By the measure of any thermometer, venture capital (VC) is hot. Investors placed a record $133 billion in private company investments in 2020, according to PwC/CB Insights MoneyTree data. They directed another $62 billion into VC-backed companies during the first quarter of 2021.

The bulk of the funding funneled into three sectors—internet, healthcare, and mobile and telecommunications firms raised roughly three-quarters of the $195 billion. Perhaps more strikingly, 74% of VC cash went to companies in three states: California, New York, and Massachusetts.

More specifically, PitchBook-National Venture Capital Association (NVCA) surveys state that the money flowing into California’s San Francisco Bay Area, Boston, and New York far exceeded that raised in the rest of the country combined.

Many factors may contribute to this long-standing trend:

• VC reinvestment. Investor bases may repeatedly fund early-stage and emerging businesses. They accept higher risk levels for potentially higher returns in doing so—and they may subsequently reinvest profits in new VC-backed ventures.
• Centers of innovation. Frequently built around institutions such as Harvard and Stanford, these centers forge direct connections to a business community and nurture creative advances.
• Connections. Robust networks can capitalize on the close proximity between founders, funders, and innovators to build an entrepreneurial ecosystem.

Cash Flow Tides Set to Shift

New York, California, and Boston may remain VC heavyweights for some time. However, there are signs that the tides are beginning to shift. The success of startup business funding has contributed to higher costs of business in these three leading markets. AngelList research found that investor returns in the Bay Area have diminished due to higher taxes and the repercussions of a high cost of living.

Alternatively, VC interest is currently surging in markets such as Austin, Texas; Seattle; Denver; Portland, Oregon; Nashville; Pittsburgh; and Miami. This trend is hastened by the emergence of viable remote connections during the COVID-19 pandemic. For example, Florida saw an influx of investors and founders during 2020 due in part to support from Miami’s mayor as well as the state’s lack of an income tax.

Such developments prompted PitchBook to project in its 2021 US Venture Capital Outlook that the number of VC deals closed in Silicon Valley this year will fall below 20% of the US total for the first time.

How Communities Can Prepare

For emerging VC markets looking to emulate Silicon Valley’s success, PitchBook explains in VC Ecosystemsthat the key is in the breadth and depth of the startup, early stage, and later-stage business communities.

Investors can foster growth across the entrepreneurial spectrum by:

• Actively engaging with the local startup and early-stage business communities
• Investing money, time, and resources in emerging companies
• Exploring local sources of innovation, including universities, business incubators, and government labs
• Connecting founders and innovators with fellow potential funders

“Both founders and investors are applying the playbook learned from the [Silicon] Valley and adapting it to their local situations,” Pittsburgh-based GP Taylor Davidson told TechCrunch. “We think that will help companies throughout the USA prove successful in raising capital and building big businesses.”