2021 was a record-breaking year for venture capital fundraising, investments, valuations and IPO activity. According to Pitchbook, U.S. VC-backed companies raised $329.6 billion in 2021 across more than 17,000 deals.1 This nearly doubled the previous record of $166.6 billion raised across more than 12,000 deals in 20202 and caps a decade long surge in VC investment — with valuations increasing threefold in the 2010s. Angel and seed investment has been on a similar upward trajectory, with valuations increasing by more than 25% over the last six quarters.
U.S. VC Deal Activity
Last year also marked one of the most geographically dispersed years for raising capital, with cities like Denver, Chicago and Atlanta seeing at least 175% year-over-year deal value growth.3 Yet even with this increased activity outside major funding hubs, access to capital is still fairly localized — especially among early-stage capital. Half of all deal counts in 2021 were made in Boston, New York, Los Angeles and San Francisco.4 The Bay Area alone saw one-third of all deal value last year. Entrepreneurs and fundraisers outside of top-tier funding hubs often still face high capital-raising hurdles, and it becomes increasingly difficult to raise capital the farther you are from a city hub. Despite their smaller share of total investment dollars, however, regions outside these top 10 funding hubs accounted for more than a third of the number of angel and seed deals, representing a broad base of startup environments and untapped potential.5
Earlier in the year, the Kenan Institute hosted a webinar, “Capital Ecosystems: Seeding Smaller and Regional Funds to Increase Opportunity,” where investment specialists described their experiences working with entrepreneurs and investors outside the major capital hubs and offered solutions for growing the investment pie for all locales.
“We had a record year in 2021 for venture capital fundraising,” Martha Legg Miller said, “but the headlines don’t tell the full story.” Miller, who until April was the Security and Exchange Commission’s first director of the Office of the Advocate for Small Business Capital Formation, moderated the webinar.
As venture capital markets have surged, she pointed out, “early access to capital remains highly localized.” Individual angel investors and angel investor groups tend to focus on their local communities. In fact, the average distance between lead investors and their target company is only 37 miles, a radius that has not expanded with growing investment amounts and deal counts. This illustrates how companies located outside large funding hubs struggle to compete for capital simply based on their location.6 Moreover, while angel and seed investment activity and deal value rose sharply in 2020 and 2021, underrepresented entrepreneurs — especially women and minorities — raised less capital in proportion to their peers. In other words, the rising tide did not lift all boats equally.
For many venture capitalists, easy access to markets they are familiar with is a critical path toward investment. “Venture capitalists tend to go to the places they can get to easily,” said Maryann Feldman, professor of public policy and finance at UNC Kenan-Flagler Business School and faculty director of the institute-affiliated CREATE. “They tend to invest in technologies that they know.”
Leaders at the 1909 Foundation, a nonprofit in West Palm Beach, Florida, that aims to support regional entrepreneurs, find that connecting investors and entrepreneurs, and educating each to the needs of the other, are central to developing familiarity between an older investor class and young founders of technology-forward startups.
“There’s quite a wide divide between what people are creating in their businesses today, the technology that’s up and coming, and what the people with the potential ability to invest understand,” said Shana Ostrovitz, executive director of the foundation. “We’ve seen a lot of our founders having to really explain what the types of technology investments could be, the opportunities for growth, and the risks associated. So we’ve had a lot of education going on.”
In recent years, South Florida has transformed from compartmentalized zones of investment that historically have reflected separate strands of the region’s social diversity to a more mixed and melded entrepreneurial ecosystem. Several factors have contributed to the area’s increasingly synergistic network and opened up new investors to entrepreneurs throughout the region. New public transportation in the form of a high-speed rail line called Brightline, which opened in 2018, connects Miami to Fort Lauderdale and West Palm Beach, and plans are afoot to open additional lines north to Cocoa and west to Orlando and Tampa. This added connectivity is one reason Miami is becoming a booming city for venture capital. In 2021, Miami saw a 147% year-over-year growth in deal count, with $4 billion in deal value, representing 325% year-over-year growth.7
These improvements can help better connect investors and communities of young entrepreneurs. For instance, a team of ethnic minority college students looking for seed investment in their startup can now hop on the train from Miami to West Palm Beach to meet with mentors at the 1909 Foundation, and then pitch to often-older investors in the Palm Beach area.
Capital is a key component of a robust entrepreneurial ecosystem. Talent is also an essential element of a vigorous startup environment, however, and young companies succeed or fail on their ability to attract and retain talented individuals.
Brent Comstock, founder and CEO of BCom Solutions, a Nebraska-based digital-strategy consulting firm, focuses on helping businesses and organizations grow outside of the major investment hubs. He emphasized the country’s changing entrepreneurial landscape and challenges of talent acquisition. For a startup, “once you get that money,” Comstock said, “you’ve got to be able to supply it with a talent pipeline. In Nebraska, we have a 1 percent unemployment rate. So it can be hard to find people once that money comes in.” Given that not everyone has experience in growing startups, this makes an already challenging search for talent even more difficult.
With such a tight labor market, companies must become creative to attract talent. In a post-pandemic world, for startups both outside large population centers and in cities, this means accommodating remote work. COVID-19 has redefined norms around working remotely and spurred many young people to think hard about where they want to be while they work and where they live in relation to their work.
“[While] horrible from a health perspective,” Comstock reflected, “[COVID has caused] people to look at where can you achieve success from a business and commerce perspective [and] has really incited interest in developing rural communities and the venture capital ecosystem.”
The 1909 Foundation has also observed this “silver lining” to the pandemic’s dark cloud with an influx of people and dollars coming from larger funding hubs like New York City. “The biggest shift,” Ostrovitz said, “has come from a large number of people moving here from New York during COVID, and a lot of those people had more involvement in investing [and] in making their money through [technology-centered] ventures.”
The pandemic has forced a reckoning among working-age people and contributed to labor market realignments that are still taking shape. The talent pipeline has bent to some degree away from major markets and toward more medium-size and small regions.
“What you see,” said Comstock, “is people that have moved to the coasts that are interested in investing in their hometowns and their communities.” The challenge is, how to invest. What mechanisms can be put in place to attract investment and talent to small and rural communities that are potential hotbeds for entrepreneurship?
Entrepreneurial ecosystems develop as part of what Feldman calls a “temporal process.” “In the early stages,” she said, “when a place is trying to build capacity, you can’t attract venture capital because you don’t have a critical mass. There’s not sufficient deal flow. And so that’s where government investment becomes really important.”
Before seed funding comes in, there has to be a medium in which to plant the funds. This is where government investment can make a difference. “The Small Business Innovation Research Program is very foundational in helping businesses get this nondilutive investment that then helps them develop some capabilities and interest,” Feldman said.
Another prime example is the State Small Business Credit Initiative, which, Miller said “is the $10 billion program that Congress has passed, and Treasury is in the process of implementing the first 30 percent. Three billion dollars will go back to state- and tribal-led venture funds that are investing in local businesses.”
Publicly funded local infrastructure projects are vital supports of the entrepreneurial environment, as Ostrovitz attested to in the example of Florida’s new Brightline rail system. Something as basic as broadband internet is another example. “A lot of [government funding] was put into rural broadband,” Comstock pointed out, “which maybe isn’t a subject for venture capital on the coast. But what that means is there are now places across the country that previously couldn’t do anything with the internet, literally nothing, that can now build billion-dollar exited tech startups.”
In these examples, we see how foundational the government’s role can be in nurturing an entrepreneurial ecosystem. Direct public investment in startups precedes and attracts private money. And publicly funded infrastructure, from education to public transportation to energy to the internet, helps break down barriers for startups in small hubs and rural areas while connecting entrepreneurs in these locales with investors who might otherwise overlook them.
As investment continues to boom in the 2020s, companies formed in areas outside of the usual funding hubs will likely find themselves fighting for their fair share of the growing pie of venture dollars. Unheralded entrepreneurial environments are fertile ground for investment, as burgeoning firm formation numbers show. A mix of public funding, investor education, civic engagement and investor-entrepreneur connectivity nurtures these entrepreneurial ecosystems, transforming quiet corners of the country into thriving investment hubs.
1 PitchBook & NVCA. (2022). Venture Monitor (Q4 2021). https://files.pitchbook.com/website/files/pdf/Q4_2021_PitchBook_NVCA_Venture_Monitor.pdf
2 U.S. Securities and Exchange Commission. (2021). Office of the Advocate for Small Business Capital Formation Annual Report for Fiscal Year 2021. https://www.sec.gov/files/2021-OASB-Annual-Report.pdf
5 See U.S. Securities and Exchange Commission (2021)
6 See U.S. Securities and Exchange Commission OASB (2021) as cited in PitchBook & NVCA, (2021)