If you read the normal tech startup and venture capital blogs and news sites, it’s easy to think that West Coast investors in the Bay Area have unbelievable deal flow and never have to leave the region. Then, if you look at the 10-20 largest venture financings each year in major cities like Atlanta (and plenty of others), you’ll see that a good percentage, if not most, of the money came from California VCs. If the Bay Area is so great for deal flow, why does so much VC money from the West Coast go into deals outside their region?
Simple: VCs are trying to make the most money possible, and they believe the deals they invest in outside their region are better than the deals they looked at in the Bay Area. Most VCs only do one or two deals a year, so when they invest in a startup in a different state, it’s because they believe they’ll generate a better return on their investment when compared to the other options. Being a top-quartile VC is super hard (making 3x cash-on-cash is much harder than it seems) and the best ones know that there are great startups all over the country (and world).
Great entrepreneurs and startups are everywhere. The next time you read about a Bay Area fund leading a deal outside their region, know that it’s because they believe it’s a better opportunity than the ones they looked at locally.
What else? What are some more thoughts on why West Coast investors invest outside their region?