How Is Remote Work Reshaping Venture Capital?

Key Takeaways

Since the start of 2020, the industry composition of venture capital investment has remained essentially unchanged despite the heightened salience of biotech and software during a pandemic-induced transition to remote work.
The continued flood of venture capital money into the Bay Area stands in striking contrast to our earlier coverage of the region’s stagnating private real estate market.
There are some early signs of up-and-coming venture capital hubs developing around Salt Lake City, Atlanta, Seattle, and San Diego; however, the Bay Area remains dominant.

In an earlier blog post, we explored how private real estate investment has responded to the sudden shift from in-office work to work-from-home arrangements. Here, we take a similar approach to determine how venture capital investors have adapted. In this blog post, we explore shifts in investment by industry as well as emerging geographic trends in the U.S.

Venture Capital

The Burgiss Manager Universe (BMU) contains nearly 12,100 funds and funds of funds and represents over $9.3 trillion in capitalization, providing insight into private capital funds and their holdings. In this blog post, we focus on 675 U.S. venture capital funds that were active from 2019 through 2021, using data on more than 14,000 investments into 5,624 unique companies. Compared to our previous findings for investments in real estate, venture capital investment is concentrated in a small subset of industries. While private real estate investment has historically been spread across two or three major property types, venture capital has become synonymous with tech companies. As shown in figure 1, the majority of venture capital money continues to flow into the tech sector.[1] Despite a growing reliance on information technology to enable remote work, we do not see venture capital firms significantly increasing their exposure to tech companies. Similarly, while the COVID-19 pandemic raised the profile of biotechnology companies, there was little reallocation to the industry. It is somewhat surprising that the pandemic has essentially had no impact on which industries venture capital funded, especially compared to the dramatic shifts we observed in real estate. Our review of documents that GPs have sent to their LPs further supports this finding—real estate managers regularly highlighted ways in which the pandemic shaped their investment decisions, but venture capital managers were conspicuously silent on the topic.[2]

Companies in many sectors benefit from agglomeration effects: when similar companies cluster together, they produce liquid labor markets, deep funding networks, and knowledge spillovers from the mingling of employees.[1] While manufacturing companies may gather around supply chains (e.g., the auto industry centered in Detroit) or geological features (e.g., oil and gas companies near the Gulf of Mexico), software companies seem unusually amenable to remote work. Unlike biotech companies, which are anchored by expensive lab facilities, the software industry is comparatively untethered to a particular location. Despite the digitalized nature of software companies, figure 2 demonstrates the strength that the aforementioned agglomeration effects continue to exert on them—the Bay Area stands out as the preeminent venture capital hub, with a focus on tech. In 2019, apart from second-tier hubs around New York and Boston, most major metropolitan areas received little venture capital investment. Markets receiving smaller investments also tend to specialize; venture-backed companies in Boston and San Diego, for example, are primarily in the biotech industry. In contrast with our earlier research on the geographic dispersion of real estate, venture capital investment is extremely geographically concentrated, with major U.S. metropolitan areas like Chicago, Houston, and Washington, D.C., receiving hardly any venture funding compared to the leading hubs.

While venture capital flowing into the Bay Area has ballooned since the start of 2020, it has been matched by increases throughout the rest of the country—San Francisco continues to attract just over 40% of all U.S. venture capital investment. Some mid-sized markets have seen especially dramatic booms: the Salt Lake City and Seattle metropolitan areas both saw large increases in venture investment, led by software companies. Boston, already a relatively established venture hub, grew rapidly due to a surge in biotech investment. Other metropolitan areas, like Atlanta, Dallas, Austin, and Miami, started from a low base but saw strong growth in venture capital inflows after the start of 2020.

Compare venture capital investments between 2019 and 2020–present.

Desktop: Hover your mouse over the map to view the different time periods.
Mobile: Touch the map with your finger to change the map from 2019 to 2020–present. To switch back to the 2019 map, refresh the page.

Fig. 2: U.S. venture capital investment. A circle’s size denotes the annualized value of investments into companies headquartered in that metropolitan area. Colors correspond to the GICS industry group receiving the largest share of investment dollars. City coordinates courtesy of SimpleMaps.com.

The rise of software companies across the U.S., including clusters around Seattle and Salt Lake City, suggests that the pandemic may have slightly eroded the agglomeration effects in the industry. However, figure 2 makes clear that if software companies are going to meaningfully diffuse out of expensive metro areas like San Francisco—and, to a lesser extent, New York—it is going to take time. Even the unprecedented shock of the pandemic did little to dampen the Bay Area’s status as the country’s (and world’s) premier venture hub.

Conclusion

Pandemic-induced shifts in demand have forced startups to rethink their locations, but venture capital GPs have continued with their pre-pandemic sectoral strategies. Software companies are still the most important component of venture capital portfolios, and the bulk of money has continued to flow to the Bay Area. However, we also found evidence of up-and-coming venture hubs like Salt Lake City, Seattle, and San Diego. Burgiss Applied Research will be monitoring these trends as the state of remote work evolves.

Footnotes

[1] The Global Industry Classification Standard (GICS®) Information Technology Sector includes Application Software, Internet Services & Infrastructure, and Systems Software, among others.

[2] Venture capital GPs were much more focused on company-level actions, including cash management, assistance with navigating Paycheck Protection Program loans, and strategic advice or knowledge sharing.

[3] https://www.aeaweb.org/articles?id=10.1257/jel.47.4.983

https://www.hbs.edu/ris/Publication%20Files/16-037_eb512e96-28d6-4c02-a7a9-39b52db95b00.pdf

Ruby AtwalAugust 22, 2022