Analysis & Trends

Which States Are Seeing the Amount of Capital Available to New Companies Increase?

With the recent news that initial public offerings and mergers and acquisitions for venture-back companies are becoming scarce, many are anticipating a national venture capital crisis. A lack of exit opportunities could lead angel and venture investors to become more hesitant to invest at any stage of venture development as they seek opportunities that produce a return in the foreseeable future.

In this sort of environment, it may be appropriate to examine how recent trends have effected early-stage investment around the country and which states have been successfully cultivating early-stage capital in a time when risk-averse investors increasingly have turned toward later-stage investments for short-term returns.

Last week, SSTI analyzed the data on per capita venture capital dollars and deals at different stages of company development. Adjusting for population and focusing on seed- and early-stage capital revealed that several states, including Washington, the District of Columbia, Colorado, Maryland and Connecticut, are seeing impressive increases in capital opportunities for early-stage entrepreneurs, even though their achievements are often overshadowed by the sheer volume of dollars invested in California and Massachusetts. This week, SSTI examines trends in this data and, in particular, which states have increased the amount of per capita venture capital available to early-stage entrepreneurs since 2003.

After the end of the tech boom, the venture capital market hit a six-year low point in 2003. Since then, investment has grown steadily from $19.75 billion to $30.25 billion, while the number of national deals has increased from 2,925 in 2003 to 3,900 last year. This growth reflects a strong rebound in the national venture market, but these gains have been neither equally distributed around the country nor equally strong for all stages of investment. Later-stage investments have gained in popularity, nearly overtaking expansion-stage investment as the most common type of deals. Meanwhile, seed- and early-stage investment has languished in many states, including those where overall investments are growing due to the rise in later-stage investments and the larger size of those deals.

California and Massachusetts lead the country in per capita seed- and early-stage venture dollars and in overall growth in investments since 2003, so it is unsurprising that those two states are near the top of the list in earlier-stage per capita growth and deals. California leads the country in terms of dollars, with seed- and early stage investment increasing by $43.78 per person in the last four years. The state has increased its number of seed- and early-stage deals per million residents by 5.46 in that same time, making it the third-fastest grower. Massachusetts increased its per capita investment in the earlier stages by $19.43, placing it in third, and grew its number of deals by 5.24. These two venture capital hotspots posted large gains in both dollars and deals; however, several other states also have made impressive progress.

Washington performed well in both categories, increasing its earlier-stage per capita investment by $29.16 and its number of deals per million residents by 6.13, placing it in second in both categories. The District of Columbia was the only other state to rank in the top 10 in both dollars and deals. Vermont led the country in deal growth with 6.43 more deals per million people in 2007, though it did not appear in the top ranks for dollars due to the smaller size of these deals.

View the top 10 lists for dollars and deals, as well as figures for all 50 states, on an Excel spreadsheet here.

In the U.S. as a whole, the amount of per capita dollars invested in seed- and early-stage deals increase by $8.42, and the number of deals grew by 1.39 per million residents. Only 10 states had a dollar increase higher than the national average. Only 13 states did the same for earlier-stage deals. This indicates that relatively few states are seeing substantial gains in increasing the early-stage capital available for entrepreneurs.

Of course, this data is susceptible to the quirks of annual data, particularly in smaller states where a few deals can mean massive changes in the per capita figures. For instance, Maryland had a particularly weak year in 2007 for early-stage investment and Delaware had a strong year in 2003, despite the downturn in the rest of the country. Visualizations of state-by-state trends are available on the profile pages of the SSTI State Venture Capital Dashboard.

As mentioned last week, this data can be useful to help target state venture capital policy effort to support the companies and entrepreneurs that need the most help. In many states, the amount of deals involving seed- and early-stage companies is not growing at a pace that is sustaining long-term growth in the high-tech economy. Also while many states currently are seeing their total number of invested dollars increase due to trends in later-stage investment, only about half of all states have experienced increases in per capita dollars at the earlier stages since 2003. State venture capital tax credits or other policies that support investment without taking into account the specific needs of the state’s capital-seeking businesses may not be effective as a better targeted initiative.

Explore the Dashboard on Your Own. State and national per capita figures by stage are now available on the profile pages of the SSTI Venture Capital Dashboard for all 50 states, plus D.C. and Puerto Rico. These pages also provide data from 1995 to 2007 on total venture capital investment and deals, as well as national share and per capita figures for each. Per capita data on the growth of seed and early capital by state is available in Excel spreadsheet format. Investment information has been derived with permission from the PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report with data from Thomson Financial. The population data have been drawn from the U.S. Census Bureau's Annual Population Estimates.

This article was originally published in the July 2, 2008 issue of the SSTI Weekly Digest.


State Per Capita Early-stage Investment Data Helps Reveal Policy Options

While California and Massachusetts may overshadow much of the venture capital (VC) activity going on around the country, other states have made significant progress in developing venture industries that serve the needs of their economy. Though larger investments in later-stage companies are becoming more prevalent in the U.S. venture industry, some states are seeing increases in smaller, early-stage investments that, if successful, should lead to significant growth in their total VC investment in years to come. Breaking down per capita venture investment by stage reveals states like Maryland, Washington, Colorado and the District of Columbia are building capital industries that service the needs of early-stage entrepreneurs.

In the April 30, 2008 issue of the Digest, SSTI examined statesí VC intensity - measured by per capita venture capital investment - uncovering a few states that have not been recognized for their success in attracting investment due to the size of their VC pool relative to the overall VC market. From the per capita perspective, the District of Columbia, Maryland and New Hampshire entered the top five with Massachusetts and California. SSTI later explored state venture investment data by stage in the May 28, 2008 issue, which revealed the growth of later-stage deals over pre-seed-, seed-, early- and expansion-stage activity. This trend has been partially responsible for the growth in gap between California and Massachusetts and the rest of the country in recent years. The more mature venture capital and high-tech markets in those states provide more opportunity for later-stage investments.

Combining these two approaches by looking at per capita investment data broken down by stage, provides some clues about where seed- and early-stage capital are most accessible for start-up entrepreneurs. The top positions remain with the same two states: Massachusetts and California have the greatest amount of seed-stage dollar investment per capita, with $16.72 and $16.56, respectively.

These figures represent a far greater per capita dollar amount than anywhere else in the rest of the country. The distant third place state in 2007 was Washington, which had $7.61 per person and was followed by the District of Columbia, Colorado, Maryland, North Carolina and Utah. Several states that rank highly in overall investment, and even in seed- or start-up-stage investment, appeared much farther down this list. Texas, for example, received only $1.81 in seed-stage investment per capita last year. Florida had $1.33 and New Jersey received $0.73.

Massachusettsí and Californiaís lead, when viewed by the number of seed-stage deals per million residents, is somewhat smaller. Massachusetts had 5.89 seed-stage deals per million people last year, while California had 4.21. This was followed by the District of Columbia with 3.4 deals, then Pennsylvania, Maryland, Washington, Connecticut and Colorado. New Jersey, Texas and Florida had 0.69, 0.5 and 0.33 deals per million people, respectively. North Carolina, which was also among the top states for per capita dollars, had 0.88 deals per million residents.

Massachusetts and California are also the leaders in early-stage investment per capita, but the rest of the field differs a bit from seed-stage investment. Massachusetts received $89.90 per capita at the early-stage and had 18.61 deals per million residents. California had $73.13 in dollars and 11.6 deals. Washington is the clear leader in the rest of the country, with $37.99 per capita and 7.42 deals. Connecticut ranks fourth in per capita dollars, followed closely by the District of Columbia. Virginia, New Jersey, Utah and Georgia are also strong performers in per capita early-stage investment.

Policy Implications of the Data

Overall, these figures reveal that total investment and deals for a state can be misleading when taken as an indicator of how accessible seed- and early-stage capital are for entrepreneurs. The east and west coast still dominate the U.S. venture capital market, but some states outside of California and Massachusetts have managed to develop a supportive venture market for newer companies.

The data provide an opportunity for states to explore and re-evaluate appropriate policy interventions to help boost their private investment activity in the earliest stages of companiesí success if the per capita figure is low, or to help transition more seed and start-up deals into local, later-stage investments if the figure is high relative to their overall position in the VC market.

Simply increasing the pool of available venture capital funds, without appropriate targeting by stage could result in a localized overabundance of capital for the deals with the hottest prospects of yielding quick and high returns.  The higher-risk seed- and early-stage deals could go wanting and the market for later-stage deals could quickly dry up, encouraging VC managers to look for investment opportunities outside of the state. That, in turn, could help defeat one of the most important political goals for enacting the policy intervention in the first place -- growing a local tech-based economy.

Explore the Dashboard on Your Own

State and national per capita figures by stage are now available on the profile pages of the SSTI Venture Capital Dashboard for all 50 states (plus D.C. and Puerto Rico). These pages also provide data from 1995 to 2007 on total venture capital investment and deals, as well as national share and per capita figures for each. Investment information has been derived with permission from the PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report with data from Thomson Financial. The population data has been drawn from the U.S. Census Bureau's Annual Population Estimates.

This article was originally published in the June 25,2008 issue of the SSTI Weekly Digest.


Later-stage Companies Emerging as Top Choice of U.S. Venture Capital Investors

Throughout most of the history of the U.S. venture capital industry, expanding, and not start-up companies, have been the primary focus of venture investors. Recent data from the PricewaterhouseCoopers and National Venture Capital Association (NVCA) annual MoneyTreeTM Report indicates that investors are beginning to focus on even later-stage companies, which could be a problem for entrepreneurs and states trying to attract earlier-stage dollars.

State and national investment data by stage is now available on the profile pages of the SSTI Venture Capital Dashboard for all 50 states (plus Washington, D.C., and Puerto Rico).

The MoneyTreeTM Report divides venture capital investments into four stages based on the maturity of the target company: start-up/seed, early, expansion and later. The expansion stage has been the leading target of investment since the survey began in 1995. While all four stages experienced increases in investment during the late-1990s, expanding companies benefited the most from this new interest in the industry. In addition to a doubling in the number of deals between 1998 and 2000, the average deal size grew from $6.8 million to $16.2 million. These numbers fell in the aftermath of the 2001 crash, but expanding companies remained the primary focus of investors for several years. (To view data on U.S. investment trends by stage, visit http://www.ssti.org/vc/us_stage.php.)

More recently, however, later-stage companies have been steadily growing in popularity. In 2007, investment in later-stage companies exceeded that of expansion-stage companies. If trends continue, the number of later-stage deals will exceed those of the expansion stage as well. This change represents a growing preference on the part of investors for more mature companies, which can minimize risk. This may pose a problem for companies and regions that depend on start-up/seed and early-stage investment.

Start-up/seed and early-stage investment have not grown as much as later- and even expansion-stage investment in recent years. Early-stage investment represents a smaller percentage of overall investment than it did five years ago, and start-up/seed investment still comprises less than 4 percent of venture funding.

The trend toward increased investment in later-stage companies is fairly consistent across the country. Later-stage companies have become the leading target of investment in the top 10 states for venture capital except Florida and Pennsylvania, where expansion-stage investment has continued to grow rapidly. The trend is particularly pronounced in the top two states, California and Massachusetts, where later-stage opportunities for investment abound.

Small sample sizes make it more difficult to decipher an investment trend in less active states, but few states have posted significant increases in start-up/seed stage funding in recent years. One explanation for this lack of start-up/seed-stage growth during a relative boom time for venture investment is that coastal venture companies are increasingly looking for later-stage investment opportunities. This affects states without their own venture capital industries more than in more active states because start-up/seed investment can require closer proximity between venture firms and start-ups to close deals and to properly develop successful companies. While venture firms may feel comfortable investing in more mature companies in faraway states, they may not feel comfortable taking a chance on a smaller firm. Thus, overall increases in venture capital investment in smaller states may not represent more opportunities for entrepreneurs.

The SSTI-developed pages also provide data from 1995 to 2007 on total venture capital investment and deals, as well as national share and per capita figures for each. Investment information has been derived with permission from the PricewaterhouseCoopers/NVCA MoneyTreeTM Report with data from Thomson Financial.

The article was originally published in the May 28, 2008 issue of the SSTI Weekly Digest.


Looking at State Equity Intensity Changes Leader Board

SSTI’s VC Dashboard Value Enlarged with Addition of Per Capita Data

The runaway success of California and a few other major venture capital centers in the U.S. has made it difficult to get a firm grasp on the venture capital scene in the rest of the country. In the April 16, 2008 issue of the SSTI Weekly Digest, SSTI looked at the impact of removing California from the data to get a clearer picture of how venture capital investment is distributed throughout the other 49 states. This approach, however, does not make it any easier to evaluate a state's venture activity relative to its actual capacity for investment. Such a study would require reliable metrics on the demand for investment, which we have yet to uncover.

In the absence of such metrics, it may help to examine each state's amount of investment and number of deals at the broadest and most general standardization level -- venture capital investment relative to the state’s total population. While total population is no substitute for data on investment capacity, it can provide a thumbnail sketch of how states are performing in light of their size. This approach could also help deconstruct the success of state with larger populations, such as Texas, New York and California. It also may suggest a degree of equity intensity for each state relative to similar sized states and the national average.

Equity Intensity Measured by VC Dollars Per Capita

Though Massachusetts perennially places a distant second to California in total venture capital dollars, the state has outperformed California in per capita investment every year since 1995, the year our data set starts. At the height of the tech boom in 2000, Massachusetts was securing $1,631.75 per person in venture capital investment. The state also has maintained the highest number of deals per capita, with 67 deals per 1,000,000 residents last year. Taking population into account, however, moved California to second place in investment. California took in $377.61 per person last year, well over the national average of $100.28. Massachusetts received $540.97.

Revealing how skewed the data is toward the states with the greatest intensity, only seven states finished last year with per capita figures higher than the national average: Massachusetts, California, the District of Columbia, Washington, New Hampshire, Colorado and Maryland. Among these leading states, the District of Columbia (DC) and New Hampshire benefited the most from the transition from total dollars invested to per capita dollars. DC ranked 23rd last year in total investment but has risen from a post-tech boom low of $35.13 per capita in 2002 to $226.43 in five years. New Hampshire ranked 21st last year in total dollars, but took fifth place in the per capita rankings. The state has remained among the top states in per capita investment since the tech boom, although it did dip below the national average in 2006.

Accounting for population, Texas ranks considerably lower in per capita dollars than in total investment. Last year, the state had the third largest share among states of venture capital dollars, but ranked 18th in per capita investment. Other states with larger populations, like Florida and New York also had poorer showing on the per capita list. Taking population into consideration, however, did little to improve the standing of smaller states with little investment. North Dakota, Wyoming, Arkansas, Alaska and Nebraska occupied the bottom spots on both lists for 2007.

Equity Intensity Measured by Number of Deals

The data for deals per one million residents is similar to dollars per capita, with a few exceptions. Vermont consistently ranked much higher based on its annual number of deals vs. its total dollars received. For instance, in 2007, Vermont ranked 32nd in per capita investment but eighth in deals relative to population. This shift reflects the prevalence of much smaller deals in the state compared to the national average deal size. In 2007, Vermont’s average deal was $873,775; for the U.S. as a whole last year, the figure is nearly nine times higher at approximately $8 million.

The impact of looking at per capita deals rather than dollars can work in reverse on a state’s performance, as well. In 2007, for example, Kentucky ranked 22nd in per capita investment, but ranked 40th in deals per million residents. Average deal size in the Commonwealth was well over the national average at more than $15 million that year, although that figure was unusually high for the state.

SSTI will take a closer look at average deal size and other aspects of venture capital in the coming months.

Explore the Dashboard on Your Own

State and national per capita figures are now available on the profile pages of the SSTI Venture Capital Dashboard for all 50 states (plus DC and Puerto Rico). These provide data from 1995 to 2007 on total venture capital investment and deals, as well as national share and now per capita figures for each. Investment information has been derived with permission from the PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report with data from Thomson Financial. The population data has been drawn from the U.S. Census Bureau's Annual Population Estimates.

This story was originally published in the April 30, 2008 issue of the SSTI Weekly Digest.


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 feel they have been unnoticed historically by the national VC economy. In the March 19, 2008 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 non-traditional 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 seem 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 and 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 venture capital 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 academics and practitioners 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 ten 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 venture capital 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 (NASVF), 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 four and five percent. The balance of the top ten states were around two and three percent each in 2007.

The data clearly shows 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 venture capital. 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 build on the premise that access to early-stage, risk capital is critical for growing technology-related companies, seeing positive trends in growth for venture capital 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 ten states for venture capital investment, sans California, were respectively, Massachusetts, Texas, Colorado, Washington, Virginia, New York, New Jersey, Florida, North Carolina and Illinois. During the past 12 years several states changed relative rankings in the top ten list. In addition, Pennsylvania and Maryland moved up to join the top ten; Virginia and Illinois dropped out.

To address the question of whether venture capital has become more concentrated, SSTI developed a graph comparing the shares of the top ten states, after California, in 2007 back through to 1995. The graph shows the share of venture capital 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:

  • Any increased concentration of total VC activity is being borne by above average growth of California’s investments.
  • Throughout the rest of the country, though the overall dollars invested have grown substantially, there has been a less pronounced increase in the percentage of venture investment concentrated in the top states, at least at the state level.

If these conclusions are correct, then it would seem prudent to omit California from future investigations into the geographic distribution of investment. They also suggest that 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.

Right click here to 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 US venture capital market is becoming more or less concentrated around a few states.

SSTI will take a closer look at the distribution of venture capital 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 to 41 percent.

This story was originally published in the April 16, 2008 issue of the SSTI Weekly Digest.

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