As the startup scene in Silicon Valley becomes more saturated and the cost of living skyrockets, cities elsewhere are beginning to look far more attractive to startups--and to venture capitalists.

While San Francisco continues to remain supreme as the biggest and baddest of startup cities, investment research company PitchBook decided to look into other regions and cities just to be sure. Shockingly, they found the Bay Area does not have the highest percentage of profitable startups. What's more, some of the smaller markets were far more profitable than large cities like New York City and Los Angeles. And the most profitable of all? Chicago.

In Chicago, 45 percent of investments produced 10 times a return on investment. This was far higher than the runner up, Raleigh, where 26 percent of startups produced the same return on investment. Chicago raked in high numbers across the board, with 81 percent of its startups producing between three and 10 percent a yield on initial investment. New York came in third below Chicago and Raleigh.

PitchBook culled through their proprietary data to draw up the results. Here's how they determined the profitability of the startups:

  • Full exit through acquisition or IPO in the last 10 years
  • At least $500,000 in VC funding had to be raised before the exit
  • PitchBook double checked all funding rounds to verify the total of invested capital
  • PitchBook confirmed the amount of the exit

Cities with at least 30 startups who met the above qualifications were included in their data set. That said, both Chicago and Raleigh only have 31 startups that met the profitability requirements. New York City has 98. As the granddaddy region of startups, the Bay Area has 613.

"The results are a bit surprising, with cities like Washington, D.C., and Chicago ranking ahead of the Bay Area and NYC," PitchBook reported. "That said, there are many ways to cut the data that may give alternative results."

No matter how you read into the data, this is still a big win for Chicago. Fred Wilson, the co-founder of Union Square Ventures, recently named Chicago as a third-tier startup city behind first-tier Silicon Valley and second-tier cities New York City, Los Angeles and Boston. Chicago has been a flurry of activity this June, BuiltinChicago reported. All this month, cloud-based software SMS Assist raised $150 million with a $1 billion valuation, mobile marketing company Vibes raised $45 million, advertising technology platform Signal raised $30 million and HR software Hireology raised $12 million.

Published on: Jun 17, 2016