Traffic snakes past downtown Seattle on Interstate 5. (GeekWire Photo / Kevin Lisota)

Early stage startup investors looking for strategic advantages should pay attention to Seattle.

Founders’ Co-op Managing Partner Chris DeVore. (Founders Co-op Photo)

That’s one takeaway from an analysis of historical investment returns for markets across North America over the past decade.

Chris DeVore, managing partner at Seattle-based early-stage venture capital firm Founders’ Co-op, penned a blog post this week that combined two datasets: a stack-rank of startup cities based on actual dollars returned from companies based in respective metros, and geographic location of early-stage funds under $100 million.

The resulting data, which you can see below, “shine[s] a light on some startling imbalances in the relative allocation of early-stage LP dollars by market, particularly when compared to the markets that have actually driven the greatest cash returns over time,” DeVore wrote in his post.

DeVore used the number of local early-stage firms as an indicator versus counting actual dollars because “the relative density of very-early-stage funds in a specific location is the cleanest possible signal of market-specific appetite among LPs.”

We caught up with DeVore on Tuesday to learn more about his takeaways. He said the “misallocation of capital by geography continues to amaze me,” referencing how the data shows markets that are overfunded relative to historical performance.

“Institutional money managers are supposed to among the most analytical and quantitative seekers of return in the capital markets, but this analysis shows that they’re as swayed by proximity (most wealth is managed from money-center cities like NY and LA) as performance when it comes to selecting managers for their clients,” said DeVore, who recently stepped down from leading Techstars Seattle so he can focus on Founders’ Co-op.

But perhaps more importantly, the analysis serves as a call to action for early-stage investors who want to use geography to their advantage. DeVore thinks they should be looking more closely to the Seattle market. Here’s more from DeVore, via email:

“The disconnect between early and late-stage capital allocation is also laid bare here. As I note in the post, the higher you get up the capital stack the more freely money flows across locations and borders.

It’s at the earliest stages where local capital really matters, and that’s where Seattle’s shortfall does the most damage. Late-stage, out-of-region investors will always find the good companies here at Series A and above, but they won’t take that “first check” risk needed to unlock the entrepreneurial potential of all the amazing talent we’ve been able to attract to the region. That’s what we’ve got to fix, and by shining a light on the mismatch between returns and capital I’m hoping to give a few additional LPs around the country the facts they need to look more closely at our market.”

In his post, DeVore said that “any LPs who want to dig deeper into North America’s most overlooked innovation market are welcome to pay us a visit.”

The Seattle market has long been criticized for its lack of local startup capital, especially in the context of how much talent has migrated to the area in recent years with the growth of hometown tech giant Amazon and engineering outposts set up by Facebook, Google, Apple, Salesforce, and others.

This is not a new phenomenon, but it’s still top of mind for folks in Seattle, especially given the massive boom taking place in the region’s larger tech ecosystem, one that’s created unprecedented wealth.

“The big hole right now in the Seattle startup ecosystem is really the access to capital at the angel level to support companies as they are getting going,” Micah Baldwin, managing director of Seattle-based founder center Create33, told GeekWire last month.

There are a bevy of newer funds and startup studios such as Flying Fish, Pioneer Square Labs, Unlock Venture Partners, and others trying to address that gap in Seattle.

Seattle-area companies raised $970 million across 85 deals in the third quarter, according to PitchBook. That’s up just slightly from last year ($936 million across 89 deals).

But it’s far below the $12.3 billion raised across 485 deals in the Bay Area last quarter; $3.1 billion across 258 deals in the New York City region; $2.6 billion across 168 deals in the Boston area; and the $1.5 billion across 138 deals in the Los Angeles area.

Seattle-area investment firms raised $498 million in the third quarter across six funds, PitchBook reported. That compares to $16.5 billion raised in Silicon Valley; $4 billion in Boston; $2.7 billion in New York; and $1.2 billion in Los Angeles.

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