The Funded: The Bay Area and New York continue to dominate the VC industry, but a shakeout could be coming

The venture capital industry raised record amounts of funding in recent years, but that money remains concentrated in the business' two traditional financial centers, and despite all the new dollars, the industry could be due for a shakeout.

Those are the conclusions of a pair of new reports, one each from CNBC and PitchBook Data.

Since the beginning of 2019, U.S. venture outfits have raised a whopping $481 billion in new capital, according to PitchBook. Of that total, $330.8 billion, or around 69%, has gone to firms or organizations based in the Bay Area or New York. Those based in the rest of the country got just $150.8 billion, or 31%.

That concentration of capital happened despite the fact that more than half of the firms raising funds were located outside of the Bay Area and New York, according to the report. The danger of pooling so much capital in those two places is that the funds will largely go to companies based in those two regions, rather than being distributed elsewhere, PitchBook said.

Indeed, some 54% of all megadeals — funding rounds of $100 million or more — from the last four years went to companies based in New York or the Bay Area, PitchBook reported. And 60% of all venture backed companies worth $1 billion or more are based in those two places, according to the report.

One countervailing trend, though, is that venture firms in the two regions have been making efforts to step up their investments outside of them, PitchBook said. Indeed, Menlo Park's Andreessen Horowitz, which has raised billions of dollars in new capital in recent years, has made a point under partner Marc Andreessen of opening offices in other regions of the country to look for deals outside the Bay Area.

Meanwhile, the industry's good times may be coming to an end. Thanks to rising interest rates, recession fears and the sharp decline in startup valuations, the investors that put money into venture funds are becoming more selective about how much money they invest in the sector and with which firms they choose to invest, CNBC reported. The likely result is that hundreds of venture outfits will become "zombie firms" in coming years, unable to raise new investment funds, according to the report.

Indeed, that could be the fate of as many as half of the venture firms in operation today, Techstars CEO Maelle Gavet told CNBC.

"We expect there's going to be an increasing number of zombie (venture capital firms); VCs that are still existing because they need to manage the investment they did from their previous fund but are incapable of raising their next fund," Gavet told CNBC.

Which firms are destined to become zombies may not be apparent for three to four years, Frank Demmler, who teaches entrepreneurship at Carnegie Mellon University's Tepper School of Business, told CNBC. Many of the new firms that started up in the last several years can be expected to be making investments out of their first funds during that period, he said.

It will only be later, when they haven't made any big new investments and haven't raised any new capital, that it's clear they've become zombies, he said.

Here's more Bay Area venture and startup news from the end of the week:

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