In the April 16, 2008 Issue:

Copyright State Science & Technology Institute 2008. Redistribution to all others interested in tech-based economic development is strongly encouraged — please cite the State Science & Technology Institute whenever portions are reproduced or redirected.

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 Is VC Becoming More or Less Concentrated Among States?
SSTI Gives Readers Closer Look at the Data
With U.S. venture capital (VC) investment reaching its highest level since 2000, many are excited about the potential growth of investments in states that have received historically smaller amounts of VC. In the March 19, 2008 issue of the Digest, SSTI covered analysis from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers that highlighted the five U.S. regions that have experienced the greatest growth since 1997. These regions, including the state of New Mexico and Pittsburgh metro area, have posted remarkable gains.
 
Others, looking at the data from different perspectives, disagreed with the NVCA conclusion and argued national trends do not appear to be especially favorable to nontraditional venture regions or select states.
 
Understanding trends in the VC industry from various angles is important to ensure state policymakers propose and support the most appropriate interventions for the specific goals to be accomplished. In some cases, no public intervention may be necessary. In others, perhaps programs should be targeted to specific sectors or geographic areas. In still other cases, broad policies may be required.
 
The March 19 Digest article tried to present a balanced view of both arguments for several reasons. First, reporting errors, omissions and the quirks of individual deals can paint a distorted picture of overall patterns when viewed in isolation or in single year “snap shots.” Also, rapid growth in the national VC industry as a whole or in certain regional markets could mask trends on another scale, such as the state level. Finally, the number of dollars invested in a state is important, but as an increasing number of firms turn to later-stage, high dollar investments, early-stage companies may still be left without access to private equity financing.  
 
The SSTI State Venture Capital Dashboard
To make a case for whether or not VC is more or less concentrated, one needs to look at the trends in the data over time and through several lenses. As an aid for everyone in this effort, SSTI has developed a new Web tool designed to help practitioners and academics look at the level and distribution of U.S VC investment since 1997. The SSTI State Venture Capital Dashboard provides 52 profiles (50 states plus the District of Columbia and Puerto Rico) connected by a simple interface that will allow users to easily navigate to state investment data. Users can view state investment levels, deal flow, and the share of overall U.S. investment received by each state on the basis of annual and quarterly reporting. This information has been derived with permission from the PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report with data from Thomson Financial.
 
Using State Share of Total U.S. Investment to Facilitate Comparisons
VC investment experienced remarkable variance over the 10 years, most notably with the exuberance of 2000 and 2001 and the post dot-com crash lows immediately following. That variance presents challenges for studying trends among states. To overcome this, SSTI looked at changes in each state’s share of the total U.S. investment over the years.
 
Using state share of total VC investment as a standardizing measure, however, has its own drawbacks when looking the VC industry. For example, it presumes that all VC is the same, or, in other words, that any deal could take place anywhere but just happens to occur in one particular place over another. A second presumption is that there have been no changes in the types of deals made or the preferences of investors for certain “hot” industries or sectors.
 
A more rigorous model is required to really understand the nature and differences of VC investment among states. Since the question is whether VC is more or less concentrated geographically, however, share of total provides a good launching point.
 
The California Phenomenon/Problem
On the national, 50-state level, the most striking trend in venture capital distribution over the past 12 years has been the increasing prominence of California. As George Lipper noted for the National Association of Seed and Venture Funds, California claimed about 40 percent of national venture investment in 1995, a figure which had grown to about 47 percent by the end of 2007. Second-place Massachusetts captured almost 12 percent of the total pot last year. While approximately only one-fourth of California’s investment, Massachusetts does significantly outdistance the other states; third, fourth and fifth places come in between 4 percent and 5 percent. The balance of the top 10 states were around 2 percent and 3 percent each in 2007.
 
The data clearly show the Golden State has been consolidating its dominant position in the market over the past few years, dramatically skewing the data about each state's share of venture investment. So what to do about California in comparisons? And should California, as such an obvious outlier, even be included in the comparisons?
 
One cannot argue that California is capturing “more than its share” of VC. The issue is not one of fairness, as money follows the deals VC firms believe will yield the best returns for their investors. There may, however, be good deals that go lacking for funds in other areas of the country.
 
Since many state and local TBED initiatives are built on the premise that access to early-stage, risk capital is critical for growing technology-related companies, seeing positive trends in growth for VC invested within a state is a useful indicator to monitor or adjust public policy interventions. Removing California from the analysis makes it easier to see the trends in the rest of the states.
 
In 1995, the top 10 states for VC investment, sans California, were Massachusetts, Texas, Colorado, Washington, Virginia, New York, New Jersey, Florida, North Carolina and Illinois, respectively. During the past 12 years, several states changed relative rankings in the top 10 list. In addition, Pennsylvania and Maryland moved up to join the top 10; Virginia and Illinois dropped out.
 
To address the question of whether VC has become more concentrated, SSTI developed a graph (available on the SSTI Venture Capital Dashboard site) comparing the shares of the top 10 states in 2007, after California back through to 1995. The graph shows the share of VC activity in these states has gradually grown over the period, beginning at  64 percent in 1995 and climbing to 72 percent by 2007.
 
Two conclusions seem to be apparent:

If these conclusions are correct, then it would seem prudent to omit California from future investigations into the geographic distribution of investment. It also suggests the share of U.S. venture investments is not the most useful or accurate measure for evaluating the effectiveness of programs intended to increase a state’s risk equity activity.
 
On the Dashboard site, you can download a visualization of the percent of non-California U.S. venture activity experienced by each state since 1995. The chart provides little evidence that the U.S. venture capital market is becoming more or less concentrated around a few states.
 
SSTI will take a closer look at the distribution of VC deals and the stage of those deals in a future issue, but in the total number of deals, California's position appears to be dominant as well. Between 1995 and 2007, the state's share of national deals crept from 36 percent to 41 percent.

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Recent State Budget Actions Produce Mixed Results for TBED
A growing number of state governments face revenue uncertainties in the near future. More than half now expect budget deficits and shortfalls in the upcoming fiscal year and beyond. Despite the bleak outlook, however, legislators nationwide are continuing to invest in science and technology with many lawmakers projecting high returns to their state in the coming years. Following are highlights of TBED investments and reductions in recently approved budgets in Kentucky, Maine and Nebraska.
 
Kentucky
Recognizing the statewide economic benefits of strategic investments in university research, Kentucky legislators concurred with Gov. Steve Beshear’s proposal to continue support for the Bucks for Brains initiative. Lawmakers approved $60 million in bonds under the fiscal year 2008-10 biennial budget agreement to expand the state’s endowment matching program used to attract high-quality researchers. 
 
The total funds appropriation under the budget agreement for the Economic Development Cabinet is $29.3 million in FY 2008-09 and $31.8 million in FY 2009-10. The budget agreement also includes language directing interest income earned on the balances in the High Tech Construction/Investment Pool and loan repayments received to be used to support the Department for Commercialization and Innovation. The approved Capital budget provides another $20 million for the Economic Development Cabinet for projects and loans approved by the Kentucky Development Finance Authority.
 
Gov. Beshear vetoed $1.2 million each fiscal year in New Economy Funds from the High-Tech Investment Pool to administer the ConnectKentucky program, a statewide broadband initiative. The governor expressed support for the initiative in his veto message but objected to the lack of oversight in spending for the program. Instead, he directed the Cabinet for Economic Development to structure a funding plan and identify program needs for the continuation of the initiative.
 
The Office of Energy Policy would receive $13.4 million over the biennium under the budget agreement, with $3.5 million each fiscal year for the Energy Research and Development Fund. Projects slated for funding include research into clean coal, development of alternative transportation fuels and other coal research targeted solely to Kentucky’s Local Government Economic Development Fund-eligible counties in coordination with state universities and related community and technical college system programs.
 
Also included in the appropriation to the Office of Energy Policy from the Local Government Economic Development Fund is $2 million over the biennium to be matched with federal or private funds to support R&D activities at the University of Kentucky Center for Applied Energy Research directed toward development and demonstration of technologies for carbon management. Technologies may include chemical or mechanical capture, chemical or biological utilization and mitigation through the use of alternative fuel sources.
 
The budget agreement cuts base funding for state universities and the Kentucky Community and Technical College System by about 3 percent in FY 2008-09 with level funding remaining in FY 2009-10, the Louisville Courier-Journal reports.
 
The FY 2008-10 approved biennial budget is available at: http://www.lrc.ky.gov/record/08RS/HB406.htm
 
Maine
Several state initiatives supporting TBED fell victim to budget cuts in a package of revisions to the fiscal year 2008-09 budget, LD 2289, signed into law earlier this month by Gov. John Baldacci.
 
Facing a $190 million revenue shortage, legislators reduced funding for numerous state programs, including $220,000 in FY09 for the Office of Innovation’s Maine Technology Institute Innovation Cluster Program. There is an additional reduction in funding for management and operating costs of a bond program administration by the Maine Technology Institute by $300,000 in FY08 and $150,000 in FY09. Funding for research projects at the Centers for Innovation is reduced by $18,000 over the FY08-09 period.
 
The supplemental budget also reduces Maine Manufacturing Extension Partnership funding within the Department of Economic and Community Development by $50,000 in FY08 and $80,000 in FY09 and reduces funding to the Maine Procurement Technical Assistance Center by $70,000 in FY09.
 
Nebraska
Lawmakers are expected to pass the final version of Gov. Dave Heineman’s Super Advantage proposal (LB 895) this week, according to the Nebraska Department of Economic Development. The bill aims to lure companies that create high-salary jobs that pay well above the state’s average wage by expanding tax incentives.
 
The legislation stipulates that all businesses qualify for the tax breaks, excluding retail. Companies are required to create 75 new high-salary jobs with a $10 million investment or 50 new high-salary jobs with a $100 million investment.
 
The jobs would have to pay 150 percent of the state average wage, which is at least $50,700 based on current wage levels, according to the Omaha World-Herald, or 200 percent of the average wage in the county where the business is located. Qualifying companies will receive a 15 percent tax credit and 10 percent wage credit. Additional benefits include direct sales tax refund and a 10-year exemption on all tangible personal property.

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$700M for New York Upstate Economic Plan in Budget Agreement
Legislators passed the fiscal year 2008-09 budget last week, increasing spending by 4.9 percent over last year and investing in New York’s Upstate economy despite projected shortfalls for several years to come.
 
Lawmakers approved $700 million for the Upstate Revitalization Fund, an initiative that Gov. David Patterson continued to push forward following the resignation of Gov. Eliot Spitzer last month. In January, former Gov. Spitzer unveiled the Upstate proposal, asking lawmakers for $1 billion to encourage economic growth through targeted investments in high-technology development, agriculture, housing, transportation, and state parks (see the Jan. 23, 2008 issue of the Digest). Many of Gov. Spitzer’s initial requests for funding were fulfilled, including $120 million for the Regional Blueprint Fund - $200 million less than Gov. Spitzer’s recommendation - and $180 million for City-by-City investments, which was $65 million above the governor’s original recommendation. Additional components of the approved fund include:

Downstate Regional Projects slated to receive funding in the enacted budget include $35 million for R&D activities on Long Island, with $5 million earmarked for the Cold Spring Harbor Laboratory and $10 million for the State University of New York (SUNY) Stony Brook Energy Research Center.
 
The New York State Foundation for Science, Technology and Innovation (NYSTAR) will receive $48.4 million in new appropriations from all funds in FY 2008-09 (down from $60.7 million last year) and $211.3 million in re-appropriations – an increase of $29.2 million over last year. From the Science, Technology and Academic Research Account, $34.2 million is allocated to the High Technology Program – down $1.3 million from last year. New appropriations for state operations and aid to localities include $14.7 million to support matching grants for Centers for Advanced Technology, $8.2 million for the Research Development program, $4.9 million for the High Technology matching grants program, $1.5 million for matching grants for college applied research centers, $1.5 million for technology development organization matching grants, and $1.5 million for training and business assistance programs.
 
Lawmakers approved $63 million in new FY 2008-09 appropriations for the Department of Economic Development and $50.5 million in re-appropriations. The Empire State Development Corporation is slated to receive $67.6 million in new appropriations and $3.4 billion in re-appropriations, with $6.9 million divided equally between the six centers of excellence.
 
The Energy Research and Development Authority will receive $31.2 million in new appropriations with $18.3 million earmarked for the research, development and demonstration program. From the Energy Research and Planning Account, $9.6 million will support research, development and demonstration program grants with $735,000 allocated to the University of Rochester laboratory for laser energetics.
 
The enacted budget authorizes nearly $6 billion in capital funding for SUNY, the City College of New York (CUNY) and community colleges. The budget also authorizes the creation of an endowment for SUNY and CUNY that provides a permanent source of recurring revenue with the funding source to be determined in the future, according to the governor’s office. During his State-of-the-State Address earlier this year, former Gov. Spitzer said the endowment should be at least $4 billion. Gov. Spitzer recommended selling a portion of the state’s lottery to finance the endowment – a proposal rejected by legislators.
 
In addition, SUNY Upstate Medical University is slated to receive $10 million for an umbilical cord blood bank first proposed in 2006, reports The Post-Standard. The proposed facility will provide stem cell research opportunities.
 
The FY 2008-09 spending plan relies heavily on borrowing and increased taxes and fees, including an increase of $1.25 per pack of cigarettes and $70 million in additional assessments on health insurance policies, reports the Times Union. The New York State Budget Office projected in December a general fund budget gap of $4.3 billion in FY 2008-09 and $6.2 billion in FY 2009-10 (see the Dec. 5, 2007 issue of the Digest). Critics of the new spending plan said in the Times Union article there will likely be an imbalance in the 2009-10 fiscal year budget and that a mid-year correction may force lawmakers back this year to cut programs, find emergency revenues, or do both.
 
The fiscal year 2008-09 enacted budget is available at: http://www.budget.state.ny.us/
 
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To Lighten Debt Load, Revised Ohio Plan Redirects Tobacco & Other Funds
In a deal ironed out earlier this month by Gov. Ted Strickland and legislative leaders, the state will move forward with an economic stimulus plan that borrows far less than the governor’s original proposal while using existing state revenue such as tobacco settlement funds to supplement the plan – a move that has prompted legislative action to secure control of the tobacco funds.

Under the agreement, the state will invest $1.57 billion over five years in emerging industries, alternative and renewable energy, local infrastructure, logistics and distribution, and higher education workforce development. The plan would borrow $400 million in bonds with additional funding sources of $970 million from the sale of bonds, $370 million in general fund revenue projected for future years and $230 million from the Ohio Tobacco Prevention Foundation. The governor’s proposal called for an investment of $1.7 billion in bonds.
 
The agreed upon economic stimulus plan invests in many of the same areas outlined by the governor during his State-of-the-State Address in February (see the Feb. 14, 2008 issue of the Digest), including:

Additionally, the new plan invests $200 million in Clean Ohio Fund conservation to help preserve farmland and green space and $200 million to help revitalize cities and industrial areas. Another $400 million would support local infrastructure such as roads, bridges and sewers. Similarly, the governor’s plan called for $400 million to the Clean Ohio Fund and $400 million for Ohio Public Works.
 
New to the plan is $250 million to be matched with private sector donations for a higher education workforce initiative linking college graduates with internship programs and co-operative education programs to help keep the graduates in-state upon graduation. Legislators also included $120 million for a new Historic Preservation Tax Credit.
 
Details of the bipartisan plan to boost Ohio’s economy are available at: http://governor.ohio.gov/Default.aspx?tabid=921

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Metros from All 50 States Used to Compare Business Costs within U.S. and Internationally
The declining value of the U.S. dollar and other business cost considerations are giving the U.S. a favorable cost advantage compared to other industrialized nations in Europe, Japan and Australia, according to a new biennial report from KPMG. The 2008 Edition of KPMG’s Competitive Alternatives collects data over a range of industries, such as precision manufacturing and biomedical R&D, to compare 136 metro areas in 10 countries. When looking at aggregate national business costs across various sectors, Japan and Germany are 14.3 percent and 16.8 percent higher, respectively, than the U.S. Canada’s overall business costs are 0.6 percent lower than the U.S., and Mexico’s costs are 20.5 percent lower than those of the U.S.
 
To create the U.S. business costs comparisons, KPMG examined 59 metropolitan areas throughout all 50 states and Puerto Rico. The report delved into the varied business costs over a 10-year planning horizon for 17 different operations in each metro, which were grouped into the following four industry clusters:

The location-dependent business costs used to calculate each metro’s relative competitiveness consisted of: labor costs such as wages, workers’ compensation, pensions and medical plans; facility costs, which include industrial construction and leasing office space; income taxes from the local to federal levels; non-income taxes such as taxes on capital and property; utility costs including electricity and telecommunications charges; and, transportation costs.
 
Examining countries over a two-year period, significant shifts are evident in business costs between last month’s release and the previous edition. Whereas in 2006 Australia, France, the United Kingdom, Netherlands and Italy were all determined to have overall lower costs than the U.S., in 2008 all of these countries were gauged as more expensive than the U.S. From 2006 to 2008, the cost advantage in Canada shifted 4.9 percentage points higher, bringing it close to parity with the U.S. These dramatic jumps resemble similar fluctuations in exchange rates, as the British pound increased its exchange rate by 14 percent compared to the U.S. dollar, the Canadian dollar rose 17 percent comparatively, and the euro rose 24 percent in the past two years.
 
This year’s edition also examines some non-cost competitiveness factors for the first time. While not incorporated into the overall cost calculations, the report compares countries by educational attainment, various measures of science employment, and R&D expenditures per GDP. Other non-cost factors identified included demographics, availability of skilled labor, environmental regulations, crime rates and energy supply, in addition to others.
 
Practitioners may find the report’s information useful to examine the details of the cost structure of various localities, especially as compared to other U.S. and international metro areas. The website of the report also offers an interactive tool to compare metros within various business sectors, which may be of use to companies looking to expand or relocate their business operations.
 
The appendices of the 2008 version of KPMG’s Competitive Alternatives report also contain detailed information on each of the 136 metros highlighted in the report, which can be found at: http://www.competitivealternatives.com/

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State-Federal Lab Partnerships to be Highlighted May 5-8 in Portland
Many state and regional TBED organizations see federal laboratories as an integral partner in their efforts to promote technology development and commercialization. At least 22 of the leading state TBED organizations across the country have established partnerships with at least one federal laboratory to address a broad range of goals, according to a recent SSTI survey. Advancing collaborative research, strengthening industry clusters, transferring technology to/from federal labs and companies, and assisting in education and outreach were the most commonly cited reasons for pursuing closer relationships with the nation's network of 700 federal labs and research centers.

The survey also found state TBED-federal lab collaboration crosses state boundaries more easily than some may expect: SSTI discovered one-third of all relationships state TBED organizations have with federal laboratories take place at laboratories outside of their state. In addition, more state and local TBED organizations are looking to form new partnerships or expanding existing arrangements based on the successes seen from their initial efforts.

Understanding the opportunity and establishing that first relationship may seem daunting for the uninitiated at both the labs and state/local levels. To help facilitate the process, examples of successful partnerships will be discussed during a presentation at the upcoming annual meeting of the Federal Laboratory Consortium for Technology Transfer (FLC). The balance of the annual FLC conference explores the best practices and policies that enable the technologies created within the labs to advance into the marketplace. Training sessions are used to enhance learning about the commercialization process. The meeting is open to TBED, federal and other tech transfer professionals alike and provides a unique opportunity to gain a solid understanding of the federal tech transfer process, to network with approximately 300 lab officials and tech transfer experts, and to forge new opportunities to collaborate with the labs to advance your TBED goals.

Information for the FLC conference, including the detailed agenda and registration materials, is available at: http://www.federallabs.org/meeting/

SSTI and the FLC are now in the second year of working together to make the primary audiences of both organizations more familiar with the "how tos" of forming effective lab-TBED partnerships. The upcoming session at the FLC conference in Portland is just one example of these efforts. Another is Federal Laboratories and State and Local Governments: Partners for Technology Transfer Success, a collection of successful tech transfer collaborations recently published by the FLC. The booklet is available at: http://www.federallabs.org/store/sandlg2/

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People

John Austin is the newly appointed executive director of the New Economy Initiative for Southeast Michigan.

Tom Cech announced he will return to the University of Colorado at Boulder next year to pursue laboratory research and teaching after eight years as president of the Howard Hughes Medical Institute.

Sarah Djamshidi was selected as executive director of the Chesapeake Innovation Center.

John Hardin was named the acting executive director for the North Carolina Board of Science and Technology.

Wayne Hicks announced he is stepping down as the president and CEO of the Cincinnati Business Incubator to focus on other interests, including his work as executive director of the BDPA Education and Technology Foundation.

Paul Wooley will serve as R&D director for Via Christi's Orthopedic Research Institute and a faculty member in engineering and biology at Wichita State University.

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