Venture Capital and Seed Activity in NYS: Statistics for Upstate and Downstate 2005-2008 Part II of a Two-Part Series Judith J. Albers, Ph.D. Theresa B. Mazzullo Samir H. Navani Vivek Pandey May 2009 160 Linden Oaks, Suite E Rochester, New York 14625 www.excellny.com TABLEABLE OF OF CONTENTS CONTENTS I. Introduction ……………………………………………………………....………...3 II. Distribution of Capital…………………....……………………..…….…..………...3 III. Capital by Development Stage……………………………………………..……….7 IV. Deals ……………...…………...……………………………………………..…….10 V. Deal Size………………………………………………………………………..….11 VI. Sources of Capital………………………………………………………………….13 VII. Intellectual Capital…………………………………………………………………15 VIII. Investments by Industry………………………………………………………..…..16 IX. Entrepreneurial Ecosystem…………………..……………………………………. 17 X. Conclusions....……………………….…………………………………….……….19 APPENDIX………………………………………………………………………......20 Note: Unless otherwise referenced, all data in this report is from PriceWaterhouseCoopers / National Venture Capital Association (NVCA) MoneyTree report with data provided by Thompson Financial (www.pwcmoneytree.com). © 2009 Excell Partners Inc 2 I. Introduction This paper is the second part of a two part series. The first paper entitled Venture Capital and Seed Activity in NYS: Perception, Reality and Unrealized Potential told the story about venture capital activity, particularly at the seed stage, and the unrealized potential in leveraging the incredible amount of Research and Development (R&D) that is being generated at pre-eminent universities across the region. There are many misperceptions and misunderstandings about these matters among our state, regional, and local community stakeholders. Data from many different sources was knit together to paint the picture of what is really happening in New York State (NYS). We also offered suggestions related to instituting a State-Supported Seed Fund for NY modeled after the Ben Franklin Technology Partners (BFTP) in Pennsylvania. In this sequel report, we again address the important issue of venture capital (VC) investing in NYS. However, here we take a deep dive into one primary data source, i.e., the raw data on www.pwcmoneytree.com for both the Upstate and Downstate regions. We have created a data base for every venture deal reported to the National Venture Capital Association (NVCA) for a four-year period from January 2005 through and including December 2008 (2005-2008). We take a close look at the distribution of capital among the metro regions from Buffalo to Long Island and how capital is invested by development stage. Data on the number of deals by development stage paints a picture of the level of VC activity in each region. In the venture world, “right-sizing” deals is an important consideration, particularly at the earliest stages of a company’s development. We consider the size of the deals by development stage by region. Because VCs, Angels, and State-Supported Seed Funds all participate to different degrees at the seed stage, we explore what constitutes a “real seed deal”. The next question then becomes, where are the NYS investment dollars coming from, i.e., sources of capital. It appears that less than expected is coming from NYS VCs. Because of this, the NYS Comptroller’s Office has committed to providing Common Retirement Funds (CRF) to VC firms for in-state investing. We’ll say a few words about the impact of the CRF monies. We’ll also explore some strange juxtapositions. In Upstate and Long Island there is an enormous amount of intellectual capital but a dearth of venture capital. In NYC, there is an enormous amount of intellectual capital in the life sciences, but the lion’s share of VC monies is invested in the “soft sciences” and services. We attribute these paradoxes to the lack of an entrepreneurial ecosystem both Upstate and Downstate for translating academic R&D into investable companies. We conclude by identifying the major missing components of the ecosystem and suggesting gap filling measures. II. Distribution of Capital Capital Invested Nationwide. Our paradigm in this paper will be to consistently present our state data in the larger context of what’s happening nationally. So, we’ll start “big picture” and ask the most fundamental question related to venture capital: how much is being invested? © 2009 Excell Partners Inc 3 Figure 1 shows that the venture market has been fairly stable during 2005-2008 and national investing levels have been in the range of $23 - $31B. The impact of the current economic crisis is already evident in the 2008 “dip” and recent reports are showing a continued decrease in VC activity for 2009. Figure 1: Annual National VC Investment The next question then becomes: So, where is the money going? Figure 2 below shows cumulative numbers for the time period of interest and calculates a percentage for each region. So, with data aggregated over four years, at the top of the list we have (no surprise) Silicon Valley. Note that, in addition, LA/Orange County and San Diego totals (along with a small amount from Sacramento/N. Cal) combine to give California 48.5% of the venture capital in the nation. New England (which is basically Boston) comes in second place at about 12%. “NY Metro” has a respectable rank of #3 on the list. 2005-2008 2005-2008 Region Cumulative Amount % of Total Cumulative Invested ($M) Number of Deals Silicon Valley $39,942 36.4% 4590 New England $13,160 12.0% 1814 NY Metro $7,596 6.9% 1023 LA/Orange County $7,188 6.6% 848 Southeast $5,625 5.1% 870 San Diego $5,504 5.0% 547 Texas $5,318 4.9% 674 DC/Metroplex $4,487 4.1% 815 Midwest $4,328 3.9% 879 Philadelphia Metro $2,908 2.7% 454 Colorado $2,711 2.5% 371 SouthWest $2,078 1.9% 333 Northwest $5,154 4.7% 767 North Central $1,976 1.8% 292 Sacramento/N.Cal $530 0.5% 78 Upstate NY $429 0.4% 125 AK/HI/PR $403 0.4% 113 South Central $283 0.3% 100 TOTAL $109,620 100.0% 14693 Figure 2: National VC Investments, Cumulative 2005-2008 However, there are two matters to note here. First, there is a big chasm between the more than 36% that Silicon Valley draws in venture capital versus the less than 7% for NY Metro. But even more © 2009 Excell Partners Inc 4 important is the fact that pwcmoneytree.com defines NY Metro as “the Metropolitan NY area, northern New Jersey (NJ), and Fairfield County, Connecticut (CT)”, the tri-state region. So, before we can continue, we need to make sure we really understand how much of NY Metro capital is actually staying in-state versus how much is headed to NJ and CT. Distribution of Capital in “Metro NY”. The pie chart below is illuminating. 41% of the total NY Metro venture capital technically goes out of state while 59% remains in NYC and Long Island, i.e., Downstate NY. Long Island, $111M, 1% Connecticut $782M Cumulative for 10% 2005-2008: $7,596 M New Jersey $2,306M NYC 31% $4,343M 58% Figure 3: Distribution of Capital for “Metro NY” But this paper is about NYS. It is Upstate and Downstate NY that are governed by the same legislative body in Albany and that contribute to the NYS economy. So, for our purposes moving forward, all data for NJ and CT will be deleted and, while they are disparate regions, we will “lump together” Upstate and Downstate NY. In fact, that’s what we did next. Capital Invested in NYS. We combined the Upstate and Downstate totals to see what the bar graph would look like for 2005-2008 just for NYS. Fairly consistent with the national numbers, we see a picture of a fairly stable market, averaging about $1.2B annually. (Although it is interesting that NYS totals for 2008 did not “dip”.) $1,307M $1,303M $1,400 Cumulative for $1,127M $1,156M 2005-2008: $1,200 $4,893 M $1,000 $800 Downstate NY $600 Millions Upstate NY $400 $200 $ 2005 2006 2007 2008 Figure 4: Annual NYS VC Investment © 2009 Excell Partners Inc 5 By eliminating NJ and CT data from NY Metro and combining what was left with the Upstate numbers, NYS ends up representing 4.5% of the national total for that time period. If we were to reconfigure Figure 2 and define NYS as a “region”, it would be #7 on the list. The chasm between NY and Silicon Valley widens. And now there is a big difference between NY and the Boston area. 2005-2008 Region % of Total Investment ($M) Silicon Valley $39,942 36.4% New England $13,160 12.0% LA/Orange County $7,188 6.6% Southeast $5,625 5.1% San Diego $5,504 5.0% Texas $5,318 4.9% New York State $4,893 4.5% TOTAL $109,620 100.0% Figure 5: If NYS were Recognized by PWC as a “Region” Distribution of Capital in NYS. Now that we’re confident that we’re looking just at NYS numbers, we will again assessSum the ofdistribution financing of capital, amount this time - In just Millions for the state. Long Island Albany 2.3% Ithaca North NYC Upstate Region 89% 9.0% Buffalo Other Syracuse Rochester Figure 6: Distribution of Capital, NYS 2005-2008 As shown above in the left pie, NYC receives 89% of the venture capital in NYS. Long Island receives about 2% and all of Upstate is at 9%. In the “pie of pie” chart to the right, we magnify the Upstate region to determine where in Upstate the money goes. Buffalo and Rochester each receive about a quarter of the Upstate capital. (Keep in mind that this is a quarter of Upstate’s 9% share of NYS, so overall only 2% of the state’s total.) Ithaca is a small town which ranks with the major metro regions and is on par with Albany.