In 2017, three metro areas accounted for 66% of the investment for the top 20 areas in venture capital.  These three metros included San Francisco, New York, and San Jose, CA.  When compared to 2015, it may come as a shock that these three metro areas have actually increased their investment share when looking at the top 10 cities in venture capital boosted by companies such as WeWork Inc., Uber Technologies Inc., and Lyft Inc.

With so much money pouring in to just 3 cities (and 2 states at that), there is a growing concern that American is fast becoming a nation of the haves and have-not from a regional perspective.  While new startup hubs are growing in cities such as Columbus, OH, Indianapolis, IN, and Minneapolis, MN, there is still a huge divide between financial support.  Indianapolis, for example, accounted for $351 million in venture capital in 2017 while San Jose saw $6.9 billion flow through its ranks.

In the life of startups, money matters!  According to Bloomberg, “Research has documented the historical tendency for startups to perform better when they’re located in areas with lots of VC. Companies that move to Silicon Valley, for example, have historically outperformed those that stayed behind.”

In addition, “big tech companies generally prefer to locate in places with lots of startups, which they can acquire, and whose engineers they can hire away. The likelihood of acquisition only increases the incentive for startups to move to tech clusters, creating a snowball effect that can greatly enrich a tech hub, but which is distinctly unhelpful for the large number of regions that lose out.”

The need to surround oneself with access to capital and resources makes growing a startup that much easier.  Without it, struggles are imminent.

The current strategy to lure venture capitalists away from big market deals is through connections with “secondary cities”. Carole Carlson and Prabal Chakrabarti of the Federal Reserve Bank of Boston suggests five main ways metro areas looking to lure VCs can do so effectively.

  1. First, cities and their corresponding state governments should invest in upgrading their local universities, in order to produce a pool of talented engineers and managers.
  2. In addition, they should encourage local investors to become angels, creating the nucleus of a local investor community.
  3. They should improve access for VCs, with good airports and quality hotels.
  4. They should boost quality of life with appealing downtowns, while investing in the arts.
  5. And perhaps most importantly, they should focus on narrow clusters — such as biotechnology, robotics or agricultural software — instead of trying to become the next Silicon Valley.