National Association of Seed and Venture Funds
| Ten States Attract 85% of Venture Funds; Seed Deals Less than 2% |
05/03/2005
Preview:
A state-by-state look, courtesy of the Money Tree, at first quarter venture investing and an analysis of the trend line in venture capital risk avoidance. Ten states get 85% of the venture funds. Seed stage companies attract less than 2%
Article:
There is precious little evidence in the first quarter 'Money Tree' statistics to suggest that startup and early stage companies are attracting a larger share of the total capital being invested by those companies reporting their data to the PricewaterhouseCoopers/National Venture Capital Association/Thompsom Economics information system. Last week's NetNews reported the bable of bragging rights carried in local papers. Today we'll examine some of the devil in the detail of the statistics.
First of all, let's take a look at the state-by state distributions. Not much new here. California captured nearly half the dollars (46.3%) and Massachusetts scored a distant second with 12.3% with about $569 million. Total venture capital distributions over the past ten years show these two coastal centers usually claim more than half the money. Other states reaping more than $100 million include, in order, Texas (7.5%), New York (3.7%) Colorado (3.5%), Pennsylvania (2.9%), New Jersey (2.7%) and Washington (2.3%). Florida and North Carolina just missed the hundred-million level. As the stories last week noted, several states made the elite list because of a single huge investment. These ten states snared more than 85% of the money.
At the other end of the spectrum 14 states failed to capture a single deal, including, not only the regulars at that table, but a couple of surprises in Michiagn and Wisconsin. Alaska, Iowa, Kansas, Louisiana, Maine, Mississippi, Montana, North Dakota, Nebraska, Nevada, Oklahoma and South Dakota also had zeros aside their nameplates.
States that registed a single investment include Alabama, Arkansas, Idaho, Indiana, Kentucky, South Carolina, Vermont and Wyoming.
In fairness, it should be noted that while the 'Money Tree' data collection system is robust, it does not capture the details of every venture investment because it is a voluntary reporting system. It does obtain about 70% cooperation, certainly enough for useful relative comparisons.
But perhaps more important that the geography of venture capital is the trend line. We've noted in these quarterly examinations that the venture capital distributions have increasing been moving to safer, later stage deals over the past several years. The VC community enjoys professing its role as the source of seed and startup companies that eventually grow to become the gazelles of tomorrow, but the statistics tell a different tale.
We've been tracking the trend line for seed deals closely, because that's the space in which we work. We've watched it diminish over the past decade from about 20% of distributed funds to about 2%. So this month, we decided to look from another angle. Same results:
The chart above examines 'stage of development' statistics in the first quarter of each of the past three years...then looks back to a pre-bubble first quarter of roughly the same overall size. Note if you will that more than 18% of the deals and 10% of the money in the first quarter of 1998 was directed to the startup/seed strata. Today, it's so small a slice of the pie that it discourages, not only the fly-over states, but the entrepreneurs in search of financial partners. Expansion and later stage deals now account for more than 80% of venture capital funds.
With the slimming pressures in the federal budget for R&D funds, SBIC's and SBA loans, increasingly worthy entrepreneurs are finding angels as their court of last resort. Fortunately, or perhaps via cause and effect, angel involvement shows significantly increased activity over the past few years, particularly at the sensitive, deprived startup stage.