Venture Capital Slowly Trending Up: A Positive Sign for CRE, But Gains Mostly Limited to Silicon Valley

by CoyDavidson on June 13, 2011

Research Matters

By: Ross Moore | Chief Economist, Colliers USA

Since the first quarter of 2009, venture capital investment activity has slowly been trending up. According to PWC/National Venture Capital Association’s most recent report, investment volumes in the first quarter of 2011 totaled $5.9 billion. This was a substantial increase from two years ago, when venture capitalists invested just $3.6 billion; but still well below cyclical highs registered in the 1999-2001 period, when $10.0 billion or more was recorded in every quarter. For Q1 2011 venture capital volumes were up 5.0% over the quarter and 13.7% over the year.

Silicon Valley is the Star Performer

Closer examination, however, shows most new venture capital is going to Silicon Valley (defined as Northern California, the Bay Area and coastline) with very few other regions registering gains. As the chart below shows, only Los Angeles/Orange Country (defined as Southern California [excluding San Diego], the Central Coast and San Joaquin Valley), New York (Metropolitan NY area, northern New Jersey, and Fairfield County, Connecticut) and the Midwest (Illinois, Missouri, Indiana, Kentucky, Ohio, Michigan, and western Pennsylvania) outperformed in the first quarter relative to their long-term average. Silicon Valley received 42.4% of total venture capital against a long-term average of 33.7%. New York accounted for 9.9% (7.9% average), LA/Orange County 6.7% (6.4%) and the Midwest 5.5% (4.9%). Indeed Q1 venture capital destined for Silicon Valley increased by 14.5% relative to the fourth quarter, and 42.5% from the same period a year ago. Moreover, if we exclude Silicon Valley, total venture capital actually shrank 1.0% over the quarter and 1.0% over the year.

Why the Focus on Venture Capital?

As all of us search for the next source of demand for office space, startups are a logical place to look. Startups almost always require some sort of seed capital which venture capitalists often supply. With talk of IPOs in such companies as Facebook, Zynga and Groupon, the focus is once again on companies that are in their infancy and about to experience rapid growth. The next question is, where will the next Facebook or LinkedIn be located? While the initial destination of venture capital doesn’t dictate the final geographic location, it almost certainly does show where incubator-type companies will begin their growth and hence the need for real estate. (After all, startups can’t stay in the garage forever.) By this measure, Silicon Valley (which has recently seen an uptick in demand for office and tech space) and to a lesser extent places such as Boston/Cambridge and New York, are some of the more obvious candidates. While it is highly unlikely that we will see a repeat of the dot-com boom of the late 1990s and early 2000s, it may be prudent for all real estate practitioners to pay closer attention to venture capitalists and what they may be telling us is the next source of office demand.

Ross Moore is the Colliers International’s Chief Economist with a focus on providing bottom-up and top-down analysis of commercial real estate markets across the United States. In addition to his North America wide reports, Ross also authors all global research produced by Colliers.

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