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: no longer a tale of two cities
We track thousands of companies that manage and protect people and assets. When we look at our dataset, 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. Today, San Francisco, the Washington DC area, and New York and its Tri-State area, all have meaningful, and in some cases more important, innovation hubs.
While the West Rim is home to 38% of all companies (early, late and public), 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 sector.
We also find that in safety and security, the West Rim doesn't have a materially larger share of the startups. Almost half of our database are companies we would consider “startups” (being less than 5 years old). In the startup ecosystem alone, the innovation landscape is undergoing significant changes: San Francisco, Washington DC, New York and Boston are increasingly the locations of choice for safety and security startups - mainly due to strong talent pools and access to customers. As both Rims are growing, both regions maintain their proportion of newer companies, with the West Rim having 41% of startups, and the East Rim having 33%, again only 20% fewer.
Innovations are great, but exits are better
From the moment venture capitalists 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”. Our analysis revealed that in safety and security this was something of a myth.
Silicon Valley has enjoyed 22% of the exits in safety and security, but they also have 20% of the companies in the sector. Honestly, you would be forgiven for being disappointed in this result. With it's long, established history as the startup epicenter of the world, with a unique confluence of scientific centers, innovation labs and services, angel investors and venture capital, surely the Valley should be disproportionately punching above their weight in terms of exits. A 10% relative over performance, is frankly, underwhelming for all the noise. It's certainly not the 20% or 30% that would justify the "location over-confidence" we see touted by some entrepreneurs who come to the east coast with staggering valuation expectations.
At a regional level, the West Rim as a whole is notably under-performing in terms of exits, relative to the number of companies it hosts. This is particularly concerning when considering that the West Rim receives significantly more venture capital (76% more than East Rim companies). The higher number of companies, with significantly more funding, is translating to notably fewer, rather than more, exits.
In the safety and security sector, the East Rim has close to the same number of companies as the West Rim. With proportionally the same number of exits, the East Rim is actually more effective than the West Rim as a whole in fostering exits in our sector. And, East Rim companies on the whole demonstrate a materially more capitally efficient culture, which can only be of benefit to employees and investors alike. By being based in New York, we are an easy drive to these investment opportunities, and are close enough to offer hands on, in the room, support that help entrepreneurs accelerate their businesses. In safety and security investments, New York is not a compromise, is an advantage.
About The Analysis: The above analysis was run using data from AlphaPrime’s proprietary data warehouse, Charlotte’s Web ? that tracks thousands of companies that manage and protect people and assets. This specific location analysis was conducted in June 2016 with significant support from our first analyst, Charlotte Kwon, who was so phenomenal, that we named the warehouse after her.
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.