Is Silicon Valley really losing its crown?

Where is the heart of the technology industry?

The simple answer is “Silicon Valley,” a term that now generally means the San Francisco-San Jose-Oakland area of California. There are other options: The two largest public cloud providers, Microsoft and Amazon, are based in the state of Washington. Europe’s tech scene has been busy in recent years, meaning that it can’t be ignored in any such conversation. And the combined tech industries of China and India form a bloc that carries material heft.

So there are contenders. But Silicon Valley has historical centrality in the tech industry — it’s a hub of startup and major corporate technology activity stretching back decades, one that has been able to create a venture capital flywheel of investment and reinvestment that other markets work to mimic. Now, the question is perhaps better phrased as not “where is the new center of tech?” but “has the technology industry become so broad-based that it has no real gravitative nexus?”

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To answer that question, we have to understand how Silicon Valley compares to the larger United States venture capital and startup market; if Silicon Valley is truly losing its dominance domestically, it certainly cannot claim an international title. But if Silicon Valley is still the top dog in the U.S., itself the leading recipient of venture capital dollars, then perhaps we leave the Valley in the top slot for a while yet.

The question isn’t idle. Well-known investor and former SPAC booster Chamath Palihapitiya stirred the pot recently with the following:

In time, I do anticipate that a more global tech industry will dilute Silicon Valley’s former hegemony as the spawning point for what’s next, and it will become more figurehead than anything else. But has that happened?

We decided to find out: What’s the current ratio of dollars invested in the Valley compared to the rest of the nation, and how rapidly is that figure changing?

We’ve pulled data, parsed external definitions and come up with an answer of sorts. Let’s have some fun!

Definitions and other annoyances

What is Silicon Valley? You could argue that it’s a small bit of the larger Bay Area, but more normal definitions cite it as something a bit broader.

For example, CB Insights defines it as follows in one of its reports: “Silicon Valley refers to the San Jose-San Francisco-Oakland CSA,” where CSA stands for combined statistical areas. A CSA is a grouping, more or less, of cities and similar in a particular region that is counted as a unit in some cases. Happily, the CB Insights definition appears to be standard — PitchBook offers the same CSA in its own data service.

For our purposes today, we’re referring to the San Jose-San Francisco-Oakland CSA when we say Silicon Valley. The latter is shorter, so we will use its phrasing over its larger and more precise phrasing. Fair enough? Good.

Next up, data. I pulled PitchBook data from 2016 through today (September 27, 2022) regarding venture rounds in the United States and Silicon Valley. Using both deal volume and the dollar value of those deals, I’ve come up with a loose set of metrics that we can use directionally to get a sense of how the Valley is evolving as part of a larger, more active domestic venture scene.

Here are the numbers (that we will caveat afterward) tracking the portion of venture deals and dollars that the Valley controlled during any particular year:

  • 2016: 26.6% of rounds, 39.0% of dollars
  • 2017: 25.4% of rounds, 37.6% of dollars
  • 2018: 25.92% of rounds, 49.0% of dollars
  • 2019: 23.3% of rounds, 42.3% of dollars
  • 2020: 22.6% of rounds, 38.0% of dollars
  • 2021: 20.8% of rounds, 37.1% of dollars
  • 2022: 20.0% of rounds, 33.6% of dollars

Naturally, when data companies like PitchBook or CB Insights or Crunchbase do data work for publication, they tidy up the information. It’s good practice to go into your dataset and expunge weird edge cases and the like. I have experience doing that work and can confirm that it is at once important and tedious as hell.

We have not done this work in the above math. Instead, we care more about where the numbers are trending than where they are at a precise point. And because the 2022 data is partial, it is subject to change.

That said, we can see a pretty clear set of trends:

  1. Silicon Valley is slowly commanding a smaller fraction of total venture capital deal flow in the United States, though it does still see around one in every five domestic deals occur inside its borders.
  2. Silicon Valley punches above its weight in terms of the dollar value of deals that it does see.

You can argue the point of Silicon Valley’s purported centrality to the globally dominant United States startup market either way from this data. For example, the fact that the Valley is slowly bleeding market share to other domestic markets is evidence, if you want, that venture capital activity is increasingly broad-based, meaning that the Valley has never meant less than it does this year.

On the other hand, the fact that the not-very-big Silicon Valley area still commands one out of every three venture dollars in the largest global market for such investment is an indication of its outsized importance. The argument here is simple: If you want to build a big company, go where the big dollars are. With a fifth of deals and a third of the money, it’s clear that we’re seeing more, larger rounds in the Valley than elsewhere in the United States.

So is Silicon Valley losing its crown? Perhaps slowly, but its leading regional position in the leading international venture capital market is not in danger. So it’s hard to argue that the region is no longer prominent. When it is no longer preeminent, I suppose, will remain a matter of taste — it’s hard to be definitive with the data we have today.