We’ve Got New BizVoice For You!

The September/October edition of BizVoice magazine is now live!

We’ve highlighted venture capital, banking/finance/investments and Indiana innovation. Our own Tom Schuman also followed Indiana Congressman Larry Bucshon (R-8th District) for a day in Washington D.C. Read his story and the rest of the new content in the online edition.

You can also subscribe to receive a hard copy every other month.

Tech Talk: Don’t Miss Out on inX3 Extravaganza

What is one of the biggest challenges for Indiana’s technology and innovation communities? Many would agree that it’s securing the needed venture capital to take promising start-ups to the next level.

What is a new event to try and overcome that hurdle? It’s inX3 and it’s coming in just two weeks – June 13-16.

inX3 stands for inspire, innovate and invest. Indiana’s leading tech organizations are coordinating a series of events that will bring together entrepreneurs, venture capitalists and investors. And most of the action takes place at The Union 525 space in downtown Indianapolis.

A special Almost Fail Entrepreneur Reception celebration kicks off the week, which concludes with the next in a series of Indy Civic Hack programs. The two middle days feature a variety of programs – Pitch Competition Finals, Invest Indiana Forum and much more – as well as an AT&T Street Party on June 14.

There’s something for everyone at inX3. Details are on the web site, with app updates available through iTunes and GooglePlay.

inX3 asks the simple question: Are you in? The answer should be equally clear: Y-E-S.

Many Tech, Entrepreneurship and Innovation Priorities Remain in Budget Bill

The House Republicans’ budget priorities were recently announced, as HB 1001 goes from the Governor’s initial budget priorities to more in-depth House consideration. The Chamber was glad to see several technology and innovation priorities in the bill including:

  • Makes the Venture Capital Tax Credit transferrable to people who don’t have Indiana tax liability. It also removes the 2021 expiration date of the tax credit, which helps enhance certainty
  • Several parts of the $1 billion over 10 years for innovation and entrepreneurship plan:
    • It caps the amount of the Next Level Trust Fund that can be invested in Indiana businesses to 50% of that $500 million fund. It still appoints a board of trustees to oversee the investment policy of the fund
    • Has $20 million over the two years for the Indiana Biosciences Research Institute
    • Due to budget pressure, it reduced the 21st Century Research and Development Fund by $10 million per year to $20 million per year
    • It allocates $1 million for the biennium for the Launch Indiana program

We expect many changes in HB 1001 as it advances through the legislature. The Chamber will continue to educate legislators on these important economic development priorities currently in the bill and why they need to remain.

VC Numbers Look Good in Q2

PricewaterhouseCoopers and the National Venture Capital Association are the leaders in surveying venture capital investment deals and statistics. And the State Science & Technology Institute is the best at putting the numbers in perspective.

Below is part of the analysis from a strong second quarter of this year. Also, SSTI has a spreadsheet that breaks down investments by quarter over the past six years.

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

 

In the second quarter (Q2) of 2013, venture investment totaled $6.7 billion over 913 deals, according to the quarterly survey by PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA). Compared to the first quarter of 2013, the amount of venture capital investment increased 12 percent and the number of deals increased 2 percent. Although still well below venture capital investment highs in 2007, Q2 2013 had the largest total amount of investment in a year.

In total, $12.6 billion in venture investments has been made in the first half of 2013 in 1,776 deals. This represents a 3.8 percent decrease in the investment amount compared to the first half of 2012, but a slight uptick, 4 percent, in the number of deals completed.

The software and biotechnology sectors were the largest two recipients of venture capital investments. The software industry received $2.1 billion in investments, although this was a 7 percent drop from the previous quarter. Biotechnology rose 41 percent in investments to $1.3 billion in 103 deals. Other sectors receiving large totals of investments were IT ($654 million) and medical devices ($543 million).

Clean technology, which includes a range of activities across sectors, captured $364 million in 43 deals. This is a 6 percent investment decline and 31 percent deal decline, and is the lowest level since the fourth quarter of 2006.

Breaking investments down into company stage, seed and early stage companies together accounted for 57 percent of deals made, while expansion stage companies had 23 percent and later stage companies had the remaining 20 percent. Early stage companies closed on $137 million in 37 deals in Q2, while early stage companies had their highest levels of investments in six quarters.

First-time financings were also up in Q2, raising 24 percent to $1.1 billion, a 10 percent increase from Q1. The first-time financings were 17 percent of total investment amounts and 33 percent of total investment deals in the quarter.

Compared to the rather pessimistic survey from the first quarter of this year, and despite a decline in clean technology investments, this Q2 report appears to offer some optimism, with more than half of the sectors surveyed increasing in investment dollars.  In addition, a 39 percent rise to $1.9 billion was invested in “internet-specific companies” in Q2, with five of the 10 largest rounds in the quarter in the internet-specific sector. This suggests venture capitalists are looking for investment possibilities in more flexible and nimble companies with less overhead and low-capital-intensive operations.

 

Venture Dollars Up for Quarter, Down for Year

The optimist points to increased venture capital deals and dollar amounts in the second quarter of 2012 compared to the first three months of the year. The pessimist notes that both the second-quarter and first-half numbers for 2012 are lower than those figures in 2011.

The brief recap: January through June 2012 saw 1,707 deals worth $13.1 billion; for the same time period in 2011, it was 1,942 deals with a value of $14.7 billion.

Further numbers and analysis from one of the longest names/reports on record: The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

The number of Early stage deals reached the highest quarterly total since Q1 2001, with $2.1 billion going into 410 deals, an 18 percent increase in dollars and a 28 percent increase in deals from the prior quarter. The Internet-specific sector also saw increases during the second quarter, rising 22 percent in dollars and 31 percent in deals from the prior quarter to $1.8 billion going into 261 deals in Q2.  The Life Sciences sector (Biotechnology and Medical Devices), however, experienced a decline in funding in the second quarter, dropping 9 percent in dollars and 6 percent in deals from the prior quarter to $1.4 billion going into 174 deals in Q2.

“The concentration of venture capital dollars in the hands of fewer firms will increasingly dictate the flow of investment,” said Mark Heesen, president of the NVCA. “Currently, this translates into more funding for IT start-ups and less capital available for life sciences and clean technology.  We hope to see this investment mix rebalance over time as the start-up ecosystem is better served with more diversity, not less.  Additionally, we continue to watch the early stage and first time financing numbers as they are critical to the U.S. innovation pipeline.  We are encouraged that these numbers were stronger this quarter and hope that this signals an ongoing commitment on behalf of venture firms to make these longer term, breakthrough investments.”

“If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010,” remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US.  “Software and Internet companies continue to be attractive industries for VCs since most of these companies tend to be capital efficient and don’t require large amounts of capital to operate.  VCs also find the potential for profitable liquidity events to be attractive for these companies.  On the contrary, given the regulatory challenges currently impacting the Life Sciences industry and the amount of capital required to fund these companies, it’s no surprise that investments in this industry have declined for the fourth consecutive quarter.”

The Software industry received the highest level of funding for all industries with $2.3 billion invested during the second quarter of 2012, which is the highest investment total for the sector since the second quarter of 2001.  This level of investment represents a 38 percent increase in dollars, compared to $1.7 billion invested in the first quarter.  The Software industry also had the most deals completed in Q2 with 290 rounds, which represents a 16 percent increase from the 251 rounds completed in the first quarter of 2012.

Life Sciences investing declined for the fourth consecutive quarter, most notably in the Biotechnology sector where $697 million went into 90 deals, representing the lowest quarterly total for the industry since the first quarter of 2003. 

Seed stage investments rose 33 percent in dollars and 15 percent in deals with $199 million invested into 63 deals in the second quarter. Early stage investments also rose, climbing 18 percent in dollars and 28 percent in deals with $2.1 billion going into 410 deals, the largest quarterly deal total since the first quarter of 2001.  

First-time financing (companies receiving venture capital for the first time) dollars increased 24 percent to $1.1 billion in Q2, and the number of deals rose 27 percent to 282 deals in the second quarter.   

Venture Capital Update: It’s Up

What’s going on in the venture capital world and where does Indiana rank compared to other states? We’ll let the experts provide the analysis (below). As far as Indiana’s status, the 14 deals in 2011 (ranking 26th among the states) were similar to previous years; the nearly $178 million invested (20th ranking), however, exceeded recent trends. In other words, we had bigger deals in 2011.

The State Science &Technology Institute offers the following on a national level:

U.S. venture capital activity continued to rebound in 2011, with total investment dollars reaching levels similar to venture capital activity before the late-2008 drop, according to the latest data from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers (PWC) Moneytree survey. Venture capitalists invested $28.4 billion last year in the U.S., up 30.3 percent over 2010. The NVCA/PWC announcement ranks 2011 the third highest year for investment in the past decade. Venture deals, however, grew by only 12.1 percent, stemming from higher valuations and continued support for portfolio companies.

Early stage investment activity grew substantially last year, while seed stage investment declined. VCs invested $8.3 billion in 1,414 early stage companies, an increase of 47 percent in terms of dollars and a 16 percent increase in deals over the previous year. Early stage investments represented about 29 percent of all venture dollars and 38 percent of deals, a modest increase over 2010. Seed stage investments, however, declined by 48 percent in terms of dollars to $919 million. Seed stage deals remained steady at 396. These numbers indicate that even though the overall trend in 2011 suggest a preference for larger deals, seed stage deals experienced a decline in average size.

Most states shared in the increase in venture activity last year. Among 2010’s top ten states for venture dollars, only North Carolina and Washington had decreases in activity in 2011. The decline caused North Carolina to drop out of the top ten for the year, replaced by Virginia where venture dollars increased by 61.8 percent to $607.6 million. California, which was the recipient of 51 percent of all venture dollars last year, experienced a 32.1 percent increase in investment.

View SSTI charts on dollars invested and deals.

Venturing Along the Capital Trail

That headline is a cute way of saying "who are the recipients of venture capital?" CB Insights, a New York-based services firm for the financial industry, tried to answer that question in a recent study. You can sign up for free to get the full report, but I found this analysis from the State Science & Technology Institute provided a good overview.

 A CB Insights’ report on the "human capital" of venture-backed Internet companies finds that vast majority of company founders are white. They also tend to be between 35 and 44 years old, male and have MBAs.

When venture capitalists are asked the most important factor in choosing a company for a deal, they often say that the founder or team weighs heaviest in their decisions. CB Insights drills down into this human element by providing data on the founders of Internet companies that received venture capital in the first half of 2010. The study includes data on race, age and experience, the number of founders per company, gender and the educational background/pedigree of the founders. It also provides specific data on deals in California, Massachusetts and New York.

Within the 165 deals tracked in the study, 87 percent of early stage, venture-backed Internet startup founders were white, with 83 percent of entire founding teams being all white. Only 77 percent of the general U.S. population is white. Asian founders represented 12 percent of founders, while making up 4 percent of the U.S. population. The percentage of Asian founders was larger in California, and their companies tended to receive larger investments. Black founders accounted for only 1 percent of company founders, while Native Americans and "other" represented less than one percent.

The founders in the study were overwhelmingly male. Across the country, 92 percent of founders were male and 86 percent of teams were all male. Massachusetts had the highest percentage of female founders with 27 percent. All-male and all-female teams received similar levels of funding, but mixed teams received substantially more.

Almost half of the founding teams had average ages between 35 and 44. Teams in the 26-34 age range, however, tended to receive more capital. Massachusetts favored somewhat older teams, New York favored younger teams, and California teams fell in the middle. Nationally, 51 percent of founders hold a Master’s or PhD, but two-thirds of all teams had at least one person with an advanced degree. In New York, founders with only an undergraduate degree actually tended to raise more capital. Cornell, Stanford and Harvard produced the most founders with undergraduate degrees. Harvard, Stanford and MIT’s graduate programs generated the most founders with advanced degrees. About 37 percent of companies had one founder, 40 percent had two, 19 percent had three, and 4 percent had four partners.

While providing an interesting snapshot of the founders who received funding in the first half of 2010, there are limits on the conclusions that can be drawn from the CB Insights report. It focuses exclusively on venture-backed Internet companies, and, since it is the first in a series of reports, no trend data is yet available. Also, without data on who is seeking for venture funding, the report does not reveal much about the preferences of venture firms. It is clear, however, that the population of venture-backed founders included in the study does not reflect the diversity of the U.S. population.

Study Ventures Into Capital World

The Silicon Valley and Route 128 have long been identified as the homes of venture capital. For the unitiated, that’s the San Francisco and Boston areas. Throw New York in the mix and the three regions are home to nearly half of all VC firms and a like number of VC-backed companies.

The State Science & Technology Institute reviews some recent research that says what appears to be bad news (it is in some respects) for other parts of the country has some silver linings for investors.

Venture firms exhibit a strong local bias, according to the study. A firm is almost six times more likely to invest in a local firm, controlling for other factors. The authors note, however, that out-of-region investments have a higher success rate than in-region investments. One explanation is that firms have a higher barrier to investing out of their home region and tend to restrict their investments to low-risk and higher-yield opportunities.

Despite the greater likelihood of success in out-of-region investments, firms based in venture capital centers outperform firms in other locales. These regions have a greater number of opportunities, pools of talented employees and benefit from knowledge spillovers. The authors suggest that this concentration may be a rational allocation of resources and make sense for investors.

The researchers advise that anything a region can do to increase the number of successful venture-backed investments in a region can greatly increase the likelihood of future deals. Once a region has experienced a few successes, they are much more likely to become the home of branch offices, which in turn are prone to invest locally. Also, once a firm has invested in an out-of-region area, they are much more likely to invest in that region in the future.

Indiana has certainly seen increased outside investment and realized some success stories. More of each will lead to … more of each.
 

Survey: Asia, India in Line for More VC Dollars

Venture capital has long been concentrated in California and Massachusetts. No news there. Many people, however, will cite improved efforts in recent years by Indiana private and public sector leaders to attract those VC dollars.

The 2009 Global Venture Capital Survey, though, indicates that job might become a little more difficult in coming years. Why?

  • More than half of venture capitalists are now investing outside their home country
  • Fifty-four percent of investors anticipate working with additional international partners in the next three years
  • Asked where their dollars are most likely to go over those 36 months, the top answers were Asia, 50%; India, 43%; and South America, 36%. Only 17% forecast increased U.S. investment

There is still room for states to set themselves apart. Nearly 60% responded that government can play a key role by establishing favorable tax policies. Fifty percent noted that more support for entrepreneurial activity is also important.

On the other hand, maybe more international dollars will find their way here. Another very good reason for the U.S. to avoid protectionist policies that shut the door on international trade and investment.

Research: Distance Impacts Structure of VC Funding

What do we know about venture capital — other than there isn’t quite as much in play today as in recent years?

In a recently compiled list of the most active VC firms in 2008, 40 were located in the Silicon Valley and San Francisco. Another 18 of the firms doing the most business were in Massachusetts. That distribution is nothing new.

Whether that fact makes it more difficult for Indiana and other Midwest companies to obtain funding is an age-old question. Some say it is a distinct disadvantage for Hoosiers, while others contend good ideas will find the money no matter the location.

Research from Xuan Tian, an assistant professor of finance at IU’s Kelley School of Business, finds that if companies do receive funds, the overall level is not impacted by distance. The structure of the financing, however, is subject to variances based on proximity.

The State Science & Technology Institute summarizes it this way:

Companies located farther from their venture investors receive more frequent rounds of financing with lower cash amounts per round. According to the study, this difference is attributable to the higher cost of monitoring companies that are farther away.

Investee companies that are located near their investors are able to meet with them regularly, minimizing the risk to the investor and the cost of gathering information.

Tian argues that monitoring and the staging of funding rounds are substitutes for each other. With the low-cost monitoring that is possible with nearby firms, venture firms can afford the larger risks associated with large, infrequent cash infusions. The cost of monitoring more distant companies means that venture firms are less willing to take those risks. More frequent funding rounds give investors the option of dropping a company that is not meeting its goals, with fewer losses.