The 12 Best Places in America to Raise Money

The 12 Best Places in America to Raise Money

A new study from Pitchbook crunches 10 years of numbers to paint a clear picture of how access to venture capital is different across the country. This info is far from academic. For entrepreneurial Millennials, today America’s largest working generation, thinking about where to settle down often also includes thinking about where to launch a startup, someday. For city leaders, organic tech jobs are dependent on the startup economy. For founders intent on surviving the venture capital downturn, this report also offers great perspective on regional nuances in startup finance.

“We chose twelve MSAs (metropolitan statistical areas) for our report to give exposure to the lesser-known, up-and-coming regions where investor activity is picking up,” says senior analyst and report author Garrett James Black of Pitchbook. (Full disclosure: I run a venture capital firm in Atlanta.)

For those cities bringing up the rear, he encourages that improvement in ranking, “comes down to fostering a supportive ecosystem of local investment firms” and keeping an eye on other factors like cost of living.

The top cities for raising money.

1. San Francisco came in at number 1, with$117 billion in funds raised since 2006 and 9710 deals in the same time period.

2. San Jose, at $35.5 billion in venture funds raised since 2006.

Together, these two California cities are the juggernaut of startup finance. The last full year of data, 2015, showed 664 active venture funds in San Francisco alone. To compare it to the city last on the list, Atlanta, there were 28 active local funds last year. Looking at the difference in venture firm population, it puts it in perspective that Atlanta raised $1.15 billion since 2006, and San Francisco one hundred times more, $117 billion.

But despite the sheer scale differences between the first and last city in this venture ecosystem report, it’s not all roses in Silicon Valley. Black points out, “the Bay Area still holds the title in terms of sheer concentration of activity, but the interesting thing to note is the rate of growth elsewhere. Seattle, for example, saw overall number of venture rounds double between 2010 and 2015, while Philly saw its first-time financings double in the same timeframe.” In addition, the research reveals that top regions like San Jose and San Francisco are seeing a slowdown in terms of first financings. Now jumping to the East Coast:

3. New York, $43.6 billion in venture funds raised since 2006

4. Boston, $41.2 billion in venture funds raised since 2006.

Yet the East Coast exits are taking their time. “New York, for example, has had $33.9 billion invested into companies headquartered in its MSA since 2010, while the amount exited during the same time period has only amounted to $17.6 billion, almost half the value,” says Black.

Good cities for raising money

5. Los Angeles, $2.6 billion raised since 2006. While the MSA is significantly less active in raising capital, Pitchbook placed them high on the list in part due to their $11.2 billion in exits since 2010.

6. Seattle, $7.6 billion raised since 2006

On the list at #7 appears our first non-coastal city:

7. Chicago, $3.4 billion raised since 2006

8. Washington, DC, $4.8 billion raised since 2006

Emerging cities for raising money

9. San Diego, $1.5 billion of funds raised that is attracting $9.4 billion of funds invested since 2006

10. Austin, another non-coastal city, at $1.9 billion in funds raised spread across 1375 first financings in this period–one of the best dollar to dealflow ratios on the list.

11. Philadelphia, with $3 billion in local funds raised serving 1003 local deals in the time period.

12. Atlanta, with $1.15 billion in funds raised since 2006 and 867 local deals in that time period.

Local venture firms sway startups to stay

Black noted trends that suggest the venture capital frontier is no longer the West Coast, even as the area remains the ecosystem’s finance hub. “Areas like Austin and Philly have been receiving more attention from outside investors over the last few years, which could indicate that investors are looking outside of the traditional startup hubs for quality investments,” he says.

For cities that would like to attract more startups, Pitchbook’s report indicates it’s a balancing act for founders, between their actual access to local venture capital and their costs of living. “Generally speaking, the ratios of outside and inside investors was surprising. The vast majority of funding in each region came from outside investors,” says Black.

All cities in the report, from San Francisco to Atlanta, attract more venture capital from outside their city than from inside. Thus, attracting outside capital is not a core point in creating a strong venture ecosystem–it’s more of a symptom. The number of local venture firms plays catalyst in creating the startup’s opportunity to stay local. “If founders can access sufficient capital within their home towns that have equivalently friendly business climates among other factors,” Black points out, “then there is a compelling case to stay local.” See the full report.

The 12 Best Places in America to Raise Money

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The user’s guide to early-stage fundraising

Chasing Money 1

The user’s guide to early-stage fundraising

Over the last decade, the early-stage funding environment has dramatically changed. There are now myriad financing options that founders can consider as they look to build their companies. Nearly 70,000 companies received funding through angel networks and 3,000 through venture capital firms annually, according to CB Insights.

On the most recent episode of Ventured, we spoke with Qasar Younis, Chief Operating Officer of Y Combinator (YC), about the early-stage funding landscape and how entrepreneurs can best navigate the waters of raising capital today. Here are some takeaways from our discussion.

Benefit from more accessible investors

The startup ecosystem is more sophisticated than ever before because of global availability to startup resources and new types of funding sources. With platforms like AngelList and Indiegogo, access to early capital has dramatically improved. Investors like Y Combinator (YC) and KPCB have continued to increase funding accessibility for founders regardless of location. Programs such as KPCB Fellows or KPCB Edge target entrepreneurs earlier in their careers while the YC Fellows Program and the YC College Tour seek to educate new entrepreneurs on how they can begin their journeys as founders.

Consider all funding options before tapping VCs

There are roughly four ways to get funding for your startup. Understanding your funding options and thinking critically about each path is crucial to your success — and is often overlooked.

Bootstrapping: This is how the majority of companies are funded today. The benefits here are that you retain maximum ownership of your company. However, this may not be sustainable as your capital requirements grow.

Incubators & Accelerators: If you are a first-time entrepreneur, it can oftentimes be helpful to join an incubator or accelerator to get your business going. While there’s a variety of these that exist today, most usually provide mentoring, content and a small amount of capital.

Online Platforms: There are a number of funding platforms available online. As a founder you can utilize these to get a sense of demand for your product, find angel investors from across the globe and get feedback on your company.

Venture Capital: While some founders may jump straight to venture capitalists, most usually reach this step later in the life of their companies. By utilizing the options, or a combination of options outlined above, you can prove more out as a founder prior to meeting investors.

Don’t worry too much about today’s macro environment

While the current economic environment has been fluctuating over concerns of global growth and European solidarity, early-stage founders should not panic. The macro-funding environment does not necessarily constitute a barrier to achieving success. Oftentimes, downturns provide unique opportunities for entrepreneurs to succeed because it’s harder for competitors to raise capital, and talent is usually cheaper to hire. For instance, more than half of the companies on the Fortune 500 list in 2009 were started during recessions or bear markets, as well as almost half of the firms on the Inc. list of America’s fastest-growing companies in 2008. In the most recent economic turmoil of 2009, both WhatsApp and Square were started.

Great companies are founded irrespective of a boom or bust. Startups are a test of will and determination and as a result are often on a seven- to 10-year time horizon, if not longer.

Stay focused on customers and users

While many entrepreneurs don’t realize it, they may be going through the motions and simply doing things that look and feel like work but aren’t actually creating value that will ensure long-term success. Two areas that highlight this gap are customers and product fit, or making stuff that people really want. Not enough entrepreneurs truly understand their customers, especially in the early days, even though that understanding will help dictate product and roadmap decisions. Similarly, founders need to be able to explain why customers actually want the product they are creating, since that insight will help drive almost any business forward.

Know that VCs invest in people, not pitch decks

Although we evaluate certain metrics that help us gain conviction about a particular company, we often invest in the intangibles — the things that are hard to get across on paper. We find ourselves asking questions like how do the founders work with each other, how do they communicate, what do they know that no one else knows and how are they uniquely positioned to solve this unique problem? Having conviction about the team beyond quantifiable growth or user metrics is a major driver for how we decide to invest in companies.

The user’s guide to early-stage fundraising

Be your own “lead investor”

lead-investor

Be your own “lead investor”

A common complaint of startup founders is that VCs take forever to do anything. This is especially true when looking for that magical “lead” investor, defined as someone who can put in a significant amount of money, agree on a term sheet with you, and if necessary, syndicate the deal in order to fill a round. At the seed stage, this complaint is lame!

lead-investor

THE BEST FOUNDERS LEAD THEIR OWN ROUNDS.

Let’s say you are trying to raise a $1 million seed round. The classic way of doing this was to speak to numerous investors, hoping that one will be willing to step forward as a lead investor by offering a term sheet for half the round ($500,000). But for most startups, it’s tough to get an investor to step forward, as many investors don’t feel comfortable without social proof, and want to know “who else is in” before committing. On the other hand, due to FOMO, most investors will ask you to keep them “in the loop” and don’t give a definitive no.

AIM FOR “MINI-LEADS”

This harmful dynamic of syndicates can be managed by finding a “mini-lead” willing to negotiate with you and by offering them a term sheet. Combining 2-3 mini-leads makes it easier for them to move forward, removes some of the investor fear of being alone in an under financed company, and allows you to tell others you are in term sheet stage. In fact, it makes it less likely that an investor will back out on their own, as they are now accountable to their co-investors in the round in addition to you.

Going back to the example $1 million round above, you offer a term sheet to one investor that typically writes $300,000 checks, a second investor that writes $200,000 checks, and a third more passive investor that writes $100,000 checks. Assuming you can get one respected investor to negotiate with you and the others to agree to the conditions that the first set, you now have a “lead”. By simultaneously reaching consensus among a few mini-leads around one term sheet, you can then proceed as a normal round and keep momentum, allowing you to more easily round-up the smaller investors.

NOT FOR EVERYONE

Of course, only the best fundraisers can pull this off, as negotiations with multiple party’s have the potential to spin out of control. But if you successfully manage this process, you can end up with more favorable terms than you may have otherwise received (since the initial terms started with your offer) and can end up with a nice base of “lead” investors for future support without facing the issues of a “party round”.

clever

Be your own “lead investor”

8 Compelling Reasons to Bootstrap Your Company

Plenty of entrepreneurs never go after funding. Here’s why.

  1. You’re the boss
  2. You have time to make mistakes
  3. You can focus on your business
  4. Regardless of what they say, investors want an exit
  5. Funding leads to more funding
  6. Pivoting is easier
  7. You’re not subject to market timing
  8. You’ll save money and have less stress

8 Compelling Reasons to Bootstrap Your Company

Crowd Power: What Is Crowdfunding?

Crowd Power: What Is Crowdfunding?

Crowd Power: What Is Crowdfunding? [INFOGRAPHIC] | Intuit Small Business Blog.

 

How Venture Capitalists Decide What to Fund

How Venture Capitalists Decide What to Fund | Inc.com.