Pennsylvania Venture Capital “Too Small”
Despite drawing $4.42 billion in venture capital in the last six years, Pennsylvania must attract much more early-stage investments in order to transition to “the next economy,” said a study by the Brookings Institution released today.
The amount of capital invested in Great Lakes states, such as Pennsylvania, is “too small” relative to what early-stage companies require and how much is needed to “create new deals that will achieve good financial returns,” said the report.
Brookings’ report suggests Great Lakes states create a “fund of funds” of between $1 billion and $2 billion in investment capital to help transform their economies in the 21st century. The idea would be to leverage entrepreneurial resources, especially those spawned by universities, to grow early-stage companies.
The state of Ohio, for instance, set up such a fund in 2004, said Mike Stubler, managing director of Draper Triangle Ventures, Downtown. The Ohio Capital Fund hired a Cincinnati firm to manage the fund of funds, which attracts private capital by using state tax credits.
“Pennsylvania has been very active in promoting venture capital in the state,” said Stubler, citing the Ben Franklin Technology Development Program, for example. “But there are more things it could do that wouldn’t impact the budget.”
Of the dozen states in the Great Lakes region tracked by Brookings, Pennsylvania lagged only New York in terms of the amount of venture capital invested in the years from 2004 through 2009. Early-stage companies in Pennsylvania received nearly $1.5 billion in 2006, for example, while firms in New York received $1.7 billion.
Since the recession started in December 2007, however, venture capital has tailed off. For instance, companies in Ohio received nearly $345 million in capital in 2007, but only $24 million last year. Pennsylvania companies received about $981 million in 2007, and $216 million last year.
“Because of the macro environment in the last 14 to 18 months, there’s been fewer dollars invested with venture capital firms,” said Stubler.
“The traditional partners in venture capital firms — pension funds and university endowments — have slowed down their investments because of declines in their portfolios,” said Stubler. Such partners only allocate so much to venture capital, so when a bear market eats into the total pie, the venture-capital slice shrinks, too.
Recession or not, the technology-magnet states of California and Massachusetts drew far more venture capital than Great Lakes states, said the report. California companies received about $14 billion in 2007 and $4.1 billion last year, while Massachusetts companies received nearly $3.6 billion in 2007 and more than $1 billion last year.
“There’s no shortage of great ideas just because we’re in a recession,” said Stubler. “Innovation doesn’t stop because of the economy.”
Friday, January 29, 2010
By Thomas Olson, PITTSBURGH TRIBUNE-REVIEW
Thomas Olson is a Pittsburgh Tribune-Review staff writer and can be reached at 412-320-7854 412-320-7854 or via e-mail.
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