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

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.