of life sciences, and other “deep tech” which would expand the tally for both geographies. That said, MobileEye and Waze demonstrate the country’s engineers have a penchant for consumer apps as well.
There’s magic in the Mountain West
Utah strikes some as a surprising tech hotspot, but really shouldn’t. The University of Utah was host to one of the first four nodes of the ARPANET, and the school graduated engineers who would go on to found and lead Pixar, Adobe, and Silicon Graphics. Combine that with Brigham Young University’s robust alumni network and it’s not terribly surprising to learn the state has produced over $20B worth of exits in the last ten years, in industries as diverse as education, makeup, mattresses, and consumer electronics.
Likewise, Colorado has well-developed a reputation as a tech hotbed, in large part due to Brad Feld’s advocacy on its behalf, but it’s eye-opening to see that the combined value of the two states’ tech exits rivals Seattle.
Nordics > Germany/England/France
Europe’s tech scene is fascinating. Sweden, a country of 11M, edges England, nearly doubles Deutschland, and quelle horreur, crushes France in terms of startup output. If combined with its Nordic neighbor Finland, Scandinavia is in contention with Boston and SoCal as the second-best performing startup hub overall.
What makes the Scandanavian startup scene especially impressive is that it’s building companies that compete and influence culture globally. Just think about how Spotify has changed the way music is delivered and Minecraft has shaped the minds of young engineers across the world. Compare that to Germany, whose most famous startup is arguably Rocket Internet, best known for cloning startups that are popular in the United States.
Great startups can be built anywhere
CB Insights recently published an infographic showing notable startups in all 50 states. Over the last few years, there have been billion-dollar tech exits in Raleigh, Bethesda, Indianapolis, Nashville, Phoenix, Columbus, and Wayne, Pennsylvania. There’s no reason to believe those companies couldn’t have continued to grow; Atlanta-based MailChimp has a valuation thought to be somewhere close to $10B; Electronic medical records leader Epic generates billions of dollars a year in revenue, and it’s based in Madison, Wisconsin; Raleigh-based Red Hat was just acquired for $33B.
It’s hard for investors to cover all these areas, but an entrepreneur can build something special almost anywhere. To be clear, it will be easier to build a world-class tech startup in an established hub. Recruiting, especially senior executives, is much harder in an unusual location, but dozens of examples show that it is possible.
Power laws & you
Critics of this piece will surely point out that our data is actually evidence of a power law that makes the case again for the Bay Area. They’ll note that Facebook’s market cap is roughly the same size as all the other US/EU exits combined. This is watertight logic if you’re a GP at a $1B fund and can’t survive without a steady stream of $10B+ exits.
The story is quite different for entrepreneurs, or even managers of $100M-$500M funds. Over the last decade, there have been over a hundred billion-dollar exits outside of the Bay Area. Each one of those companies can make its founders rich, return a fund for a VC, and lay the groundwork for new tech ecosystems. Put another way, nearly every month for the last ten years, a tech company has been acquired or gone public for over a billion-dollars — outside the Bay Area.
There are plenty of good reasons to choose to build a company in the Bay Area; Over half of our portfolio is based in Northern California. Still, entrepreneurs should decide where to establish their startup based on what’s best for their company, and for them personally. The decision of where to build a company will dictate the course of the entrepreneur’s life, and shouldn’t be dictated by the business model of their investor. Hopefully, this primer opens some eyes to the potential to succeed in places well beyond the borders of Palo Alto or the Presidio.
