Preview:
The title: "Fastest Growing Regions for Venture Capital Investment Lie Outside Silicon Valley" The National Venture Capital Association's publication of a 'Money Tree report comparing 1997 investments to those of 2007 suggests, as USA Today headlined, that venture capital distributions are spreading the wealth both as to seed stage investments and geography. We question it's conclusions.
Article:
It’s hard to argue with an essentially promotional media release, one which selects data specific to its objective. But that’s what we're trying to do anyway. Our initial take on the Money Tree’s distribution of a headline-getting special report comparing 1997 with 2007 to underscore that institution venture capital is more well balanced geographically, and is putting more funds into start-ups strikes us as misleading, at best.
Regarding the disbursements of funds according to the stage of development: The industry has drawn significant criticism in recent years for channeling its resources to later stages of investing, where risk is diminished and returns more speedily. We’ve written about the shrinking portion of the venture capital pie for seed and start-up stage companies often. It has fallen dramatically to less than 5% of total investments in recent years, while expansion and later stage firms are sopping up more than 80% of the funds, year after year. Took at the chart below. Back in the 80's and early 90's, about one dollat in six was invested in seed and startup companies. Since the turn of the century that share has dropped to one in twenty, even on a few years to about one in fifty.
Trends in Venture Capital by Stage of Development
Seed and start-up companies have been so starved by the industry, that a huge gap was created, in turn attracting angel investors across the country to meet the demand. In fact angels have so clearly emerged into THE principal source of seed and start-up capital, that VentureOne (Money Tree’s chief rival as a source of information on venture capital deployment) and the newly formed Angel Capital Association have determined to begin quarterly measurements of angel investing activity.
We suppose that poses a PR problem for an institutional venture capital community anxious to display its battle ribbons to a congress looking longingly at its favorable tax treatment. And a few glowing headlines, particularly from locations that typically attract little venture capital, might offer some subtle persuasion.
The report seems selective in comparing data from disparate years, separated by a decade, the latter of which registered twice as much capital investment as the other. That fact alone is likely to gin up some good examples in selected geographies.
As far as geographic distribution of venture capital is concerned, we note that in the 1997 report California claimed 40% of all venture capital reported to the Money Tree, while Massachusetts got 9%, just tickling the 50% mark between them. And in 2007 47% and 12% respectively went to the the two coastal states or about 59% of the total. That doesn’t argue very convincingly that the venture capital community is ‘spreading out.’ So we shook the Money Tree’s branches to take a state-by-state look at all states in 1997 and 2007. Interesting. Some are getting a much larger share; others a lot less. We think such a comparison is irrelevant in determining relative growth rates. It should be obvious that when you start with a small number, it's much easier to show large percentage gains that when you start from the larger base that siloicon valley represents.
We used state-by-state data because that’s what we have historically provided NetNews readers. We don't mean to pick on Pittsburgh or New Mexico. Both have been doing great work in building local capital sources for their entrepreneurs. And they are recording wonderful progress. But to suggest they are the 'fastest growing' is unsupported by simply using the 1997 and 2007 figures. 1997 may well have been a relatively slow year for Pittsburgh; and 2007 a relatively more robust year. It hardly justifies calling it a 'trend.' And the use of the media release without more a critical analysis simply results in a distortion.
But, of course, some some desirable headlines arise promoting favor with the venture capital industry:
Pittsburgh Second in Venture Capital Growth Pittsburgh Post Gazette
Seattle Venture-Capital Activity Is amnong the Fastest Growing Seattle Times
Venture Centers Gaining on Silicon Valley Red Herring
Venture Capital Is on the Move — to New Mexico, Pittsburgh and Points Beyond New York Times
New Mexico, L.A., New Rivals to Silicon Valley Venture Growth CNet
It is perfectly reasonable that the institutional venture capital community try to re-assert its claim that it is the fount of capital for the worthy start up entrepreneurial companies, it claims as its turf. But the statistics used in this report are a bit disingenuous both in terms of the geography of investments and in terms of the relative proportions going to seed and start-up versus more mature companies.