There’s no exact formula that cities and states can follow to create a healthy startup community in the vein of Silicon Valley, but that doesn’t stop them from trying to find one. To that end, venture capital research firm PitchBook released a report today attempting to quantify how the startup communities in each U.S. state stack up against each another.
The firm looked at three criteria: the density of venture-backed startups; access to resources needed to build a startup, including venture capital; and the amount of diverse, experienced talent in the area. Drawing from PitchBook’s database of venture-backed startups, the firm looked at the number of startups that received very early-stage funding (angel, seed, accelerator, or incubator), early-stage funding, and late-stage funding in each state — divided by the state population in millions.
Unsurprisingly, Massachusetts and California — two of the states that consistently receive the most venture capital funding each year — had the highest density of late-stage startups, at 23.32 and 15.61, respectively. While both of these states also had a high concentration of very-early-stage and early-stage startups, there was more disparity between states in the density of late-stage startups, according to PitchBook.
PitchBook analyst Joelle Sostheim told VentureBeat in an email that Utah and Colorado had a surprisingly high late-stage startup density, at 8.92 and 6.77, respectively. “While they don’t have the highest density compared to mature venture ecosystems like California, these regions are developing a strong enclave of VC-backed startups, even despite access to fewer resources,” Sostheim said. On the flip side, she said that Washington had a lower-than-expected density of late-stage startups, at 6.89. Despite Seattle’s reputation as a mature tech ecosystem, Sostheim said that this data point indicates how much the tech ecosystem is dominated by incumbents like Seattle and Microsoft.
Some startup community indicators were a little more difficult to measure. For example, PitchBook decided to measure how well a local community does fostering local talent by looking at the number of startup founders who have a degree from an in-state university compared to all startup founders in the state — but this doesn’t account for founders who don’t have a college degree, how well startups do at hiring local talent, or whether states are able to retain talent that moves there for, say, their first job. Nevertheless, California and Massachusetts both scored well in this area. PitchBook also tried to measure how experienced local startup founders were by looking at the percentage of founders in a state who had previously started a company compared to the total number of founders. This percentage never rose above 5 percent in any state, indicating that it doesn’t play a huge role in the development of startup communities.
There are a few caveats to consider with PitchBook’s data. For starters, it doesn’t necessarily account for all of the venture-backed startup deals in the U.S. PitchBook notes in its report that “there is likely underreporting in certain areas due to general lack of transparency in private markets.” Second, PitchBook gathered data on a statewide-level, not on a citywide-level. Considering how different San Francisco’s startup scene is from that of Sacramento, for example, PitchBook might have gathered a more accurate view of startup communities in the U.S. if it had looked at the same metrics within some of the largest cities in the country.
One takeaway for investors is that there are a few states with high early-stage startup density and a low cost of doing business that they may want to consider. Sostheim specifically cites Texas as a state that appears to still be undercapitalized, based on PitchBook’s analysis.
“The local VC per venture-backed startup in Texas is only $239,428 (compared to $5,479,920 for California startups), yet the costs of labor and housing are far less expensive relative to more mature ecosystems,” Sostheim told VentureBeat in an email. “Investors might be able to find pricing advantages making deals in Texas, while financing startups that can stretch dollars, thanks to lower operating cost.”