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Venture investing shifts away from traditional Silicon Valley

When the phrase “Silicon Valley” came into being in the early 1970s, it referred to a group of Santa Clara Valley, California, communities south of San Francisco with San Jose as its hub.

It was here that the modern chip industry grew out of fruit orchards and gave rise to companies such as Fairchild Semiconductor and Intel.

Turns out this birthplace of the modern high-tech industry is losing some of its mojo, at least for venture capitalists.

For several years, venture investors’ interest in companies in the original Silicon Valley has been dwindling, replaced by a growing excitement for those in San Francisco.

The trend reached a dubious milestone last year, when even metropolitan New York and Boston saw more companies funded than the traditional Silicon Valley did.

That’s not to say Silicon Valley, as it is now thought of, is losing its billing as the nation’s tech center. Today, a broader definition of the valley encompasses a much larger stretch of California, from San Francisco to San Jose and across San Francisco Bay to its East Bay towns.

It is these new communities, specifically those in the San Francisco metro area, that now get the lion’s share of venture funding. Last year, that amounted to more than three times as much as the original San Jose-anchored Silicon Valley, according to data from Thomson Reuters.

There are numerous explanations for this. The original Silicon Valley is home now to more established companies, such as Intel, Cisco and Yahoo. And it is still more associated with the chipmaking technology that enabled its rise than the Internet companies springing up further north in San Francisco.

Activity also has grown in places such as New York and Boston.

This wasn’t always the case. As far back as 2006, the San Jose metro area still topped San Francisco in venture companies funded and dollars distributed.

That flipped by 2008, and by 2012, dollars going to San Francisco metro companies were more than 60 percent greater, according to the Thomson Reuters data, which uses metropolitan statistical areas.

The trend has continued. Last year, VCs invested $19.8 billion in San Francisco-area companies, triple the $6.4 billion in San Jose-area ones, according to the data.

The difference in companies funded was also dramatic. Venture dollars backed 746 companies in metro San Francisco, more than twice the 334 in metro San Jose.

And for the first time, the number of companies backed in metro New York (376) and in metro Boston (345) bested San Jose, though total dollars put to work did not.

This year, however, even dollars invested has reversed. Through late April, investments in metro New York total $1.9 billion and in metro Boston, $1.7 billion, compared with $1.2 billion in metro San Jose.

For many VCs who have opened offices in San Francisco, the trend is likely no surprise. The severity of it might be.

Downloadable Data: Top 5 venture metro areas (2006-2016)

Photo of the skyline of San Francisco and the south tower of the Golden Gate Bridge are seen from the Marin Headlands as they rise above the fog in Sausalito, California, on March 21, 2012. Courtesy Reuters/Robert Galbraith