Adam Sharp

Market Changes Favor New Startup Investors

I’ve now been investing in startups online for seven years. Over that time, I’ve invested in around 125 individual startups and three funds (those funds in turn invested in another 30 startups). The vast majority of deals were early — seed stage, pre-seed or Series A. And over those years of investing, I’ve gained some useful insights.

One of the most surprising lessons I’ve learned is that many of my best deals were located outside of the San Francisco Bay Area (SFBA). 

Here are the founding locations of some of my best performers so far:

It’s notable that most of these investments were made on accredited investing platforms based in the San Francisco area, such as AngelList and FundersClub. So they have a lot of SFBA deal flow from their local networks. 

So why are most of my best investments based outside the SFBA? I think part of the answer is pretty simple. To get into great SFBA deals, you have to compete with thousands of venture capitalists and angels. It’s hard to do that from Maryland, so I’ve found better opportunities outside of that hyper-competitive area. 

But there’s something larger happening here as well. The SFBA has traditionally been the boss when it comes to venture capital. Here’s an excerpt where Wired explains how this small geographical area still punches way above its weight.

Of the $69 billion that US-based venture funds invested in startups in the first quarter of 2021, more than $25 billion—over a third—landed in Silicon Valley and the Bay Area…

But SFBA is beginning to lose its dominance over startup investing. I discussed the region’s decline in Tech Companies Flee California (Finally) and Silicon Valley is Losing Dominance. The pandemic has dramatically accelerated things.

I recently found a chart on Twitter that shows how wealth is flowing out of places like California and New York and into places like Texas and Florida. 

This change will take time to play out. California still has a massively productive technology industry and the world’s best venture capital system. And wealth migration is just one of the first steps to shifting the investing landscape.

My startup investing focus is now almost exclusively outside California at this point. And one huge selling point for me is that valuations (prices) are far, far better outside the SFBA. 

At this point, I’d say seed stage valuations in San Francisco are at least 40% higher than the rest of the country on average. That’s a very significant number when you’re investing early and need your winners to hit big. 

This exodus of capital and talent from the SFBA is good news for new startup investors. Now that tech and capital are spreading out throughout the country and companies can easily raise up to $5 million through online funding portals and anyone can invest with only $100… I think new startup investors are entering into a market that’s never existed before. There’s a powerful combination of factors that’s changing how startup investing is done. Investors should be ready to take advantage.