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Data Shows The Importance of A Startup’s Location to Receiving Venture Capital Funding




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This analysis by the ChubbyBrain team originally appeared on Fast Company here as part of their recently launched Getting Funded content area.  Fast Company & ChubbyBrain also issued a 44 page Q3 Venture Capital activity report which you can view and download for free here.

Venture capitalists typically invest locally.  That shouldn’t come as a shock to entrepreneurs who’ve spent some time trying to understand the VC universe.  The logic essentially goes that having startups they invest in nearby makes it easier for both parties to interact, get guidance, brainstorm, etc.

So if an entrepreneur believes that getting venture capital is incumbent to his startup’s success and location is important to venture firms, it’s probably worth spending some time thinking about where your startup will call home.  A look at the Q3 2009 venture capital funding statistics compiled by ChubbyBrain offers a data-driven view into venture investment by geography which may help entrepreneurs with another data point as they consider the age old question of location, location, location.  (For a data-driven perspective into the world of venture capital, download the free 44 page Fast Company – ChubbyBrain Q3 VC Activity Report)   

First, let’s start with the easy solution.  Set up in California, specifically Silicon Valley. 

Yes – no data is really required to support this but recent venture capital activity data from ChubbyBrain makes the case clearly for the left coast.  In Q3 2009, ChubbyBrain noted a climb of overall venture investment to $6.1B.  California represented $3.43B of this – over 50%.  Versus Q2 2009, California saw a 51% jump in dollars invested and a 40% jump in deals.  Essentially, California extended its dominance of venture capital in the third quarter of 2009.  The regional graph below shows amount of funding and number of deals by various US regions, and California is denoted as its own region.  The dominance of the state is clear.

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And the reality is that the deal dominance is well-diversified based on sector.  California is not a one-trick pony that dominates just the internet sector or just the energy sector.  It is a multi-headed monster that showed healthy investment activity across all main sectors of venture investment in Q3 2009 as the graph below illustrates.

fast_company_3_image2 Although a seemingly easy solution based on the data, California may not be ideal for everyone.  So what’s next?  Let’s explore regionally at a high-level.

New England primarily driven by a strong Massachusetts-based venture community is another home for startups.  In Q3 2009, the area saw 98 deals with over $700M invested with  Massachusetts representing over 80% of the total.  The region’s data shows investment across a wide variety of sectors but Healthcare and Internet dominated in the quarter with over 60% of deals as shown below.  New England underscores the need to not just look at aggregate deal statistics but look at which sectors see the most dollars by not just region but by state. 

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The South-Atlantic which consists of states like Georgia, the Carolinas and Florida, did quite well in Q3 from a venture investment perspective ringing up over $540M of funding across 63 deals.  While there are a variety of sectors seeing investment, the region sees a larger share of healthcare deals versus other sectors with almost 40% of deals in the region being for healthcare companies.  This may mean good things for healthcare oriented entrepreneurs but the data suggests that budding green tech entrepreneurs may not see the South Atlantic as the most ideal destination for their venture.

The next big region worth looking at is the Mid-Atlantic which includes NY, NJ and Pennsylvania.  While healthy levels of investment in the region are apparent in Q3 2009 with 72 investments garnering over $420M, it is the region with the smallest average deal size.  This is largely driven by the fact that the region is driven by investment in NY which sees a much larger portion of investment going to internet oriented businesses which require less investment capital in relation to their brethren in healthcare or energy for instance.  The region also underscores the heterogeneity of investment from state to state.  NY as the Q3 data shows is very friendly to internet startups but might not be the first stop for a healthcare venture.  Pennsylvania on the other hand offers a seemingly good home for healthcare ventures based on Q3 2009 activity.

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And finally, if you are an entrepreneur in the middle of the country and you really want venture investment, the reality is that there is not a lot out going on in your neck of the woods (see first graph again).  In these areas, ChubbyBrain has seen efforts underway by local governments, various governmental public-private partnerships, angel investors and the small venture community that exists to spur investment in ventures, but these laudable efforts will take time and their ultimate efficacy is unknown. 

While going region by region is possible with ChubbyBrain data, the point is hopefully clear.  Based on the sector that your startup plays in can have real implications for where you set up your business if venture funding is important.  Having investors in close proximity who know and invest in your space is not only helpful for capital but also likely indicates that there is an ecosystem of other providers and players relevant to your business in the area as well, e.g., service providers, partners, etc.   Ultimately, if you believe in fishing where the fish are, the data suggests that there are certain places you may want to be if you want to snag elusive investment capital from venture investors.

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