What the Tech Ecosystems of Tomorrow Might Look Like

An exodus from Silicon Valley and an even bigger ongoing commitment to remote work are just two of the trends we’re forecasting for 2021.
Headshot of author Kurt Shenk
Kurt Shenk
Expert Contributor
March 30, 2021
Updated: March 31, 2021
Headshot of author Kurt Shenk
Kurt Shenk
Expert Contributor
March 30, 2021
Updated: March 31, 2021

Like most industries, the U.S. technology ecosystem has gone through significant changes over the past year as remote work has become the norm for so many companies. In the tech world, however, significant portions of the workforce were already partially or even fully remote well before 2020; the pandemic has simply accelerated this shift.

Now, as remote work continues, tech companies of all sizes are increasingly less interested in where their software development teams physically live and more interested in what opportunities a remote environment may bring to draw from a broader talent pool. We expect this will fuel continued change in where technology ecosystems are clustered and dispersed across the United States.

Over the last several years, approximately 75 percent of U.S. venture capital has been invested in four primary markets: San Francisco, Los Angeles, New York and Boston, according to PitchBook data. Because many technology companies burn through cash and require funding to sustain their operations while they scale their offerings, we expect U.S. companies will generally continue to experience the most success in these main hubs.

However, data from Silicon Valley Bank’s State of the Markets 2021 Q1 report reveals a shift that happened last year toward more startup activity in non-core metro areas, outside of traditional innovation hubs.

“Especially in the Bay Area and Boston, you see a significant number of companies being started in the ’burbs relative to the city centers,” Silicon Valley Bank senior market manager Dan Allred said during RSM’s February Tech Connection event, which brought together a panel of industry leaders to discuss the SVB report.

In 2020, 25 percent of Bay Area startups were headquartered in San Francisco, and 10 percent were headquartered in Palo Alto — a decrease for both cities compared to 2019, according to SVB’s report, which used data on the share of the bank’s clients onboarded to its startup banking group by city. Sixty-five percent of startups were headquartered in parts of the Bay Area outside of those two cities last year — up from 55 percent in 2019. The share of Boston-area startups headquartered in non-core metro areas also saw an increase in 2020 to 72 percent, compared to 58 percent in 2019. In the city of Boston itself, the number dropped from 22 percent in 2019 to 18 percent last year, according to SVB.

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Capital Concentrations

Economic output in the U.S. has, for years, been concentrated in a handful of large metro areas. In 2018, 31 counties generated 32 percent of U.S. gross domestic output, according to a Bloomberg report in late 2019, and tech is among the most geographically concentrated industries. Within the information sector, for instance, nearly 60 percent of economic output was derived from those 31 counties in 2018. The Bay Area has the most technology companies with a valuation in excess of $100 billion, according to PitchBook.

Along with where software developers and other IT professionals choose to live, the ability of a city to attract venture capital will be another leading indicator as to the technology ecosystems of tomorrow. In 2020, more than 8,000 rounds of capital were deployed to U.S. tech companies, according to PitchBook. Approximately 2,500 of those rounds of capital were directed at companies in the Bay Area, which, for reference, is approximately 10 times the number of rounds of capital deployed in Austin.

Tech companies burn cash for most of their journey from startup to exit, and many continue to burn cash well after going public. As such, access to capital is crucial for technology ecosystems. As more startups emerge around the country, we’ll be able to measure the success of more nascent tech ecosystems by how much venture capital flows to these locales.

“Historically, early stage seed investing has been characterized by people wanting to be close to the founders — within a couple hours,” Grotech Ventures general partner Steve Fredrick said during the Tech Connection event. “That may change in a world where we’ve all gotten comfortable investing over video links.”

 

The Texodus

Less high-profile technology ecosystems around the U.S. are getting stronger as a result of the pandemic and the way the explosion in remote collaboration has allowed for a more dispersed workforce.

Austin is a prime example. Oracle’s December announcement that it has moved its headquarters there from the Bay Area is arguably the biggest technology industry event that has taken place for Austin and proof of the growing strength of its tech scene.

This movement of employees and companies into Texas — which some refer to as the “Texodus” — was already underway prior to the pandemic. The Austin area and the Dallas-Fort Worth area were among the U.S. metros that saw the greatest daily net inbound migration from July of 2018 to July of 2019, according to Bloomberg. The state’s lack of income tax is one draw, and many technology companies are finding a good source of tech talent in Texas at an affordable cost.

“I do think the Texodus is real,” said Byron Deeter, partner at Bessemer Venture Partners, during the Tech Connection event. “It’s the topic du jour with people looking at alternative areas.”

In January, IT trade association group CompTIA reported an increase in the top 10 states looking to hire technology workers for remote or work-from-home positions. The top 10 states were looking to hire a total of 33,999 work-from-home jobs in the month of January of 2021, which was an increase of 4,581 jobs from December of 2020. The top three states looking to hire remote technology workers were California (8,876 jobs), Texas (5,901 jobs) and Florida (3,026). The top job posting in January was for software developer positions, with 16,832 job postings. That represents an increase of 1,519 jobs from the previous month.

As some tech companies pivot away from the San Francisco region, there will be “massive implications for where the employee base distributes not just nationally but also probably globally,” Deeter said. “That will roll through to a lot of wonderful things in terms of talent mobility, diversity, access to great people – but it’s certainly going to change this notion of a headquarters. ... Our companies are absolutely thinking about this as a mobile, unlocked workforce.”

 

Enabling the Virtual Environment

Many technology companies have jumped with both feet into the accelerated shift to more remote work. In February, the Wall Street Journal reported that Salesforce expects more than 65 percent of its employees will work remotely on a part-time basis and “come into the office only one to three days a week in the future, up from 40 percent before the pandemic.” Others there are expected to work remotely on a full-time basis.

Technology companies are looking to support their remote workforces through continued education on best practices for managers and employees working remotely, software tools such as Slack, hardware needed for working from home and how best to communicate and maintain company culture in a remote environment.

In the future, we expect collaboration will be more technology-enabled, but it’s important to note that in-person work is not dead. We anticipate that technology companies may still require employees to be physically in the office one to two days a week for meetings and other specific events where in-person collaboration is more ideal. For many companies, this has the potential to strengthen company culture and enhance innovation.

History has shown that technology industry trends that originate in Silicon Valley with companies like Salesforce often foreshadow what is ahead for many middle-market tech companies across North America. The sentiment so far about the work-from-home trend during this pandemic is no different, and we anticipate that more middle-market technology businesses will provide remote options for a larger portion of their workforce.

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