Do San Francisco Bay Area Startups Still Outperform?
We’ve seen that the fraction of startups formed in the San Francisco Bay Area, relative to the rest of the United States, was essentially unchanged through the onset of the pandemic. Despite the work-from-anywhere reality forced upon us by the pandemic, per capita startup formation in the San Francisco Bay Area remains at roughly 10x the rate of the rest of the USA. But is it still the best place in the world to start a startup? Now that it has been two and a half years since the onset of the pandemic, we have useful data to respond to this question.
What is “Best”?
As a seed stage venture investor, my definition of “best place to start a startup” is tied to financial outcomes. A prospective startup founder might have a very different, and completely rational, basis for what is “best,” around lifestyle factors. But here I will only look at investment returns considerations. One way to do the financial outcomes analysis is to wait until cash-on-cash results are available, but average time to liquidity for seed stage investments is running about eight years (with the very best outcomes often taking longer), so that approach requires waiting a long time for the data and unhelpfully tells you about the seed stage world eight years ago. Those are very material drawbacks.
A useful proxy for success is the binary test of whether or not a Series A financing was announced within a set period of time after the Seed financing (throughout this post, I use the same definitions as here). Since a Series A round is nearly a prerequisite for an eventual large successful outcome, and it generally happens within 18 months of the Seed financing, it is an effective interim measure of success. We can create a related binary success metric by observing that the top tier Series A venture firms have markedly better financial outcomes than the rest of the venture industry. We could have a robust debate on the directionality of the causal link between top tier venture firms and superior financial results, but we only need to rely on the existence of a correlation, which I’ve never seen refuted by data. So, a Series A financing led by a top tier venture firm is another interesting interim success metric to evaluate through the pandemic transition.
The table below summarizes the data on startups for four populations: two geographies and two time periods. The two geographies are for companies headquartered in the San Francisco Bay Area and Rest of the United States; the two time periods are for companies that raised Seed funding in the four quarters before the onset of the COVID pandemic (defined as end of Q1 2020) and the four quarters after the pandemic onset. For the four populations, we have the initial Seed funded startup counts, the subset of those Seed funded companies that raised Series A within 18 months, and the subset of those Seed funded companies that raised Series A from a top tier venture firm within 18 months.
Observations
The table below combines data from the table above and illustrates the following observations.
(1) The startup financing boom after the onset of the pandemic is clearly evident. Total US (combination of both geographies considered here) Seed to Series A success rate climbed from 16% to 22%, and the Seed to top tier Series A success rate climbed from 2.2% to 4.2%. This will likely roll off as the current venture slow down works its way through this data.
(2) The San Francisco Bay Area demonstrates a significant advantage over the entire time period considered here. For the Seed to Series A success metric, the SF Bay Area had a 1.60x advantage, and for the Seed to top tier Series A success metrics, a 1.52x advantage.
(3) Addressing the main question posed in this post, the regional advantage — as measured by both of the success metrics we consider here — of the San Francisco Bay Area increased after the onset of the pandemic. The SF Bay Area’s Seed to Series A advantage increased by a factor of 1.19x and the Seed to top tier Series A advantage increased by a factor of 1.13x.
Data Trumps Opinions
Despite the anti-SF Bay Area punditry, the data shows that it became a better place to found a startup through the onset of the pandemic. There are of course many caveats to this sort of analysis. Statistical correlation is not destiny. Great companies can be formed anywhere, and there are some sectors that have particular geographic areas of excellence. And the underlying causal factors may be more banal than some pro-SF Bay Area pundits would like to admit: the average SF Bay Area Seed funding tends to be noticeably larger than elsewhere, making it easier to reach Series A; a large fraction of the top tier venture firms are based in the SF Bay Area, and some have a bias toward local investments.
The typical startup has become markedly more “virtual” through the pandemic. But, in the cursory checks I did, the reported headquarters location does seem to line up with the main founder’s geographic location. And, from the data above, startup headquarters location matters more than ever, despite companies being more virtual.
