Which Cities are Winning in the Venture Capital Return Game?

If you work in the world of finance, return is everything, perhaps the only thing.  We decided to take a look at which cities are winning in the venture capital return game.

If you’re like most, you might guess the San Francisco area – after all that’s where a large – very large – percentage of venture capital activity takes place (by some measures perhaps a quarter to a half of all venture capital funding in the United States takes place in Silicon Valley).  Perhaps you’re of the view that the deluge of investment dollars concentrated in such a small geographic area might lower the expected return.  After all, when there’s a greater supply of investment dollars, expected return might be lower (by lowering the amount a startup business has to offer to an investor).

Well, take your guess.  The Pitchbook results follow.

Fascinatingly, Washington D.C. comes out on top, offering investors a 11.04 multiple on invested capital (MOIC).  This is surprising given the non-innovative nature of the area and the generally unfavorable regulatory and tax environment of the area.

The other four cities in the top five are Los Angeles at 10.89, the Bay area at 8.23, Chicago at 8.17, and Raleigh/Durham at 8.13.

On the bottom end of the cities presented, Austin, Texas comes in on the bottom at 3.97.  The other five “bottom-dwelling” cities include San Diego at 6.73, New York City at 6.94, Seattle at 7.04, and Atlanta at 7.48.

Interesting, interesting.

One Important Caveat

Pitchbook didn’t release industry or company specific data behind their study, but one important caveat is probably worth mentioning – the sample size is small.

The following is the count of the number of exits included in Pitchbook’s study.  Unsurprisingly, the Bay area is by far the leader at 613 exits.  The next closest is Boston at 196 and New York City at 98.

With such small sample sizes, it’s certainly possible that the average MOIC reported by Pitchbook has a large range, perhaps lacking any statistical relevance.  With that said, it’s still interesting.

Conclusion

Interestingly, although the San Francisco area (i.e. Silicon Valley and surrounding parts) is considered the king of startup locales, there are many vibrant startup communities across the globe.  When looking at the cities where investors earn the highest returns in the U.S., the Bay area doesn’t come out on top.  Of the cities of Chicago, Raleigh/Durham, New York City, Los Angeles, Philadelphia, Austin, Atlanta, the Bay area, Seattle, Boston, Washington D.C., and San Diego, interestingly, Washington D.C. comes out on top, at least in terms of multiple on invested capital.