Media Coverage

Report verifies venture capital doesn’t flow here
Southeast U.S. had fourth highest level of investment in second quarter, according to MoneyTree

By Michael Schwartz, Inside Business - Hampton Roads, August 20, 2007

A recently released quarterly report analyzing venture capital investment across the nation restated what many in Hampton Roads already know – there’s not a whole lot of that type of investment dollars flowing into the region.

The MoneyTree Report, compiled by PricewaterhouseCoopers and the National Venture Capital Association using data from Thomson Financial, tracks the strength of venture capital investment, breaking down data by industry sectors, states, major metropolitan areas and even down to congressional districts. The results for the second quarter 2007 were released earlier this month.

Nationwide, the report found venture capitalists invested $7.1 billion in 977 deals during the second quarter of 2007, the highest level of deals reported in a quarter since 2001.

In Virginia, the tenth-ranked state in the U.S., there were 22 VC investment deals made during the second quarter worth $137.2 million, compared to 18 deals worth $92.6 million in the second quarter 2006. During the first half of 2007, there were 41 investments made by 38 companies worth $216.3 million in Virginia.

“Venture capitalists have found no shortage of promising companies in which to invest, as indicated by the sharp uptick in the number of deals during the second quarter,” said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “Innovation is alive and well, and VCs are making sure these companies are provided with the opportunity to become the Fortune 500 powerhouses of tomorrow.”

The software industry captured the highest level of VC investments nationwide during the quarter, according to the study. More than $1.5 billion went into 248 deals in software firms, surpassing biotechnology as the most desirable industry for VCs. Virginia software firms also attracted more investment than any other industry in the state during the quarter, with 11 deals worth $78.7 million.

Other industry sectors include biotechnology, media and entertainment and the rapidly emerging “Clean Tech” sector. This sector combines alternative energy, pollution and recycling, power supplies and conservation, and saw a 38 percent increase in the number of deals to reach 44, and a 46 percent increase in dollars, reaching $451 million for the quarter.

Of the 17 industry sectors tracked by the report, 14 experienced an increase in the number of deals. However the dollar amount declined in 10 of those sectors compared to the first quarter of 2007, indicating lower average dollar rounds of investment, the report said.

But Mark Heesen, president of the National Venture Capital Association, said that decline is a good thing. “Dollars invested are holding steady or even declining, suggesting that venture capitalists are being very measured about how much money they invest per company.”

Just as the VC industry is not relying on one particular sector for deals, Heesen said, diversification was also seen in investments at different stages of company development.

The report tracks companies of three ages – seed/early stage, expansion -stage and later-stage companies. Seed and early-stage investment nationwide had its strongest quarter since 2001, with $1.6 billion in 378 deals.

In Virginia, seed and early-stage companies received $33.8 million through 10 investments. However, the majority of deals in Virginia were made between VCs and expansion and later-stage companies, amassing $103.5 million in investments.

“Not only does the increase in seed and early-stage deals demonstrate the number of young, promising opportunities available but the diversity of investment suggests strongly that the prospects for innovation are all around us,” Heesen said.

Virginia had its share of givers and receivers, according to the report. It found seven Virginia-based companies invested in 11 deals, while 12 Virginia-based companies received VC money.

The city of Fairfax led the way in Virginia with 11 deals worth $86.1 million. There was one deal made in Norfolk during the second quarter, worth $4.7 million.

Hampton Roads is included in the report’s Southeast region, which fared well in the second quarter with the fourth highest level of VC investment. Sixty-five investment deals were made in the Southeast worth $356.4 million. The region was surpassed only by the New York metro area, New England and Silicon Valley.

The study also analyzes data for 25 major metropolitan areas. Hampton Roads is not included among those, whereas neighboring regions such as the North Carolina’s Research Triangle and the Washington, D.C., Metroplex were in the top 15.

Hampton Roads is home to two so-called venture capital firms, Waterside Capital and Envest.

The MoneyTree study makes no such distinction among the three types of investors, grouping all three as VCs. However, those in the industry are careful to make the distinction between angel investors, venture capitalists and private equity firms.

Envest considers itself a private equity fund with a primary focus on midstage companies.

Waterside Capital is an SBA-licensed small business investment company, focusing primarily on mezzanine capital to what it calls smaller middle-market companies.

The region is also now home to an angel network that hopes to expand the investments made at the seed/early stage. The goal is to increase the number of local investors and the number of local companies receiving investment dollars.

“We’ve had great response from both sides,” said Gregory Stringfield, a financial adviser with A.G. Edwards in Gloucester.

The belief is that the lack of overall VC activity in the region could be given a spark by starting from the beginning, with young, emerging companies.

If those companies and investments prove successful, then the rest should fall into place for the later-stage investors. “The angel level needs to know how to pass the baton to the VC,” Stringfield said. “The angels would be feeding the VCs.”

With those efforts, perhaps Hampton Roads may shed its lack of name recognition in the VC world and someday be the 26th metropolitan area included in the MoneyTree. IB