Economic Recovery Remakes U.S. Venture Capital Map

While the U.S. venture capital (VC) industry struggles to recover from the last year’s sudden collapse in fundraising and investment, several regions are successfully rebuilding their venture environment. Venture investment remained far below 2008 levels in the second quarter of 2009, with venture centers such as Silicon Valley, Los Angeles, New York City and Texas falling farther from their lackluster numbers in the first quarter. Other key regions however, such as Philadelphia, and states in the Southwest and Southeast performed at, or near, the level of investment they experienced at the same time last year. Though the industry remains highly volatile, these changes have the potential to narrow the venture funding gap between Silicon Valley and the rest of the country.

Silicon Valley has dominated the venture capital industry for decades. Prior to the 2008 financial crisis, California’s share of U.S. venture capital investment, driven by activity in Silicon Valley, surpassed 50 percent. The crisis, however, had a stifling effect on Silicon Valley investment. Last quarter, California’s share of venture investment fell to 41 percent, the state's lowest share since 2001 according to data from the PricewaterhouseCoopers/National Venture Capital Association Moneytree Survey. The decline in share could simply indicate that VC firms are waiting for a more favorable climate to make new investments, but, at the same time, other regions are making strong gains.

At the same time, a few of the regions tracked by the Moneytree Survey are showing signs of recovery. The Philadelphia metropolitan area experienced a five-fold increase in venture investment dollars over the first quarter. The region was home to $161.9 million in venture investment and 22 deals, up from $31.2 million in 13 deals in Q1 2009. Though the average deal size jumped from $2.4 million to $3.36 million in the second quarter, the rise in investment was not simply due to a few larger investments since deal volume increased by 70 percent. In Colorado, investment dollars rose by 158 percent although the number of deals was slightly down. Venture dollars rose from $81.8 million in the first quarter to $211.1 million, even surpassing the pre-crisis investment level of Q2 2008. Colorado’s number of deals, however, fell from 18 to 16. For both Philadelphia and Colorado, the increase represents an increase in their share of total national venture investment.

Evidence suggests that the recovery is in effect in the Southeast and Southwest. The Moneytree survey groups Alabama, Florida, Georgia, Mississippi, Tennessee, South Carolina and North Carolina together as the Southeast and Utah, Arizona, New Mexico and Nevada as the Southwest. The Southeast experienced a significant rebound in dollars and a small increase in deals. Venture dollars more than doubled to $282.3 million from $113.6 million last quarter and deals increased from 30 to 34. The Southwest also performed well with venture investment dollars growing from $41.6 million to $157.9 million and deals increasing from 15 to 18. Along with Colorado, the Southwest was the only tracked region to surpass its investment level during the same quarter last year.

The other regions included in the survey experienced additional losses or modest gains. Texas, which received 4.5 percent of all U.S. venture investment last year, received only 2 percent last quarter. The Los Angeles/Orange County region received 6.8 percent of venture investment in 2008, but only 4.3 percent in the second quarter.

Read more about the venture industry’s second quarter performance at: https://www.pwcmoneytree.com/MTPublic/ns/index.jsp.

Is this the end of the Flyover Argument? Where do Public Equity Programs Go from Here?
One of the major arguments for public equity programs and policies to encourage equity capital investment is its disproportionate availability. Is this that much of a problem anymore?  Or is the remaking of the VC map, as suggested above a sign that public equity efforts are working? The future of TBED initiatives to increase access to capital is a major theme of SSTI's upcoming 13th Annual Conference. We're dedicating three sessions to the issue, starting with a bang:

• The Future of Public Equity and Entrepreneurship Programs
  Harvard professor Josh Lerner will join us to discuss his upcoming, provocatively titled book, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed-and What to Do About It. Lerner asked: when has governmental sponsorship succeeded in boosting growth, and when has it fallen terribly short? In his presentation he will provide valuable insights into why some public initiatives work while others are hobbled by pitfalls and offer suggestions for how public ventures should be implemented in the future. A discussion of the implications and opportunities presented will follow.
• Addressing Capital Gaps: Lessons from the Field
  Capital programs are facing challenging times given the financial meltdown of the past two years. At the same time, TBED efforts to increase the availability of risk capital for young firms have taken on a new sense of urgency. What worked yesterday won't necessarily work in the new world of finance, however. This session will look at the continual evolution of state programs, highlighting the pros and cons of two recently adopted approaches in Tennessee and Pennsylvania to build robust local private equity markets.
• Where Do Equity Programs Go from Here? A Roundtable Discussion
  There will be a lot to process from our first two capital-related sessions, starting right from the top with Josh Lerner's provocative plenary address. Add financial markets that are continuing to sort themselves out, and heads could begin to spin. With Rebecca Bagley, one of the TBED community's top thinkers on equity policy, as our guide, we're dedicating this session to find meaning and direction: what does it all mean for programs and policies to increase local capital access? What should they look like going forward?

SSTI's Annual Conference, Seize the Moment: Tech-based Economic Development for the Next Economy, will be held Oct 21-23 in Overland Park, KS. More information is available at: http://ssticonference.org