Shh… It’s a Secret
The North Bay Is Startup-Rich
Monday, May 18, 2020 from Corte Madera, CA
This is Part 2 of 4 in a biweekly series we will publish on the North Bay startup ecosystem. Click here to subscribe to receive future pieces. You can find Part 1, which discussed six trends that will lead to a proliferation of North Bay startups in the 2020s, here.
What words come to mind when you think of Sonoma and Marin counties? Perhaps natural beauty or wine country or Mt. Tam or mountain biking or farm-to-table or the great outdoors. This list can go on for some time and my guess is it would be a while until you thought of ‘rich with startups.’ Yet the data is undeniable - there are a large number of startup companies forming, raising capital, and innovating across this two-county North Bay area.
Marin Sonoma Impact Ventures (MSIV) has researched and pieced together comprehensive data around the North Bay startup footprint. Existing data sets are messy and are not designed for detailed analysis on the county level. Companies move across county lines, are tagged as San Francisco based when they are actually North Bay based, and there is not a straightforward definition of what is considered a startup versus a general small business.
Our definition of a startup is a young company that has plans and the potential to tap a national or international market rather than one that is entirely local. In other words, the local bakery is out but the company producing cookies to be sold in supermarkets would be in. All startups are not technology companies, and all technology companies are not startups. North Bay startups include companies in software, hardware, healthcare, telecom, specialty food and beverage, and countless other sectors, and we’ll go into further detail about the relative breakdown of these sectors in a subsequent piece in this series.
Startup Formation
Between 2010 and 2019, at least 331 startup companies were founded across Marin and Sonoma counties.
On an annual basis, roughly 36 startups, or three every single month, were founded across Marin and Sonoma when analyzing the period 2010-2016.
For startups founded the past three years, our data remains incomplete, as there is a lag between when a startup is founded and when that company comes to be listed in a data set, which is generally triggered by events such as financing, news coverage, or self-reporting.
We’ve worked hard to fill-in the gaps on the 2017-2019 cohort through our own research and personal discussions with local startups, but note that the 331 number is low and will increase over time as more comes to be known about the 2017-2019 period.
Capital Attraction
Of these 331 companies, we found that 95 of them attracted $1 million or more in equity financing when analyzing data through May 14, 2020.
We view equity financing as a proxy for the ‘quality’ of these startup companies. Clearly, this will miss a portion of companies that are entirely bootstrapped or financed via debt instruments. But at some point, startup companies generally will need to take on outside equity financing to grow, and those raising $1 million or more convinced someone (whether institutional investors, angel investors, or both) that there was the potential see a large return on that investment.
So, is that a lot or a little?
California is often referenced as the fifth largest economy in the world when comparing the state’s GDP to that of entire nations around the world. To put in context the North Bay’s startup footprint, we decided to undertake a similar analysis. If Marin and Sonoma counties together were a U.S. state, how would that state compare to the other 50 states in terms of startup formation and quality?
Overall Startup Formation
With 331 startups, Marin + Sonoma ranks 33 of the hypothetical 51 states in this exercise. Put differently, Marin + Sonoma saw more startups created last decade than 18 U.S. states. That’s a good start.
Startup Quality
With 95 startups having raised $1 million or more, Marin + Sonoma ranks 26 of 51 states in this exercise. Put differently, Marin + Sonoma saw more quality startups created last decade than half of U.S. states. That’s nothing to sneeze at.
Adjusting for Population and GDP
While interesting, the previous analysis does not take into account differences in population size and overall economic activity (GDP) across the states. Clearly, we expect the biggest states to have the highest startup numbers. However, if we adjust for population and/or GDP, those rankings can provide a better perspective on the relative prowess of a local startup community.
What we found is that the hypothetical Marin + Sonoma state ranks in the Top 3 of U.S. states when analyzing quality startups on a per capita basis. Here’s the detail:
1) Startups per million people
When adjusting for overall population size, Marin + Sonoma ranks 6 of 51 in terms of the number of startups formed per million people.
2) Startups Raising $1 million+ per million people
Even more impressive, Marin + Sonoma ranks 3 of 51 in terms of the number of quality startups per million people, only coming behind California (as a whole) and Massachusetts and even coming in directly ahead of New York and Washington.
While adjusting for population helps compare states big and small, adjusting for GDP provides a measure of how robust a startup footprint may be in relation to that state’s overall economy.
For states such as Alaska or North Dakota, for example, where local economic activity may be comparatively high but where GDP is largely driven by natural resources industries rather than the innovation economy, we would expect the ratio of startups to GDP to be quite low, indicating that non-startup businesses are a relatively greater driver of local economic activity. For a state such as California, in comparison, we would expect this ratio to be much higher.
3) Startups per $billion GDP
This analysis shows that Marin + Sonoma ranks 8 of 51 for the number of startups per billion dollars of GDP.
4) Startups Raising $1 million+ per $billion GDP
Marin + Sonoma is 3 of 51 when looking at the number of quality startups per billion dollars of GDP, with the top eight states’ rankings identical to the quality startups to population measurement in #2 above.
Conclusions
As you may be contemplating, there are some limitations with this analysis.
First, comparing two counties to entire states on a per capita basis will disadvantage large states with sprawling rural populations outside of their innovation centers. Certainly New York, Washington, and Colorado, which Marin + Sonoma ranks ahead of, fit this description - but then again, so does Marin + Sonoma with its large rural population and startups spread throughout small cities across the two county area.
Second, this analysis does not look at other counties and how they would fare in a similar analysis. If we re-ran this this analysis with San Francisco county, New York county, Suffolk county (home to Boston), or King county (home to Seattle), those hypothetical states would finish well ahead of Marin + Sonoma when making these comparisons.
And that really is the entire point here - while Marin + Sonoma may have a significantly lighter startup footprint than San Francisco, New York, Boston, and Seattle, when compared to almost any other community across the country, our level of startup formation and quality is robust and significantly greater.
Why then do startups not come to mind when completing the ‘word association’ exercise discussed at the start of this piece? There are two key reasons:
Lack of Storytelling - This really is a well-kept secret. There has not been a full-fledged attempt to tell this story and evangelize about this startup community by the local private, public, and non-profit sectors. Moreover, communities with significantly less developed startup footprints have more advanced entrepreneurial ecosystems working to wave the flag, support founders, and help them build great companies. Marin Sonoma Impact Ventures (MSIV) seeks to change this and to shine the spotlight in a way that is consistent with our values as a community.
Living in the Shadow - Marin + Sonoma live in the shadow of Silicon Valley, where the level of startup activity dwarfs that of any location in the entire world. This causes Marin + Sonoma to either be lumped in with the larger Bay Area or forgotten about entirely when viewed from the outside. As alluded to above, should this analysis be redone using San Francisco, Alameda, San Mateo, or Santa Clara counties (the four counties to our south collectively making up the modern definition of Silicon Valley), undoubtedly the relative strength of these startup communities would be even greater than that of Marin + Sonoma. MSIV is seeking to right-size this disparity.
In our next piece, we will go deeper on this Bay Area comparison issue and complete a deep dive on how North Bay startups are significantly undercapitalized when compared to the Silicon Valley counties to our south.
Zachary Kushel is Founder & Managing Partner of Marin Sonoma Impact Ventures.
This is Part 2 of 4 in a biweekly series we will publish on the North Bay startup ecosystem. Click here to subscribe to receive future pieces. You can find Part 1, which discussed six trends that will lead to a proliferation of North Bay startups in the 2020s, here.
Notes on Methods and Data Sources
Marin + Sonoma startup figures are from MSIV original research across discussions and multiple platforms including Crunchbase, Pitchbook, LinkedIn, AngelList, company websites, and news sources as of 5.14.20.
Startup figures for the 50 states are pulled directly from Crunchbase without additional adjustments. Data as of 5.4.20.
Population figures from U.S. Census Bureau, 2019 Estimates
GDP figures from U.S. Bureau of Economic Analysis, Prototype Real Gross Domestic Product by County, 2012-2015. Analysis uses 2015 figures in 2012 chained dollars.
