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

In the April 30, 2008 issue of the Digest, SSTI examined states’ 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.

Massachusetts’ and California’s 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 companies’ 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.