Useful Stats: Count VC Deals, Not Just Dollars

Most of the media coverage for the MoneyTree™ Survey of venture capital investments, prepared quarterly through collaboration of PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, focuses on the amount of money invested in a particular state or region during the given period and its change relative to another given time period.

Most tech-based economic developers, indices and TBED policy-influencing decisionmakers also use VC dollars as an indicator of the health of their region. This may be unfortunate. Should TBED organizations worry if the dollar figures reported for their state or community in one quarter are lower than the previous quarter while another state's remained equal or increased?

Easy access to risk capital is a key ingredient for most successful regional innovation systems to be certain, but is the amount of equity financing invested as accurate a measure of system health as, say, the number of deals made?

Of the following, which would you consider more entrepreneurial at the end of the year based on the following hypothetical MoneyTree™ Survey results?

• Community A sees $20 million invested in one firm for the first quarter and one $25 million deal for the third quarter (total: $45 million through two deals)
• Community B gets $35 million in the first quarter for five deals in the first quarter, one $2 million deal in the second quarter, no deals in the third quarter, and two $1 million deals in the fourth (total: $39 million through 8 deals)

Some will argue that the four companies in Community A are more likely to succeed because they had more money; others reflecting on the inflationary values of many pre-bubble dotcom deals or the cost of a biotech deal will know size doesn't equal success. Plus, the question is which community is more entrepreneurial.

Most of the perception problems occur through time, though. So what if, in the next year, Community A gets four deals totalling only $40 million while Community B gets $45 million through 1 large deal? Most analysis, looking only at dollar amounts, would suggest Community A is becoming less entrepreneurial and Community B is in better shape?

To help test this theory for your own state, SSTI has prepared a table presenting the quarterly number of VC deals by state for the five years, 2001-2005, based on MoneyTree™ data. It is available at: http://www.ssti.org/Digest/Tables/121905t.htm