Security Innovation Epicenters: No Longer A Tale of Two Cities
AlphaPrime focuses on technologies that manage and protect people and assets. We’re often asked why we are based in New York (actually, the real question being asked is ‘Why aren’t you based in San Francisco?’). Now, we’re the first to admit that we’re New Yorkers (Manhattanites even) through and through, complete with an inability to drive (well), a frustrating lack of patience, and somehow, we just feel calmer in the company of concrete skyscrapers. However, in our sector, there are other good reasons to be based in New York.
US Innovation Hubs
A Tale of Two Rims, Not Two Cities
We track several thousand companies that manage and protect people and assets. Analysis reveals that in safety and security, the “West Rim” (being the California ecosystems) does not have the overwhelming dominance that is perhaps seen in other sectors.
Over the last two decades, the innovation landscape has undergone profound shifts away from the traditional twin towers of Silicon Valley and Boston. Silicon Valley still has the largest concentrate of safety and security companies in the US (with 20% of the sector), however, Boston has slipped to 5th place behind Washington DC, San Francisco and New York.
Instead, the sector concentration is now one of two ”rims”, not two cities. The West Rim in total hosts 38% of all companies in the sector. Surprisingly, this is only 20% more than the “East Rim” (Washington DC area, Boston, New York and Tri-State area) that is home to 32% of the companies in the sector. The balance of the sector, 30% of all companies, is geographically dispersed, often servicing their local region, without particular concentration hubs of note.
But doesn’t the West Rim have a materially larger share of the startups?’ we hear our west coast colleagues cry! Not in our sector.
Almost half of our database comprise companies we consider “startups” (being less than 5 years old). Safety and security startups are increasingly shifting from regional locations towards the urban centers of San Francisco, Washington DC, New York and Boston. Interestingly, however, the West Rim maintains the same 20% higher share of the sector startups.
The Exit Landscape
The West Rim Does Not Over-Index With Exits
From the moment we invest, we are thinking about exits: building companies to strategic sale, or occasionally IPO, and delivering investor returns. One of the most frequently cited reasons given by “Valley Purists” for being in Silicon Valley is that “this is where all the exits are”. But is it?
If you look at the raw numbers, yes, Silicon Valley has historically had the lion’s share of the exits in our sector (22%). But hang on! They also have 20% of all the companies in the sector. So we dug a little deeper and looked at the propensity of different innovation hubs to produce exits.
West Rim Capital Not Driving Exits
The number of exits is proportional to the number of companies in the region. There are, however, some significant outliers. As you might expect, the growing innovation hubs (San Fran, Boston and NYC) have not yet seen exits proportional to the number of companies founded in the last 5 years. More interestingly, the West Rim has fewer exits than we would expect. This is particularly surprising when you consider that the West Rim materially over-indexes in the amount of investment made to the region.
- Most founders initially establish companies where they live. However, rapidly growing startups will usually revisit this decision in their first 4 years. In recent years, there has been an urbanization of safety and security startups, particularly to San Francisco, Washington DC, New York and Boston. Entrepreneurs choosing those cities cite access to talent, access to customers and access to likeminded innovation ecosystems (for support, ideas and entrepreneur resources) as the key drivers.
- In the safety and security sector, both the east-coast and west-coast rims have established innovation ecosystems, each with several thousand companies.
- However, despite having 20% more companies in the sector, the west-rim under-indexes in number of exits and invested capital efficiency, relative to the east-coast rim.
- Investors based on the east-coast certainly do not suffer for lack of opportunity in the safety and security sector. If anything, the innovation cultures on the east-coast promote raising less capital, relative to their west-coast brethren, to the benefit of both founders and investors.
About The Analysis: Our research leverages AlphaPrime’s proprietary data warehouse, Charlotte’s Web™ , that tracks thousands of companies that protect people and assets. This specific drone analysis was conducted in June 2016 (with minor updating in 2017), with significant support from our analysist Charlotte Kwon, that we named the data warehouse after her. Charlotte’s Web™ is the result of hours of painstaking research: from our first analyst (and the data warehouse’s namesake) Charlotte Kwon, to Matteo Cuda, Emma Yunqi Li, Nathan Coen and Marc Bove who have contributed to its data reserves over the years. We remember and remain enormously thankful.
About AlphaPrime: In an increasingly complex and dangerous world, threats to people and assets are escalating in diversity, frequency and magnitude. The need and ability to anticipate and respond to these threats is essential and universal. AlphaPrime invests in companies that address this need, and manage and protect people and assets. It’s not part of what we do, it’s everything we do.
Copyright 2017, AlphaPrime Management LLC