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.

 

Stepping Up to Tackle Tech Transfer

The goal in the Indiana Chamber-led Indiana Vision 2025 plan: Increase the amount of technology transfer from higher education institutions and attain "Top 5" ranking per capita among all states. Learn more about Indiana Vision 2025.

It’s going to take a strong, coordinated effort. Two states are reporting recent advances, according to the State Science & Technology Institute.

New efforts to step up technology transfer at the University of New Mexico (UNM) and the University of Tennessee (UT) have resulted in a record number of invention disclosures over the last year. In both cases, much of the achievement is attribtuted to faculty involvement, including new outreach efforts by the universities and ambitious goals set for the institutions.

In New Mexico, UNM’s technology transfer office, the Science and Technology Corp, reported a record number of new technologies disclosed by faculty, including a 50 percent increase in biomedical or life science breakthroughs. Aggressive attempts to recruit entrepreneurs to develop and market the technology led to 46 marketing licenses acquired by investors in 2012 and seven new start-ups were formed based on UNM inventions, the article states.

To help increase the number of disclosures by facutly, the Science and Technology Corp. is working closely with the UNM Health Sciences Center and providing more support to encourage faculty to develop their technologies. For example, they launched a gap fund awarding small grants to researchers and created the Lobo VentureLab to incubate new companies on campus. Their efforts are credited with helping grow faculty invention disclosures 85 percent since 2004. The Health Sciences Center began holding training sessions to better explain the commercialization process to faculty and to encourage partnerships with entrepreneurs and inventors.

Meanwhile, the University of Tennessee announced that in the fiscal year ending June 30, nine start-up companies were established based on technology developed by faculty — a number that is more than double last year’s total. The UT Research Foundation (UTRF), a nonprofit organization responsible for commercializing and licensing faculty technology, received 141 new invention disclosures in 2012, which is up from 87 in 2011. Officials say the increase is a result of more aggressive goals set for UTRF and a response to challenges from national and state leaders to increase and encourage innovation.

Study: We May Have Even Fewer Workers

A new study tackles an old but growing challenge: paying for higher education. Authored by Demos, a New York-based research and advocacy firm, the report is titled The Great Cost Shift: How Higher Education Cuts Undermine the Future Middle Class.

The State Science & Technology Institute summarizes below. The full report is available here.

Over the last two decades, the authors highlight a trend of state disinvestment that has shifted the cost of education from state governments to students and their families. The result of this trend is students and their families are paying and/or borrowing significantly more for a college.

According to the report, this long-term trend may threaten the economic health of states due to an insufficient supply of college-educated workers needed to thrive in the 21st economy. The authors contend that the insufficient financial support for students will contribute to low rates of college completion, depriving states of an educated workforce. They also contend that other long-term social costs include decreased social mobility by low- and middle-income students and a diminished middle-class.

Key highlights:

  • Compared to the generation that came of age in the 1990s, the current population of young adults is larger in size, more diverse and more apt to enroll in college

  • Public institutions absorbed 65.6 percent of the undergraduate enrollment increases that have occurred since 1990

  • Real funding per public, full-time equivalent student dropped by 26.1 percent from 1990-1991 to 2009-2010

  • After adjusting for inflation, published prices for tuition and fees at public four-year universities more than doubled (rising by approximately 116 percent)

  • The real price of two-year colleges climbed by approximately 71 percent

  • An increasing percentage of that aid is taking the form of merit-based aid without regard for students’ financial situations

  • The volume of outstanding student loan debt has grown by a factor of 4.5 since 1999

The report provides several policy recommendations to reverse the trend, including:

  • States must invest in higher education, especially given the projected future growth of student enrollments

  • State tax systems must be reformed to ensure that higher education remains a budgetary concern and does not face further budget cuts

  • State leaders must prioritize funding for institutions that educate the largest fraction of college students faced with funding decisions

  • States must align investments in higher education with the goal of completion

  • Financial aid polices must be reoriented back toward need-based aid

  • Students need to be steered towards more affordable sources of debt like federal student loan programs 

Bad News on the Broadband Front

Announcing a national priority and making private sector investments apparently isn’t enough to improve broadband penetration across the United States.

A fall 2009 survey by the FCC found that 65% of Americans had broadband at home. A February 2012 survey came up with an identical number. Why? According to a report from TechNet, that last third of non-adopters (older, less educated and poorer) is a difficult audience to reach. Add in the recession — 9% in the latest survey said they had to cut back or cancel Internet service due to economic troubles — and the picture begins to clear.

The10-page TechNet report is here, with some brief analysis below by the State Science & Technology Institute:

The study identifies several reasons behind the plateau and calls for better coordination among policymakers and private stakeholders to improve adoption rates. Meanwhile, some states have big plans in the works to improve their broadband networks, including governors in Hawaii and New York pushing for funding to expand Internet access to underserved areas. Ohio’s governor is taking a different approach in hopes of attracting new employers and cutting-edge researchers with a $10 million state-led initiative boasting broadband speeds that officials say would far exceed the rest of the nation.

The TechNet report finds the number of Americans with broadband at home has remained around 65 percent since 2009 when the National Broadband Plan was implemented under the American Recovery and Reinvestment Act (ARRA). At the same time, smartphone adoption and apps usage has grown significantly. However, this is not because smartphone users are swapping broadband service at home with smartphone usage; rather, connected individuals are increasing their access while others are left behind. A society more "digitally excluded," the authors contend, contributes to a smaller domestic market for tech goods and services and a less innovative economy.

Coordination and assessment is seen as key to pushing past the plateau. A clearinghouse for best practices that assembles program information would help local authorities better understand broadband opportunities and help states understand what other states are doing, the report finds.

 

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.

Mixed Message on Manufacturing

Make: an American Manufacturing Movement is a new report from the Council on Competitiveness that indicates policymakers are receiving vastly conflicting reports on the state of U.S. manufacturing. In addition, it prescribes five "solutions" to help keep the U.S. on top.

The State Science & Technology Institute offers the following:

Policymakers, the report’s authors contend, are bombarded with widely available reports and analysis that support one of three conflicting views (it is on steep decline, doing reasonably well or it is poised for growth) on the health and importance of U.S. manufacturing.

"In reality, elements of all three perspectives are likely true," according to the authors. U.S. manufacturing remains the world’s top producer and an important part of the U.S. economy — employing more than 11 million and contributing more than $1.7 trillion to the economy. However, emerging economies are increasingly becoming a threat to U.S. competitiveness. Going forward, the U.S has the potential to capitalize on emerging marketplaces, but to achieve this the U.S. must find solutions to the challenges it faces.

The report provides five "solutions" to maintain the nation’s status as the world’s top producer, resolve its manufacturing challenges and capitalize on growing international demand:

  • Enact fiscal reform, transform tax laws, regulations and other structural costs to spur investment, ramp up production, capitalize growth companies and create skilled jobs

  • Create fair and open global markets for U.S. goods and services to reduce the trade deficit and increase exports as a percentage of gross domestic product

  • Prepare the next generation of innovators, researchers and highly-skilled workers

  • Create national advanced manufacturing networks and partnerships, prioritize R&D investments and deploy new tools, technologies and facilities

  • Develop and deploy smart, sustainable and resilient energy, transportation, production and cyber infrastructures 
     

Indiana Churning at a Moderate Pace

Although it includes the end of existing companies (and the creation of new firms), business churn is a good thing. The experts say churn is a strong indicator of innovation and growth. The State Science & Technology Institute offers churn rankings for 2004-2009, with Indiana in the middle of the pack.

See the rankings here.

From Not So Good to Great?

Maybe, just maybe, that Rust Belt name will find its place in history. The Midwest has been stuck with that unflattering moniker for years. Deservedly so in many ways. But the Brookings Institution, no Johnny-come-lately to the think tank game, says in a recent report that the Great Lakes region could be the economic leader going forward.

The State Science & Technology Institute (based in Ohio, giving it extra incentive in this case) analyzed the report this way (with more than a few items and initiatives that are no strangers to Indiana):

The Next Economy: Economic Recovery and Transformation in the Great Lakes Region provides a roadmap for federal, state and local stakeholders to transition the Rust Belt into a forward thinking economy. It replaces the old economy, which was driven by highly-leveraged, domestic consumption, with an export-oriented Next Economy powered by a low-carbon energy strategy and driven by innovation that benefits all Americans.

The report outlines the many resources that can position the Great Lakes region as an economic leader. They include:

Global trade networks: Many of region’s cities rank among the top cities in terms of the share of their metro output that is exported;

Clean energy/low carbon capacity: Their blue-green potential due to the Great Lakes, waterways and abundant natural wind/solar resources position the region well in renewable energy generation; and

Innovation infrastructure: The region’s metros are home to 21 of the 32 major public and private research universities, which attract substantial federal research investment. Each year almost 36% of all U.S. science and engineering degrees come from schools in the region. The region also registers almost 33% of all U.S. patents.

To achieve this economic transformation, the region will have to address the deficient transportation infrastructure for trade, the concentration of energy-intensive industries, the lack of seed capital and the low educational attainment levels. To resolve these challenges, the report provides three key Next Economy drivers that will help federal, state and metropolitan leaders to maximize the region’s promise:

Invest in the assets that matter: innovation, human capital, and infrastructure: Even though budget cuts have become a regular occurrence, the researchers argue, long-range economic health is not just a matter of spending less, but spending and investing to spur growth. The region should concentrate its efforts on developing regional innovation clusters, instituting workforce development at community colleges and smart spending on infrastructure to facilitate trade.

Devise new public-private institutions that are market-oriented and performance-driven: Government leaders should be prepared to go to voters to support bond issues or dedicated tax sources for these institutions. They also can consider reorganizing money from programs and systems that are underperforming. These institutions include new infrastructure banks, advanced manufacturing labs, regional energy research and innovation centers and a venture capital fund of funds.

Reimagine metros’ form and governance structures to set the right conditions for economic growth: To achieve growth and innovation, cities and states must overhaul their physical redevelopment strategies and local governance structures in the Great Lakes region due to their significant population and economic declines. They must focus on right-sizing communities, green development and infrastructure and governance reform.

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.
 

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.