Is VC Growing More Concentrated or Dispersed?

Though Silicon Valley and New England still dominate the U.S. venture capital landscape, several other regions - whether through local initiatives or the natural evolution of the economy - have emerged as respectable national hubs of investment over the last decade. Some areas, like San Diego, have seen greatly expanded investments and have joined the top tier of venture markets as VC firms turned their attention toward biotech.
 
A new report from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers highlights five regions – New Mexico, Pittsburgh, Seattle, Los Angeles and the Washington DC metroplex – that are not typically counted among the country's venture capital hotspots, but which have experienced remarkable growth in venture investment since 1997.
 
The report cites the five U.S. regions that have grown the most in sheer number of venture deals and total dollars invested since 1997. Areas that received less than $100 million in investment last year were excluded from consideration, but none of the final five ranked in the top tier for total investment in 2007. The top two high-growth regions, New Mexico and Pittsburgh, remain relatively small venture markets. All of these areas, however, have managed to attract substantial investment from venture capital firms located outside of their immediate vicinity. In fact, only four of the 106 most active U.S. venture firms from the 2007 Moneytree Report are based in one of these regions, providing evidence that money will travel.
 
All five of these regions outpaced the already-impressive growth of the overall U.S. venture market, which has doubled in size over the past 10 years. The top five areas also have managed to increase their share of national venture capital investment over a period in which Silicon Valley and New England also expanded their leadership in the market. In 1997, those two regions accounted for 42 percent of U.S. venture investment, according to Moneytree data. In 2007, the figure had inched up to almost 47 percent. Silicon Valley's investment level grew by 113 percent since 1997, putting it just shy of the top five regions.
 
New Mexico experienced the most growth out of the group, increasing its total investment by 375 percent and its number of deals by 650 percent. Though the state accounts for less than a half a percent of the country's venture investment, heavy investment in R&D has helped the region generate a healthy stream of high-quality deals. The report cites the State Investment Council program as a successful initiative that has improved New Mexico's business climate for entrepreneurs. The program has allowed the state to invest in venture firms with a full-time office in New Mexico and to invest directly in in-state companies through the New Mexico Co-Investment Partnership.
 
The National Association of Seed & Venture Funds (NASVF), taking exception with some of the conclusions in NVCA’s account, compiled a table showing the 1997 and 2007 data by state. The table shows real increases in VC investments by both dollar amount and number of deals were experienced by 21 states and the District of Columbia. Fourteen states saw increases in dollars invested but not in the number of companies. Another three states had more deals for less cash. Eleven states experienced drops in both the number of deals and the amount of VC funds invested.
 
As the regions highlighted in the report were increasing their share of the total VC pool of investments, it must mean other regions were receiving a smaller percentage of the total, even while their actual investments were increasing. The result? It appears venture capital is becoming increasingly concentrated but in more areas of the country.  
 
But whether or not those conclusions can be drawn with any confidence would require deeper analysis than looking at only two years in snapshot. For example, one large deal can skew the figures for any state in one year. SSTI will look at the issue in more detail in coming weeks.
 
Read the NVCA/PricewaterhouseCoopers release at: http://www.nvca.org/pdf/Fast_Growing_07Q4.pdf
The NASVF table is available here: http://www.nasvf.org/web/allpress.nsf/pages/17631