The California Rustbelt

California has long been virtually synonymous with innovation, venture capital, and economic growth. In recent years, however, the business press has increasingly reported anecdotal accounts of businesses leaving for Texas or other states in frustration over the regulatory environment, tax burden, and budget prospects in California. Is this merely media sensationalism or there really an exodus of entrepreneurial activity from California? A quick look at some previously unexamined data suggests that California may indeed be slowly rusting from the inside out.

I collected data on startup businesses from Form D filings made with the Securities and Exchange Commission for the last decade (2002-2012). These filings are made by startup companies that raising funds in private markets, especially companies in California’s hallmark high-tech and venture capital sectors. The companies that file Form Ds are the Googles and Facebooks of the future, as those companies’ pre-IPO Form D filings can be found here and here. Thus, these filings provide a unique and previously unexamined source of information into the geographical distribution of startup companies raising funds in private markets—a window into what a state’s economic future might look like.

I complied data from 121,560 Form D filings over the last ten years to produce the plot below, depicting the shares of California, New York, and Texas in the startup financing market.

  

The plot reveals an unmistakable bleed of startup businesses out of California over the last decade.  As recently as 2002 California was the clear leader among all states, with about as many businesses as in the next four states combined (New York, Texas, Massachusetts, and Florida), and more than twice as many as its nearest competitor—New York. But by 2012 New York by itself has nearly caught California, and New York and Texas together have a far higher share than California. The trend began well before the financial crisis and housing bubble burst, so those factors do not drive the results.

These figures obviously pose a potential problem for California’s economic growth prospects over the next decade. California is dependent on the innovation economy to sustain its spending and vibrant Silicon Valley startup culture, but the figures presented here pose the question of whether California might be heading toward a "rustbelt" economy itself. In the next post, I look at which states are gaining and losing startup companies, and what that tells us about rankings of states as “business friendly.”

 

Comments

[Crashdev]

Great analysis, Robert -- the insight is dead-on. Curious if your data included Washington State filings as well -- I'd love to see that plot on the same graph to see how we're doing through this lens.

[Rob Anderson]

Thanks for the comments! The analysis covered all fifty states, and Washington was essentially flat throughout the period (2002-2012) with about 2.75% of the companies. In 2002 it had about 2.6% and in 2012 almost 3%. I plan to post a follow-up with more of this detail.