Wednesday, June 24, 2020 from Corte Madera, CA

This is Part 4 of 4 in a biweekly series we will publish on the North Bay startup ecosystem. Click here to subscribe to receive future pieces. Click here to review past pieces in the series.

One key aspect to building a thriving startup community is ensuring the community’s most promising ventures have access to the capital they need to grow. While institutional venture capital is not a great fit for most startup companies given VC’s focus on time-constrained hyper-growth and swing-for-the-fences returns, local startups that have the ability and desire to become the next great North Bay company will generally require institutional venture investment to realize their vision.

So how is Marin + Sonoma doing in terms of attracting venture capital, and how does this compare to Silicon Valley to our south? We did a deep dive into the levels of equity financing that startups founded between 2010 and 2019 received across different counties of the Bay Area. Our conclusions: 1) Marin + Sonoma startups rely on too many disparate capital sources, increasing financing risk to the region during a downturn 2) Marin + Sonoma remains undercapitalized relative to its Silicon Valley peers even after adjusting for talent proximity and the number of promising local ventures.

North Bay Startups Rely on Disparate Capital Sources

In the second piece of this series, we highlighted that last decade there were at least 331 startup companies founded in Marin + Sonoma, of which 95 attracted $1 million or more in equity financing. These 331 companies utilized differing methods to finance their efforts, from bootstrapping to friends / family / angel capital raises to debt instruments to institutional venture capital.

When looking specifically at the institutional equity financing provided, we found that these 331 companies raised capital from 251 unique institutions, ranging in type from general venture capital funds to micro VCs and also including accelerators, incubators, corporations, corporate VC arms, private and growth equity funds, angel investment groups, as well as family offices.

5% (or 13) of these 251 institutions are based in the North Bay, while 50% are located in the state of California. Moreover, last decade, capital deployed into North Bay startups from institutions headquartered in 23 different U.S. states and 20 countries. Finally, 89% of these 251 institutions invested in a single North Bay startup.

Streamlining the Fundraising Process

What all of these metrics fail to account for is the level of difficulty by which this capital was raised from these institutions. The fact that 9 in 10 North Bay investors only back one local startup means each local entrepreneur is in many ways starting from scratch with her/his fundraising process, lacking any sort of repeat playbook to follow.
For repeat entrepreneurs with strong personal networks and a history of raising capital, this is generally not a large detriment although a longer fundraising process will most certainly slow down their startup.

But a streamlined financing process complete with local sources of capital, where the best local entrepreneurs can enjoy the benefit of a warm introduction from others embedded and trusted in our community, may matter significantly for a first-time founder, in particular during recessionary times when national and global capital markets may be more constrained. Time spent fundraising is time not spent advancing the core business - to boost our local startup community, streamlining the ability for local entrepreneurs to raise capital from local sources will go a long way in ensuring more startups are better financed in a quicker and more thoughtful manner, leading to better outcomes and more job creation across the North Bay.

Funding Disparity - Demarcation at the Golden Gate

Startups founded last decade in Marin + Sonoma cumulatively raised $900 million for their efforts. How does this compare to other Bay Area counties?

We looked closely at the data for San Francisco, Alameda, San Mateo, and Santa Clara counties, the four counties to our south collectively making up the modern definition of an expanding Silicon Valley. As one might expect, Marin + Sonoma ranked behind these four counties in venture dollars raised, with San Francisco bringing in $112 billion during this time period (124x of Marin + Sonoma) and with Santa Clara at 48x, San Mateo at 37x, and Alameda at 11x the dollars of Marin + Sonoma.

This is not surprising as these four counties attract some of the greatest venture investment totals in the entire world. But what if we looked at the data in terms of what we might ‘expect’ based on labor force availability and the number of quality startups actually operating in those counties? Would that account for Marin + Sonoma’s lower figure, or would there be a continued disparity that cannot easily be explained away?

Note: Financing totals are for companies founded between 2010-2019, a
nalysis as of 12.1.2019.

1 Total Equity Financing = Equity capital invested in startups founded 2010 or later that are headquartered in that county
2 Total Equity Financing Ratio = Figure in #1 / Marin + Sonoma figure in # 1
3 Bachelor’s Degree Ratio = (Figure in # 1 / Total labor force participants living in that county with a bachelor’s degree or higher [estimate]) / Marin + Sonoma figure in #3 numerator
4 Computer Workers Ratio = (Figure in # 1 / Total labor force participants living in that county classified as a ‘computer or mathematical’ worker) / Marin + Sonoma figure in #4 numerator
5 $1M+ Startup Ratio = (Figure in # 1 / Startups founded 2010 or later that are headquartered in that county that received $1M+ in equity financing) / Marin + Sonoma figure in #5 numerator

Bachelor’s Degree Talent

We estimated the total labor force participants living in each county maintaining a bachelor’s degree or higher, positing that the availability of local startup talent may explain the disparity in funding. Yet, after isolating for this, we found that Marin + Sonoma still ranked last in venture investment per capita, coming in at 63x behind San Francisco and 6x behind Alameda with Santa Clara and San Mateo in between.

Technical Talent

We then estimated the total labor force participants living in each county classified as a ‘computer or mathematical’ worker, which is a proxy for software engineering or other technical skills as measured by the government’s classification system. Here, we posited that it is actually the availability of technical talent in a community that may justify this disparity in funding. After completing this, Marin + Sonoma still ranked last in venture investment per capita, now 27x behind San Francisco and 2x behind Alameda with Santa Clara and San Mateo in between.

Quality Startups

Traditionally, Bay Area talent has commuted in all directions throughout the area, up-and-down the 101 and 880 corridors and across all of the area’s major bridges and thoroughfares. It is companies themselves that attract capital investment, not individual workers living in a community. Thus, we repeated this analysis by first determining how many quality startups were founded last decade that are headquartered in each county (note that our proxy for a ‘quality startup’ are those that received $1 million or more in equity financing), and then looking at how much venture investment that county received on a ‘per quality startup’ basis.

With all else equal, we might expect that all of the counties would exhibit roughly the same number, meaning that all ‘quality’ startups would attract the same amount of capital when looking at investment on a county-wide average basis. Still, here, Marin + Sonoma is last when looking at this comparison, with the other counties more closely grouped with one another and 3x to 4x greater than Marin + Sonoma. In other words, even the most promising North Bay ventures are struggling to attract the same level of capital investment as similarly situated companies operating in Silicon Valley.

Conclusions

I have heard the argument that venture capital flows efficiently and that capital will flow to the most promising ventures. Thus, if Marin + Sonoma is undercapitalized relative to Silicon Valley, even on a per quality startup basis, this is justified and merely indicates that the quality of the opportunities in these other locations is superior. This argument is not grounded in the realities of fundraising nor is it consistent with how geographically concentrated venture investment is throughout America.

In general, early-stage capital flows to the most well-connected and pedigreed founders, those who are the best at storytelling and marketing themselves and who are able to create scarcity, momentum, and FOMO for their deals. For North Bay founders, not locating in the heart of Silicon Valley likely did not help with fundraising over the course of last decade’s venture investment expansion.

Yet today, as we enter the post-COVID-19 era, we have the opportunity as a region to control our own destiny and ensure that our community’s most talented and ambitious entrepreneurs have access to the capital they need to build the next great North Bay company. Let’s not be reliant on the global community to ensure local propserity. Let’s tap into the resources that are already here, being invested in asset classes all throughout the world, and ensure they also get put to work locally to close this financing gap and cede the next generation of prosperity for the North Bay.

Zachary Kushel is Founder & Managing Partner of Marin Sonoma Impact Ventures.

This is Part 4 of 4 in a biweekly series we will publish on the North Bay startup ecosystem. Click here to subscribe to receive future pieces. Click here to review past pieces in the series.

Notes on Data & Sources

Institutional Investor Profile Data - Analysis as of 12.1.2019. Source is MSIV original research across discussions and multiple platforms including Crunchbase, Pitchbook, and LinkedIn.
County Equity Financing Data - Source for Marin + Sonoma equity financing is figures derived from MSIV original research across discussions and multiple platforms including Crunchbase, Pitchbook, and LinkedIn. San Francisco, Santa Clara, San Mateo, and Alameda equity financing figures from Crunchbase. Population, demographic, and labor market data from U.S. Census Bureau.

Capital Wanted