How Do Markets Become VC HQs? Q&A with Maryam Haque

In recent years, the power dynamics have shifted more towards the startups than VCs, but VCs inevitably will go where there are compelling, innovative startups that are viable investment opportunities that will generate the next big thing. - Maryam Haque

In past years, most venture capital activity has been limited to a few different hubs, namely San Francisco, New York and Boston. But that is beginning to change as startups flee expensive and overcrowded areas and head to other cities. Maryam Haque, senior vice president of industry advancement at the National Venture Capital Association, says this is generally a good trend to see because it is typically better to have more capital dispersed than concentrated. However, she urges these new and up-and-coming hubs to not focus too much on competing with the big, already established hubs, but instead focus on what makes them unique and supporting startups in their ecosystem. Starting a high-growth startup and investing in risky early-stage companies is not an easy task, so the more support and infrastructure available around the country, the better. GoingVC caught up with Haque to discuss some of the new emerging VC hubs and what we can expect to see in the coming years from them.

Q: Venture capital is obviously dominant in Silicon Valley, New York City and Boston, but what do you think the next market or markets will be  to emerge and become VC hubs that investors will flock to? What makes these markets up-and-coming?

A: The five largest Metropolitan Statistical Areas for VC activity—San Francisco, New York, Boston, San Jose and Los Angeles—together accounted for 77 percent of total capital invested into U.S. venture-backed companies in 2018. Large, late-stage investments tend to skew this data, but annual deal count for these metro areas, collectively, has slightly decreased in recent years though still hovers around the 50 percent level. There are several markets that have seen a higher compounded annual growth rate over the past five years than the five largest VC MSAs including Indianapolis, Indiana and Columbus, Ohio. In particular, the Midwest has been a bright spot with a burgeoning startup ecosystem in metro areas across the region boasting strong academic institutions and talent pools, strategic geographic location, and it serves as the headquarters for several large corporations. In fact, after seeing the interest and growth in the region, NVCA hosted its  first VC University LIVE program in the Midwest in May with University of California Berkeley and the University of Michigan.

Q: Why do you think VC hubs are limited to certain markets right now?

A: The venture ecosystems that are traditional hubs have been growing for decades. Other, newer ecosystems are more nascent in their growth. Part of it has been a time limitation. And several markets, as noted above, have actually grown at a faster pace than some of the VC hubs. But there’s no doubt that healthy startup ecosystems require several levers that impact their growth and pace. Most important in the equation these days are the entrepreneurs and where they have the support and resources to build their companies. Other levers include capital available at all stages in a startup’s lifecycle, deep pools of financial and strategic investors, competitive talent, infrastructure and public policies that encourage innovation. How the ecosystem matures and plays to its strengths are ultimately determined by its exit activity. Some emerging geographies that have seen big exits recently are in Utah with Qualtrics’ $8 billion acquisition by SAP and PluralSight’s and Domo’s IPOs; Colorado with SendGrid’s $3 billion acquisition by Twilio and Michigan with Duo Security’s $2.3 billion acquisition by Cisco Systems.

Q: Why do you think VC hubs are limited to certain markets right now?

A: The venture ecosystems that are traditional hubs have been growing for decades. Other, newer ecosystems are more nascent in their growth. Part of it has been a time limitation. And several markets, as noted above, have actually grown at a faster pace than some of the VC hubs. But there’s no doubt that healthy startup ecosystems require several levers that impact their growth and pace. Most important in the equation these days are the entrepreneurs and where they have the support and resources to build their companies. Other levers include capital available at all stages in a startup’s lifecycle, deep pools of financial and strategic investors, competitive talent, infrastructure and public policies that encourage innovation. How the ecosystem matures and plays to its strengths are ultimately determined by its exit activity. Some emerging geographies that have seen big exits recently are in Utah with Qualtrics’ $8 billion acquisition by SAP and PluralSight’s and Domo’s IPOs; Colorado with SendGrid’s $3 billion acquisition by Twilio and Michigan with Duo Security’s $2.3 billion acquisition by Cisco Systems.

Q: How do certain markets become up-and-coming? Is it all about where the startups settle or is it more about where the VCs will go?

A: Growth in startup activity and big exits hitting investors’ radars certainly helps. In recent years, the power dynamics have shifted more towards the startups than VCs, but VCs inevitably will go where there are compelling, innovative startups that are viable investment opportunities that will generate the next big thing. In the example of some of the exits I mentioned above, these can lead to important catalysts for the local market – strengthening talent, increasing high-paying jobs, creating serial entrepreneurs and even translating to new angel investors or institutional VC investors.

Q: What are the biggest factors that lead to a market becoming a go-to place for startups?

A: This is an important question that many policymakers are looking for answers. It’s not an easy question to answer and Silicon Valley’s secret sauce is well, kind of still secret. Certain pockets of the country have become synonymous with specific sectors, given industries that have had roots there for decades. This then makes them more attractive to startups in that space, either by choice or necessity. For example, Minneapolis, Minnesota and medical devices; New York and financial services; Boston and biotech; the Midwest and AgTech; DC and cybersecurity and so on.

In the past, founders would tend to think that they’d have to move their company to one of the VC hubs, primarily Silicon Valley. Nowadays, with emerging ecosystems across the country better equipped to foster a startup’s growth through local talent and capital, founders are thinking twice about packing their bags and flying across the country. Beyond local talent and capital, the cost of starting a company in the VC hubs has skyrocketed – compensation, real estate, cost of living, etc. Not only that, heightened valuations in Silicon Valley, Boston, and New York have led investors to turn their attention more to markets that aren’t as heated. Furthermore, we’re seeing startups in the VC hubs expanding their teams and offices to more affordable locations across the country. This can, in turn, help with spreading talent and innovation at a faster pace to emerging ecosystems.

Q: What does the emergence of new VC markets say about the industry as a whole?

A: The dispersion of companies raising venture capital outside the dominant hubs shows a maturing of the industry and indicates a deeper bench of innovation, talent and opportunity. At the same time, heated valuations, rising real estate costs, and higher costs of living on the coasts suggest that a wave of the next big unicorns just might be from geographies more under the radar. We’ve already started to see some of these emerge, so it’s exciting to see what will unfold in the next few years.