Any startup that wants to see a big return knows they’re most likely to get it by basing themselves in the Bay Area. That’s common sense, given the maturity of the ecosystem and the sheer number of entrepreneurs and venture capitalists that reside here.
Being in the Bay area can also be a double-edged sword, though, with so much competition, so a number of founders choose to start their companies in smaller markets to better stand out against the crowd.
The question is, which of those smaller markets (I say smaller because they aren’t Palo Alto, but they are by no means actually “small”) will get them the best returns? Pitchbook put the data together, looking at exits of companies that have raised at least $500,000 over the last 10 years, and which cities see the highest rate of return.
In terms of percentage, the clear winner is Chicago. With 45 percent of companies, that is far and away the highest number, even topping the Bay Area in the percentage exiting with at least 10x the funding that they raised.
There were two surprising cites coming in second: Raleigh, North Carolina, and Washington D.C., each of which saw 26 percent of their companies have big exits. That was followed by Seattle and the Bay Area, in which a quarter of all exits were at least 10x.
A total of 81 percent of companies based in Chicago exited between 3x and 10x, followed by Raleigh and New York City, with 77 percent, then Los Angeles and Philadelphia, each with 76 percent.
Those number definitely highlight the benefits of being a big fish in a small pond; there are less companies to compete with, and so the dollars go further.
Cities like Chicago and Raleigh have such a high percentage of big exits is because the number of companies is so small in comparison to the largest markets, so even if less companies exit big, they stand out more.
In Chicago and Raleigh, only 14 and eight companies exited at 10x their funding, respectively, while in New York it was 25, Boston it was 34 and in the Bay Area it was 153. In the number of companies that exited between 3x and 10x their funding, Boston was the second highest by far, with 196 companies. In third place New York City with 98. Chicago and Raleigh, by contrast, only had a total of 31.
Chicago, along with Seattle, Atlanta, DC, Boulder and Austin, are what Fred Wilson of Union Square Ventures calls “third tier markets, which he pointed out also have numerous challenges in getting ahead, especially when it comes to capital and talent.
“This third tier is a decent place to be an entrepreneur and an investor. But there are challenges. Entrepreneurs in the third tier can access the talent and capital they need to be successful in these third tier markets but it is a bit harder to do both,” Wilson wrote.
“Investors can be focused on these markets if they keep their fund sizes small enough or they can take a hybrid approach by being focused on these markets and also investing in the first and second tier markets. The latter is how we have always approached being a NYC centric investor.”
Some of the biggest companies to exit at 10x in these cities include Chicago-based GrubHub, which raised $84.46 million but IPOed ata valuation of $2 billion; Seattle-based Zulily, which raised $127.6 billion, but IPOed at a valuation of $2.69 billion; Austin-based SolarWinds, which raised $48.5 million, but had an IPO that valued it $802 million; and Raleigh-based Catham Therapeutics, which raised only $200,000, but was acquired for $70 million.
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