Rise of the Startup City: The Changing Geography of the Venture Capital Financed Innovation

Source: Sage JournalsRichard FloridaCharlotta Mellander

Innovation and creativity have long been the province of cities and urban areas. However, during the 1970s, 1980s, and 1990s, innovation in everything from semiconductors, computing, and software to robotics and biotech came to be seen as largely something that happened in suburban outposts such as California’s Silicon Valley (home of Intel, Apple, Google, and Facebook), the Route 128 corridor outside Boston, Microsoft’s vast headquarters in suburban Seattle, and the clusters of high-tech enterprise in suburban Austin and the North Carolina Research Triangle. Researchers documented the postwar shift of population, business, and economic activity from the urban centers to the suburbs, the rise of so-called edge cities of industry and technology at the suburban periphery, and the clustering of high-technology enterprise and venture capital in Silicon Valley and other suburban “nerdistans.”1

The urban center was seen either as the proverbial “hole in the donut” that business was fleeing, or as a locus for artistic creativity; but certainly not as a center for leading-edge startups, venture capital investment, or startup activity. Richard Florida and Martin Kenney’s early studies of venture capital in the 1980s documented the clustering of venture capital financed startups in suburban Silicon Valley and the Route 128 areas in Boston and charted the flow of capital from urban New York and Chicago to these suburban technology clusters.2

Numerous studies have documented the “back-to-the-city” shift in population, which Alan Ehrenhalt dubs “the great inversion.3 More recently, we have seen an “urban shift” in startup activity in places such as New York, London, and the San Francisco Bay Area, with startup companies preferring denser urban areas over sprawling, car-oriented suburbs.4

However, there is an even bigger reason to expect a shift in venture capital and startup activity back to urban centers. Virtually, the entire modern literature on urban economics highlights the role of clustering, density, and diversity of the sort found in cities as key drivers of innovation.5Alfred Marshall long ago identified the basic clustering of economic activity referred to as “agglomeration” as the underlying source of innovation, entrepreneurship, and economic development.6 Jane Jacobs later famously outlined the role of cities in attracting and harnessing a diverse range of creative talent and spurring new innovative enterprises.7 More than any other social or economic organism, cities are incubators for new ideas, new innovations, and new enterprises.8

Economic geographers and urban economists have long noted the role of clusters, density, and diversity in spurring innovation.9 Research on clusters of innovation, startups, high-technology industries, and venture capital have found that these districts are characterized by dense networks that connect university research to commercial technology, entrepreneurial activity, and venture funding—a social structure of innovation and entrepreneurship that both grows up in and is deeply embedded in particular places.10 This is why it is so hard to replicate the preconditions for successful innovation and entrepreneurial regions.11

Much of the literature on the urbanization of high-tech startups has been anecdotal or descriptive in character, often focusing on a single city or metro. Our research seeks to fill that gap by providing an empirical examination of the emerging economic geography of venture capital investment. It summarizes our research on the geography of venture capital investment and startup activity at two geographic scales: across U.S. metros; and between U.S. urban centers and suburbs. To do so, we use unique data from Thomson Reuters, the National Venture Capital Association, and Dow Jones.12

Mapping Venture Capital and Startup Activity across the United States

Figure 1 charts the geography of venture capital investment across U.S. metro areas, using data provided by the National Venture Capital Association for the year 2012. While these data do not conform exactly to established metro definitions, we matched them to 134 U.S. metros.

Several patterns stand out. The first is just how dominant the San Francisco Bay Area is. It attracted more than $11 billion in venture investment in 2011, more than four in ten of all venture capital dollars invested that year. It is also suggestive of a shift in venture capital investment toward more urbanized areas. San Francisco itself actually tops Silicon Valley in venture investment, attracting almost $7 billion, nearly a quarter of the national total, compared with Silicon Valley, with $4 billion (see Figure 2).

Venture capital investment is also clustered along the Boston-New York-Washington corridor on the East Coast that ranks as the second major center for venture capital investment. The Greater Boston metro area here is the top center for venture capital investment, attracting more than $3 billion, but New York has emerged as a substantial center for venture capital as well, attracting more than $2 billion in venture investment. This is quite a contrast to the 1980s when studies identified little venture capital investment in New York, finding it to be an exporter of venture capital to Silicon Valley and the Route 128 tech hub outside Boston. Washington, D.C., is the tenth largest venture capital destination, with almost $500 million. Philadelphia is 11th with roughly $350 million in investments. Together, the corridor accounts for $6.2 billion in venture capital investment, 23% of the national total.

The broad Southern California region, from Los Angeles to San Diego and including Orange County in between, is the third major metropolitan center for venture capital investment. Los Angeles is ranked fifth in venture investment with $1.7 billion. San Diego is sixth with $1.1 billion, while Santa Barbara is 16th with roughly $250 million. Altogether, Southern California accounts for $3 billion in venture capital investment, roughly 11% of the national total.

Outside of these three regions, a relatively small number of metropolitan areas are centers of venture capital investment. These include Seattle, with $886 million; Austin, with $626 million; Chicago, with $547 million; Denver and nearby Boulder, with $264 million and $256 million, respectively; Atlanta ($262 million); Minneapolis-St. Paul ($256 million); and Phoenix ($214 million). In addition, there are 11 metros with more than $100 million in venture capital investment: Raleigh-Cary, Pittsburgh, Provo and Salt Lake City, Cleveland, Houston, Detroit, Baltimore, Dallas, Portland, and Santa Rosa.

Venture Capital and Startup Activity per Capita

Of course, larger metros are likely to have larger levels of investment simply by virtue of their size. To control for population size, we examine venture capital investment on a per capita basis (per 100,000 people). Figure 3 maps venture capital investment per 100,000 people, and Figure 4shows the top 20 metros on this metric.

Now the picture changes somewhat. At the very top, the Bay Area metros of San Jose and San Francisco continue to lead. Larger metros such as Boston, Seattle, San Diego, and even New York are also all among the top 20 regions in venture investment per capita. However, now smaller places, especially college towns, come into the picture. Indeed, the most striking findings of our per capita analysis of venture capital investment is the performance of college towns. These are not only those in larger metros such as Austin or Raleigh-Cary in the North Carolina Research Triangle. Smaller college towns such as Boulder; Ann Arbor; and Lawrence, Kansas, are strong performers when we consider venture capital investment on a per capita basis.

Read more here