As Startups Bloom Elsewhere, Best-Funded Companies Remain in the Bay Area

Christopher Mims indicated in yesterday’s Wall Street Journal that, “Clusters of high-tech startups are blooming everywhere, in cities large and small. From Denver to Washington, D.C., and Austin, Texas, to Chattanooga, Tenn., entrepreneurs are seeking greener pastures, including better quality of life and lower operating costs for their startups.

“Former AOL chief and Revolution LLC founder Steve Case calls this the ‘rise of the rest,’ and it is a real phenomenon. And yet, as fast as the rest of the country creates startups, Silicon Valley grows even faster, disrupting entire industries, from transportation to lodging, retail and media. Silicon Valley is transforming fragmented industries into unified, winner-take-all markets that reward the biggest, best-funded, most aggressive companies—which are still being built, for the most part, in Silicon Valley.

“Consider the data. According to Dow Jones VentureSource, in 1995, about 30% of all venture capital invested in the U.S. went to companies in the Bay Area. By 2015, that figure was close to 50%.”

Mr. Mims noted that, “There are several forces driving the trend. The first is proximity. The internet was supposed to erase distance. But it also created a better, more liquid market for talent and investment, making it easier for companies to find the best people, and vice versa.

“Additionally, as companies stay private longer, gigantic late-stage financing rounds are changing the nature of venture capital. Money that used to come from public markets is now funneled through VCs. Because the biggest private tech companies are disproportionately based in Silicon Valley, this skews the statistics and becomes part of the feedback loop concentrating money in the region.

Even when companies start outside the Bay Area, they often move to take advantage of the financing climate and talent pool.”

The Journal item did point out that, “Founders in these atypical startup cities are quick to extol their virtues. Cameron Doody, and Stephen Vlahos, co-founders of Chattanooga-based moving-services company Bellhops Inc., say that they’ve been able to recruit technical talent who are burned out on the rising cost of living and declining quality of life in the Bay Area. At the same time, they don’t have to fight ‘crazy salary battles,’ says Mr. Vlahos.”

But Mr. Mims added that, “No one knows if the seemingly inexorable trend of venture capital flowing to the Bay Area will turn, so that other cities can benefit from the job creation that comes from startups. Investors like Mr. Case and [Jonathan Teo, co-founder and managing partner of San Francisco-based Binary Capital] argue that their money, expertise and help recruiting talent are what startups outside Silicon Valley need to thrive.

The alternative, which is worth contemplating, is that the accumulation of money, power and influence in Silicon Valley continues to feed on itself until companies based there control pretty much everything. In other words, it may not be just software eating the world, but Silicon Valley eating the world.”

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