How beneficial is location when it comes to venture capital funding?

During the Covid-19 pandemic, when lavish tech campuses shuttered and tech workers began working from home, prominent venture partners announced they would whisk themselves to different, less costly pastures. Suddenly, as tech companies adopted remote work policies and meetings moved from Sand Hill Road to Zoom, it seemed like California’s badge as the tech startup capital of the U.S. was about to be revoked.

The numbers paint a different story, at least in Los Angeles. The Los Angeles Business Journal pulled PitchBook data from the most active venture ecosystems in the U.S. – Silicon Valley, New York City, Boston and Los Angeles, respectively – and it seems like Los Angeles is the most insular of them all.

Between 2014 and so far in 2024, the venture ecosystem in Los Angeles invested an average of 56% of funding into California-based startups, while Silicon Valley, New York City and Boston invested an average of less than 40% of funding in their respective states. The most popular investment category for L.A. venture firms is entertainment and media software, receiving 34% of funding between 2004 and 2024.

“VCs, particularly lead VCs in deals, are very involved in the companies that they’re backing because there’s a lot more than just capital that the VC brings to the party,” Steve Moyer, a professor of finance and business economics at the University of Southern California, said. “There are very frequent meetings, monthly board meetings. I know we could do a lot of things virtually now, but there is usually a lot of face-to-face contact in these things. So proximity is pretty important.”

A close-knit community

Those numbers intuitively track with Jim Andelman, cofounder of Brentwood-based Bonfire Ventures. Andelman came to Los Angeles in 2004 by way of San Francisco, where he nabbed his first venture-related job. He founded his own venture firm in Los Angeles in 2005 which then merged with Mark Mullen’s firm in 2017 to create Bonfire Ventures. The pair met several times in the Los Angeles tech scene as co-investors in a handful of startups – a common occurrence, according to Andelman.

“We’ve all known each other for over a decade,” Andelman said. “It’s relatively easy. We serve on boards together. So we have opportunities to work together all the time.”

That level of fraternization is still in play today – an unnamed company signed a term sheet with Andelman’s colleagues at Venice-based Mucker Capital and, after a quick phone call, added Bonfire Ventures to the roster. And, according to Marlon Nichols, cofounder of Hollywood-based MaC Venture Capital, that culture encouraged him to move to Los Angeles when he started his own venture firm.

“We thought we saw something special happening and also thought that the community here seemed pretty collaborative for an investment community, which was kind of an anomaly,” Nichols said. “When you think about investment communities, there are usually some pretty sharp elbows.”

Bonfire Ventures is focused squarely on the world of business-to-businesses and enterprise software-as-a-service companies. The firm’s most recent fund in 2022 raised $230 million, and Bonfire has north of $900 million in assets under management.

But the company started as a nascent venture firm focused on seed stage funding – which, up until 2024, was the most popular funding stage for Los Angeles-based venture firms. Bonfire Ventures focused exclusively on making deals in the Southern California region when it started, and has since branched out to servicing startups in other states. Today, startups in southern California account for 40% of Bonfire’s portfolio.

“As a launch strategy, hitching your wagon to a fast riding horse, a good nice fast growing market that’s underserved, is a good market entry strategy,” Andelman said. “Then your reputation grows and expands and more people get to know your brand and you as individuals, people move around. And now we are relatively (location) agnostic.”

Sending funding elsewhere

Indeed, despite the Los Angeles venture ecosystem’s loyalty to in-state investments, the sector has increasingly been scattering its dollars across state lines. The amount of funding to California companies dropped 25% between 2014, and 2024, while startups in New York, Massachusetts and Texas are seeing more love from Los Angeles venture firms.

Crosscut Ventures, one of the earliest still-standing venture firms in Southern California, has been eyeing manufacturing hubs like Denver, Seattle and Detroit for future investments.

“For us, supporting SoCal is part of our ethos, part of our mission. But anybody tackling big audacious problems that humanity faces, we are interested in,” Brian Garrett, cofounder of Crosscut Ventures, said. “We tend to articulate that by saying other manufacturing-centric or mechanical engineering-centric markets are of great interest to us.”

For what it’s worth, both the New York and Boston venture clusters send most of their money to California – and it’s something the Los Angeles startup scene desperately needs. While the number of venture firms in Los Angeles has more than doubled in the last ten years, there isn’t enough funding in-market to make up for the larger checks startups here need. A PitchBook report found that venture firms in the area were armed with $52.9 billion to spend, while startups in the same area took in roughly $139 billion in funding, necessitating siphoning from venture capital in other cities. Perhaps the importance of locality is a vicious head-chasing-tail cyclical conversation of startups anchoring in California because that’s where the venture dollars are, and venture dollars chasing California startups because, well, they’re in California.

“I think on margin, we are better at supporting a local company,” Andelman said. “It’s easier to get together with them. It’s easier to refer them to local resources that are helpful to them.”