Which VC returns were higher over the last decade? East Coast or West Coast?
Surprisingly…neither.
East Coast versus West Coast rivalries over the years are the stuff of American legend: Celtics vs. Lakers and Yankees vs. Dodgers in sports, Notorious B.I.G. vs. Tupac in hip hop music, and even rivalries in food. Here at Correlation Ventures we’ve been watching another rivalry closely for years: the performance of venture backed companies in the East Coast versus the West Coast states. When we recently re-ran this with the latest data from 2016 we were blown away. The dollar-weighted realized returns for both geographies over the past 10 years were essentially equal, both in terms of the average and the 90th percentile (the winners).
Just to clarify, we’re defining West Coast as VC-backed companies (not VC firms) located in the three states touching the Pacific (blue dots below) and the East Coast as VC-backed companies in the states touching the Atlantic (red dots). Notably, this should not to be confused with red and blue states (we won’t go there!)
Even more interestingly, as we’ve watched the two geographies over the years, a pattern has emerged. While the two geographies have accomplished essentially equal 10-year returns, they’ve done this in very different ways. The West Coast has experienced higher magnitude exits in terms of IPO market capitalization or purchase price, for instance, the Twitters, the Facebooks, the Snapchats, etc. — each greater than $20B. The biggest outcome in NYC VC history appears to be Etsy ($2B IPO). Then you may ask yourself, how did the East Coast generate the same realized multiples over the past decade? They did it by lower pre-money valuations and a lower average amount of capital needed to get a company to an outcome.
What we’re seeing here appears to be an amazing story of capital efficiency. On an annual basis (year to year not 10 year average), mean returns for the West Coast exceeded the East Coast for 5 years from 2011–2015. Last year the East Coast pulled ahead. We suspect higher relative West Coast returns over the prior 5 years attracted more capital, which increased pre-money valuations and round sizes in the West, depressing returns relative to the East Coast. As do other VC firms, our firm has offices and permanent teams based on both coasts — in our case, the Bay Area, NYC and San Diego — in order to best leverage opportunities on both coasts in a wide variety of industries.
It’s going to be very interesting to see whether the East can sustain this recent advantage and we’ll continue to watch this trend closely.
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Correlation Ventures is the predictive analytics pioneer in the venture capital industry and the industry’s leading co-investor. With more than $350 million under management, we’re one of the most active U.S. venture investors, investing in about two to three new investments a month. Over the last five years, we’ve invested in over 140 companies. Correlation offers a dramatically better option for lead investors, syndicates, and companies seeking additional venture capital to fill out a round. We offer the most rapid, convenient, and reliable source of co‐investment capital in the industry; for example, committing to make investment decisions within two weeks or less. Correlation is backed by leading institutional investors.
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Methodology Note: The Correlation Ventures database is derived from commercial data providers such as Dow Jones Venture Source and others, as well as proprietary data. It contains over 80,000 equity financings (including convertible preferred debt financings) since 1987 in U.S. headquartered companies in which at least one firm characterized as a venture fund participated. Returns for companies that went public are based on the median stock price 6 to 9 months after the IPO. Returns in acquisitions are based on realized returns, without factoring in potential future milestone payments. Correlation has spent considerable effort to identify companies labeled as “still private” in commercially available datasets but are actually out of business. As one validation of our dataset and methodologies, please note that when we calculate total returns by vintage year (versus realized returns by exit year, as presented above), we get similar results historically to the industry standard reports produced by such groups as Cambridge Associates and Venture Economics. Our estimates are extrapolated from reported returns at the financing level; there is inherently some error and variability in these extrapolated estimates and our best estimates for historical time periods may change in the future.
