scorecardVC money used to be trapped in Silicon Valley, leaving startups in other parts of the US out in the cold. Work from home is changing that.
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VC money used to be trapped in Silicon Valley, leaving startups in other parts of the US out in the cold. Work from home is changing that.

Emil Skandul   

VC money used to be trapped in Silicon Valley, leaving startups in other parts of the US out in the cold. Work from home is changing that.
Tech5 min read
  • Remote work has fundamentally changed the geography of labor and venture capital.
  • Venture capital firms are pursuing deals across the US in midsize cities, outside of traditional tech hubs.
  • A dispersed workforce is beneficial for companies, workers, entrepreneurs, and the economy.
  • Emil Skandul is an opinion writer on economic policy and is the founder of a digital innovation firm, Capitol Foundry.

With the pandemic still ongoing and employees reluctant to return to the office, remote work has dramatically impacted where startups and their employees are located. The digitally-enabled workforce is everywhere: They are timezone hoppers, part-time urbanists and ruralists, beach-bound coffee shop nine-to-fivers, and office loyalists.

Not only has employee location changed as a result of our remote world, but the geography of venture capital investing has also been dispersed. While coastal US cities have led and captured the better part of economic and job growth in tech over the last several decades, small towns and midsize cities have more of a chance now to capture a slice of the knowledge economy and the capital that comes with it. This increasing geographic diversity will benefit companies and their workers, while the diversification of venture capital funding will increase access to capital and expand tech hubs' presence to new places across the US.

The geography of labor and capital is changing

In a remote world, the internetization of the global economy makes time and place less relevant. Work happens anywhere, and communication takes place asynchronously.

While the migration of people over the past year to the outskirts of cities or to midsize cities was not insignificant, many workers have remained in place in second-tier cities as well as suburban and rural areas. For companies and venture capital firms, the marketplace for workers and investable startups has broadened, leaping over geographic boundaries. Zoom-initiated deals have provided a chance for startups in Middle America to gain access to capital that was much more difficult to secure before. Well over a year into remote venture deals, investors appear to care less about a startup's presence in Silicon Valley and the location of a team's headquarters.

Meanwhile, corporate firms have continued to relegate the importance of hiring new workers based on an employee's location. White-collar firms such as PricewaterhouseCoopers (PwC), which recently announced perpetual remote work for its 40,000 workers, have shifted markedly in granting flexibility. The company's internal survey from August showed that sentiment for permanent remote work had remained steadfast.

In a highly competitive labor market that is seeing employees quit or consider more perks, why would a company impose limiting restrictions on workers and its own labor supply?

It follows, then, that the labor market of knowledge workers may become much more leveled between places over the long-run - as opposed to centralized in a few cities. Many first-tier cities will continue to lead economically, but second-tier cities now have a better chance of keeping workers and luring capital. For an entrepreneur in the heartland, the decreased cost of doing business has always been counteracted by the geography of available capital. That is quickly changing.

VC gold rush

More money than ever before flowed into venture capital deals last year, and venture activity is on track to break all records this year with over $150 billion in deals so far. However, venture capital investment has historically been concentrated, and those title-holding capitals of tech and the firms themselves have been located on the east and west coasts - in Silicon Valley, New York City, and Boston. In 2013, only half of all venture capital dollars in the US were invested outside the Bay Area. Today, over three-fourths of venture capital is invested outside of this region, and secondary tech hubs are rapidly drawing the attention of investors.

Early-stage funds such as Revolution's Rise of the Rest Fund, Flyover Capital, and the Mercury Fund have made it their investment philosophy to work with startups outside of traditional tech hubs. Venture capital here is in the "early innings," Anna Mason, a managing partner at Revolution's Rise of the Rest Fund, which manages $300 million designated for investing in startups outside of major hubs, told me. "Everyone is still diamond hunting in roughs they don't understand."

The "FOMO" factor within venture capital may be reaching a high-water mark, but the competitive environment may be a blessing for startups raising rounds outside of Silicon Valley. Investors are shuttling around the country to "woo" founders, and many are rumored to win hot deals by "sending private jets, limousines, extravagant gifts, meals, sponsored Barry's boot classes, and more," remarked Lux Capital's Deena Shakir, a partner at the firm. In the last few months New York City-based Lux Capital has led deals in St. Louis, Austin, Texas, Emeryville, California, Salt Lake City, and Boulder, Colorado. Other coastal firms are following suit.

The gold rush taking place within venture capital will continue to draw more investors toward greener pastures and taller mountains.

Geographic diversity is a good thing for companies, workers, and the economy

Promisingly, clusters of tech hubs are beginning to germinate around the country. For example, the artificial intelligence sub-industry in California may be unmatched, but over a dozen metro areas are developing AI economies, according to the Brookings Institution. What's more, midsize US cities are seeing growth not just in tech, but in knowledge-based jobs, and rural economic innovation to support even smaller towns is becoming a policy priority as other industries move out or transition into knowledge industries. The US Innovation and Competition Act passed in the Senate in June, authorizing $10 billion to be spent over 5 years for the creation of regional tech hubs.

Remote work could be the great equalizer for the economy. Geographic diversity would help reduce regional economic and cultural divides between the coasts and the American interior. For the last two decades, the winners of the tectonic shift to an increasingly tech- and knowledge-based economy have been superstar cities - metropolises with legacy information industries, access to world markets, and global research institutions. If the most successful firms in the knowledge economy depend on employees to have a range of skills, experiences, and perspectives, inevitably, geographic diversity becomes good for business and leads to stronger ideas and robust innovation.

For workers, remote work allows access to higher wages and lower costs of living. A developer in Dallas will make only $35k a year less on average than a developer in the Bay Area, yet a home in Dallas will cost only a quarter of the cost of a single family home in San Francisco.

"A plus about not being in the Bay Area is that you don't have a homogeneous view on everything," remarked Paul Powers, who founded the Ohio-based 3D-modeling firm Physna. "We have more diversity of opinion."

To find success outside the Valley, VCs and startups must have regional partners on the ground to sustain the syndication of funding. In fact, it is that co-investment and on-the-ground knowledge that is necessary for larger investments. While regions continue to "build bridges and pathways to the Valley and New York," as Anna Mason noted, education about local ecosystems and labor forces will also need to ramp up as coastal venture firms make their way into uncharted territory. Powers, who raised venture rounds from Drive Capital, Sequoia Capital, and Google Ventures, felt this unfamiliarity personally: "People looked at me as if I was from Pyongyang, when I was from Ohio." Progressively, familiarity will need to be fostered with newer startup markets.

If the Silicon Valley venture capitalist's rule of the past was to invest only in startups that are within reasonable distance, today they are geographically unbound and exploring mid-tier cities. Proximity and time zone are trivialized by the opportunity in finding startup "oil wells".

The confluent shifts in the geography of labor and capital as a result of the transition of work onto the cloud is an opportunity for a dispersed labor and venture capital market. That, in due time, will lead to a stronger US economy built on many frontiers.