Is SF’s Tech Market Recovering? Q3’s Top Funding Rounds Suggest So.

It’s hard to talk about any economic trends in 2020 without first addressing the elephant in the room: COVID-19 and the subsequent lockdowns and restrictions wreaked havoc on the American economy.

COVID-19 hasn’t gone away, but some of the economic fallout has begun to fade. The American economy was hit hard in the second quarter of 2020, but Q3 gave many businesses and industries the chance to recover.

So far, economic recovery from COVID-19 has been somewhat uneven. While many industries have yet to return to their pre-pandemic levels, the tech sector has largely bounced back and then some.

In a way, the pandemic has merely accelerated many already growing tech trends. Things like workplace automation, e-commerce and digital banking were already catching on across the world. But when the pandemic hit, companies offering these services were handed a timely sales pitch. E-commerce became even more essential with physical stores closed. Healthtech services offered a lifeline to people when hospitals were on the frontline of the virus. Soon, companies and their employees were conducting the majority of their business through Zoom meetings and Slack messages.

Many of these companies saw demand for their product surge as people were adjusting to life during the pandemic, and that growth has continued even after the initial shock of the pandemic has worn off. This growth has manifested in increased revenue numbers, new customers added, hiring sprees and more.

But one of the clearest indicators of a tech company’s growth is the size of its most recent funding round. Companies often turn to venture capital firms in order to receive the financial backing they need to grow. If a company is raising money, that often means that it’s gearing up to launch or expand its product, hire more people so it can scale operations, or provide its service to more customers, or it’s aiming to reach a broader market. Generally, raising funding is a sign that companies are betting on future growth.

Based on our reporting across every major U.S. tech hub, we’ve rounded up the largest Q3 venture-backed funding rounds from eight key markets: San Francisco, Seattle and Los Angeles in the west, Boston and New York City in the east, and Austin, Chicago and Colorado in the middle. The funding trends this quarter shine a light on what industries and companies are growing despite the pandemic, and could indicate where tech is heading in Q4, 2021 and beyond.

Top VC-Backed Funding Rounds of Q3

1.     SpaceX (LA) $1.9 billion, Aug. 19

2.     Robinhood (SF) $980 million ($320 million, July 13; $200 million, Aug. 17; $460 million, Sept. 22)

3.     Affirm (SF) $500 million, Sept. 18

4.     Chime (SF) $485 million, Sept. 21

5.     Zwift (LA) $450 million, Sept. 16

6.     Indigo Ag (Boston) $360 million, Aug. 3

7.     Perfect Day (SF) $300 million, July 8

8.     Freenome (SF) $270 million, Aug. 26

9.     Thrasio (Boston) $260 million, July 15

10.   Next Insurance (SF) $250 million, Sept. 23

11.   Warby Parker (NYC) $245 million, Aug. 27

12.   Nuvia (SF) $240 million, Sept. 24

13.   Attentive (NYC) $230 million, Sept. 23

14.   (tie) UiPath (NYC) $225 million, July 13

14.   (tie) VTEX (NYC) $225 million, Oct. 1

16.   (tie) Gong (SF) $200 million, Aug. 12

16.   (tie) Anduril (LA) $200 million, July 2

16.   (tie) Ro (NYC) $200 million, July 27

16.   (tie) Snyk (Boston) $200 million, Sept. 9

16.   (tie) Sprinklr (NYC) $200 million, Sept. 9

Fintech Dominates the West Coast

San Francisco, Silicon Valley and the Bay Area as a whole tend to dominate the U.S. tech scene. As a result, tech companies from this region tend to have higher valuations. So it comes as no surprise that many of the companies that raised the most money in Q3 are based in the San Francisco Bay Area.

However, several companies from Southern California were also represented in the top 20 list last quarter. Most notably, Hawthorne-based SpaceX took the No. 1 spot by raising a $1.9 billion venture round in August. Other SoCal companies, like Zwift and Anduril, raised hundreds of millions of dollars in recent funding as well.

Excluding the SpaceX round, SF fintech companies seem to be taking in the most funding, with Robinhood, Affirm and Chime ranking No. 2, No. 3 and No. 4 respectively. Robinhood is an investing platform that allows people to buy stocks and equity commission-free. Affirm is a lending platform that allows people to make big purchases online through smaller installments. Meanwhile, Chime is a digital banking service that allows people to create online bank accounts and access other financial services without paying fees.

Although these three companies offer very different services, all three of them received significant interest from investors, pointing to the value of digital financial services as a whole. The global fintech market was valued at over $120 billion before the COVID-19 pandemic and it is estimated that it will continue growing at an annual rate of 25 percent through 2022. These recent investments could signal a continuation of that trend despite the pandemic.

But perhaps counterintuitively, the economic uncertainty from the pandemic may actually be a boon for fintech companies because times like these often mean people are paying closer attention to their finances.

“Fintech has really blown up in the last few months because sheltering in place has put so much pressure on jobs. It’s also created tough situations for people who don’t have access to steady income,” Aditi Maliwal, a partner at Upfront Ventures, told Built In. “So people have taken out high-interest payday loans and get trapped in vicious debt cycles, because sometimes there are no good alternatives for them to feed or take care of their family.”

Upfront Ventures is an LA-based venture capital firm that has invested in several growing tech startups this year. Maliwal oversaw several Upfront investments into fintech companies, including Clair, Jiko and Pinwheel. She also worked at Crosslink Capital when the firm invested in Chime’s Series A round. Maliwal believes that providing accessibility and inclusivity to financial services is a key way for fintech companies to grow in 2020.

For example, Robinhood added millions of new users this year as average people wanted to try their hand at making money through stock trading. A significant number of these people were first-time investors.

Fintech companies also helped people take advantage of new economic policies passed to alleviate the economic pressure COVID-19 caused. For example, Chime helped its customers get their hands on government stimulus checks early. Meanwhile, NYC-based Spruce and Better.com helped homeowners refinance their homes in order to take advantage of historically low interest rates.

For these fintech companies, now is the time to grow in order to meet high demand and provide especially timely services. And while that alone may be enough for a fintech company, there’s the added draw of the big exit.

Maliwal notes that there have been several high-profile fintech acquisitions in the past year. Visa acquired Plaid for $5.3 billion. American Express acquired Kabbage. These big payouts are very enticing for entrepreneurs and investors alike.

“There have been a bunch of financial services exits lately. Some of these players have been around for a long time, others not that long. There have been more large-scale transactions in the last 10 months than we’ve seen in the past few years. I think that's made fintech as a category incredibly exciting,” Maliwal said.

E-Commerce Reigns in the East

Although many of the biggest names in tech — Apple, Google, Amazon, Facebook, etc. — are headquartered in the west, the East Coast sometimes gives the west a run for its money due to the fact that New York City is a major economic hub.

However, in Q3 it was the Greater Boston Area that was home to the biggest funding rounds. The tech companies that raised the most money between the two markets of Boston and NYC were both Boston-based: agtech marketplace Indigo Ag and e-commerce acquisition company Thrasio.

The rest of the top five funding rounds in the east were NYC companies, including well-known eyewear e-commerce company Warby Parker, text message marketing startup Attentive and then a tie between workplace automation company UiPath and cloud-based e-commerce platform VTEX.

In the east we see a clear funding trend among e-commerce companies. This includes both brands that have their own e-commerce strategy figured out (like Warby Parker), and startups that help other businesses build an e-commerce presence (like Thrasio, Attentive and VTEX).

Brands have been working to pair e-commerce with more effective digital marketing over the past several years. It’s why NYC startups like Warby Parker and Casper were able to grab the country’s attention, despite the fact that they were selling products that have been around for decades (glasses and mattresses). But the effectiveness of these companies showed that e-commerce could be successfully applied to just about any product. Amazon and Alibaba — two of the biggest tech companies — built empires selling products from other companies online.

E-commerce has grown even more thanks to the COVID-19 pandemic because it provided people with a safe way to get whatever they needed without leaving their homes. Amazon was hugely successful during this time, with stock prices soaring and hiring sprees in the hundreds of thousands.

Even with physical retail stores reopening, e-commerce isn’t backtracking any of its recent progress, and the huge funding rounds and hiring sprees happening throughout Q3 are proof that e-commerce companies intend to continue this growth. From a customer standpoint, online shopping provides an experience that’s hard to give up once you’ve gotten used to it. How many of us still order essentials through Amazon or occasionally get groceries delivered despite the fact that stores in our neighborhoods are open for business?

“There’s been a user behavior shift due to the convenience of being able to buy everything online,” Maliwal said. “So I think people who wouldn’t necessarily know about Instacart or other direct-to-consumer brands became more familiar with the idea. The convenience that a lot of these platforms have created has led to a change in behavior for people who didn’t necessarily rely on it. That’s been a driver of new demand in a lot of new markets.”

With the demand there, plenty of startups are launching to help other businesses figure out their e-commerce strategy. Take Thrasio. The company acquires third-party sellers on Amazon, onboards them to its e-commerce platform, then helps the sellers grow through marketing efforts, SEO, product development and supply chain management.

Although acquiring third-party sellers on Amazon seems like a niche business, it actually represents a big market for Thrasio, and this is reflected in the company’s value. Thrasio’s July funding raised its valuation to over $1 billion, and it’s already profitable. Because Thrasio was founded in 2018, the company says it’s the fastest U.S. company to reach profitable unicorn status. All this despite the fact that Thrasio operates within the Amazon ecosystem. Outside of Amazon, the market for e-commerce services is even larger.

The Middle Is a Mixed Bag

When it comes to the tech scene, American cities in the Central and Mountain time zones often don’t attract as much fanfare as Silicon Valley and New York City. But VC activity in Austin, Chicago and Colorado is actually quite prominent.

That’s because these regions offer a significant amount of potential growth. And on top of that, regional advantages mean these locations are hubs for certain industries. For example, Colorado has a booming ag tech scene and was an early pioneer in the cannabis tech space. Chicago’s location makes it a shipping and logistics hub, with Uber Freight based in the city. Meanwhile, Austin has consistently ranked as America’s fastest-growing big city thanks, in part, to people moving there for high-paying tech jobs.

And because these regions each have their own strengths, the companies from them that raised the most funding in Q3 don’t easily fall into one category. Instead, they represent several ongoing trends within the U.S. tech industry.

The top earner from the central region in Q3 was Boulder-based Wunder Capital, which helps provide the software and finances for solar power installation projects. Next up was Chicago e-commerce fulfillment company ShipBob, followed by Chicago-based password protection and cybersecurity company Keeper Security, Boulder B2B transaction platform Stedi and Austin-headquartered livestreaming software provider Restream.

This mix of companies is spread across a handful of different factions within tech. There’s sustainable energy, e-commerce, cybersecurity, business automation and social media, a mix of industries that are also growing despite the economic curveball that 2020 threw.