SSTI Digest

Note: this article has been updated.

The recent tax law created a new vehicle, “Opportunity Zones” (Section 13823), to spur investment in companies and projects in distressed communities. As covered in detail during a recent SSTI members-only webinar, the tax incentive provides investors who reinvest capital gains into these zones with the ability to defer taxes on those gains and, if the Opportunity Zone investment is held at least 10 years, to waive taxes on any new capital gains. Zones must be declared this spring by each state’s governor, and only 25 percent of a state’s high poverty or low income census tracts may be included.

With the 2017 data in the books (see our analysis of MoneyTree and useful stats from the Venture Monitor), SSTI continues our series (see part 1) highlighting trends to watch in 2018. In this installment, we review two technology areas poised for increased VC-backed investments —genetics technologies for healthcare and specialized artificial intelligence and machine learning — as well as spotlight other potential areas that might emerge as key technology areas for VC-backing.

While each year brings the potential for unknown emerging tech areas of investment, these industries are poised for growth due to several unique factors such as increased consumer demand, early successes from VC-backed startups in a similar technology area, and significant advances in the basic technologies that build the foundation for startups in those industries.

Last week, SSTI looked at recently released data on venture capital dollars and deals by state, finding that total investment has skyrocketed but remains heavily concentrated in a few markets. This week we examine this data through two additional lenses: VC investment intensity and VC investment per technology startup.

Late last year, the Information Technology and Innovation Foundation (ITIF) released data on tech-startups by state, which they define as firms 10 years old and younger in 10 R&D intensive industries. These include six manufacturing industries like medical devices and semiconductor machinery, and four service industries like software publishing and scientific R&D.

Young R&D-intensive technology startups are the types of companies that attract venture capital; there is a very high correlation (0.86) between the quantity of tech-startups in a state and its venture capital activity.

SSTI’s Tech Talkin’ Govs feature continues as governors across the country roll out their state of the state addresses. We review each speech for comments relevant to the innovation economy, and bring you their words directly from their addresses. In this fourth installment, we present excerpts from governors in California, Hawaii, Massachusetts, Michigan, North Dakota, South Carolina and Wisconsin.

This week’s review includes states like California with its goal for lower carbon output to Hawaii and Massachusetts who are looking to increase their use of renewable energy sources. Meanwhile, energy-dependent North Dakota is looking to diversify its economy and Wisconsin seeks ways to build its workforce.

California Gov. Jerry Brown, who is term limited delivered his final state of the state address.

Governors continue to be cautious in their budget proposals, with many TBED programs seeing level funding or modest increases and cuts in some states while few new programs are being introduced. Kentucky is transferring one program to economic development, while at the same time reducing its funding. Missouri is proposing short-term benefits that may impact longer-term growth, while New York is looking to fund its life sciences initiative announced last year and Vermont is proposing an increase for its growth and innovation pilot project.

Kentucky

The National Institute of Standards and Technology (NIST) released a new 59-page draft report – NIST Interagency Report (NISTIR) 8202: Blockchain Technology Overview – that attempts to move beyond the recent hype surrounding Bitcoin and other digital currencies (or cryptocurrencies) to help businesses and others understand what the blockchain is and decide whether it would be an asset to their products. Dylan Yaga, a NIST computer scientist and one of the report’s authors, also hopes that the report will provide readers with a picture of blockchain that is not skewed to any players’ interests and is easily understood from an unbiased front.

Addressing what it believes is a global skills gap in IT and job displacement resulting from automation, the World Economic Forum (WEF) launched an initiative that is seeking to reach 1 million people with resources and training opportunities by January 2021. The SkillSET portal is intended to help users acquire the skills and education to adapt to an increasingly digital workplace. The initiative was conceived by the WEF’s IT community and the founding partners are Accenture, CA Technologies, Cisco, Cognizant, Hewlett Packard Enterprise (HPE), Infosys, Pegasystems, PwC, Salesforce, SAP and Tata Consultancy Services. The coalition has created a free platform of online tools with partner companies opening elements of their individual training libraries into one centralized portal, which is scheduled to be available in April.  

In this week’s review of state budget proposals, Alabama and Arizona’s governors are proposing funding increases for higher education, while Louisiana is facing cuts due to a budget shortfall. In Hawaii, the governor is seeking supplemental funding for the Hawaii Technology Development Corp to expand its grant making capacity, while Idaho and South Carolina’s governors are seeking more money for workforce programs.

Alabama

Gov. Kay Ivey’s FY 2018-2019 proposed budget increases funding for The Alabama Innovation Fund, which supports and leverages R&D at the state’s universities. The fund would receive $2.9 million in FY 2019, a 20.7 percent increase from the previous fiscal year.

Arizona

With the 2017 data in the books (see our analysis of MoneyTree and useful stats from the Venture Monitor), we can take a more informed look at the prospects for the industry in 2018. We identify four trends — increasing exits, massive deals, accumulating capital and improved diversity — that may shape the overall VC industry in 2018 and why they could make a difference for regional innovation initiatives.

Increase in the number of startups exiting

The number of exits has decreased for 11 straight quarters, according to the Venture Monitor, but 2018 is likely to see increases in both initial public offerings (IPOs) and merger and acquisition (M&A) activity.

California’s efforts to grow the role of its community colleges (CCs) was reinforced with the governor’s recent budget request to establish a fully online public community college, while a report reviewing the state’s established pilot program to offer baccalaureate degrees at some CCs presented some serious questions.

California online community college proposed

Gov. Jerry Brown included $120 million in his FY 2018-2019 budget request to establish a fully online public community college to provide sub-associate degree credentials and training across the state. Already serving approximately one fourth of all community college students across the nation through a network of 114 community colleges, the state sees an online institution as a way of reaching and educating more of the 2.5 million Californians between the ages of 25-34 who have earned only a high school diploma.

Over the five-year period from 2012 to 2017, as total venture capital investments more than doubled, growing from $41.2 billion to $84.0 billion, the number of deals increased by just 2.7 percent according to new data from the NVCA-Pitchbook Venture Capital Monitor. In 2017, more than half of all venture capital deals and three-quarters of all venture capital dollars went to companies in California, New York, and Massachusetts in 2017. However, the share of deals going to these three states decreased slightly from 2007 to 2017 (from 56.1 to 52.4 percent), while the share of dollars increased from 62.3 percent to 75.7 percent.

Based on the NVCA-Pitchbook Venture Capital Monitor data, SSTI has prepared information on VC investment by state and changes over time. That data, along with state-by-state totals for 2007-2017 are available in Excel format below.

SSTI’s Tech Talkin’ Govs feature continues as governors across the country roll out their state of the state addresses. We review each speech for comments relevant to the innovation economy, and bring you their words directly from their addresses. In this third installment, we present excerpts from governors in Delaware, New Mexico, Rhode Island, Virginia and West Virginia.