Midwest plays small role in VC investment, angel groups to the rescue

Midwest plays small role in VC investment, angel groups to the rescue

A few weeks ago, we talked about Venture Capital investments during 2005 in the biotech and medical device sectors, and how these investments compared against the general VC landscape. I also promised to provide you with information on U.S. Venture Capital investments by region and stage of development for 2005.
The information we will use for this analysis is provided once again by PriceWaterhouse Cooper’s MoneyTree Survey. It is also probably useful for us to benchmark the Midwest against some other key states, so that will also be included in the analysis.
U.S. Venture Capital Investment by Region ($ Millions)

Region 2003 VC Investments 2004 VC Investments % Change 2005 VC Investments % Change
Total U.S. $19,586 $21,635 +10% $21,680 0%
California $8,505 $10,006 +18% $10, 220 +2%
% of Total 43.4% 46.2% 47.1%
Massachusetts $2,688 $2,812 +5% $2,352 <16%>
% of Total 13.7% 13.0% 10.8%
Illinois $374 $224 <40%> $241 +8%
Minnesota $223 $354 +59% $228 <36%>
Michigan $85 $132 +55% $89 <33%>
Missouri $92 $31 <66%> $117 +277%
Indiana $25 $67 +168% $96 +43%
Ohio $88 $57 <35%> $119 +109%
Wisconsin $38 $57 +50% $68 +19%
Iowa $4 $11 175% $12 +9%
Total Midwest $929 $933 0% $970 +4%
% of Total 4.7% 4.3% 4.5%

California clearly has the lion’s share of VC investment money in the U.S. with a staggering 47 percent of all VC investment which has increased from 43 percent since 2003. California VC investments have landed not only in Silicon Valley, but San Diego, LA/Orange County and even Sacramento.
Massachusetts also has a healthy chunk of VC investment with just under 11 percent of the total, but seems to be declining from a level of just under 14 percent.
The Midwest, with its ups and downs, receives, with 8 states, less than 5 percent of the total VC investment in the U.S.
Another key analysis for looking at VC investments during 2005 is by company stage of development. Before we analyze the trends, it is important to understand PWC’s definitions:
Start-up/seed: the initial stage; company has a product or concept under development, but is probably not fully operational; company is in existence less than 18 months
Early stage: Company has product or service in testing or pilot production; in some cases product may be commercially available and may or may not be generating revenues; company in existence for less than 3 years
Expansion stage: Product/service in production and commercially available; company demonstrating significant revenue growth but may not be making a profit; usually in business for more than 3 years
Later stage: Product/service widely available; company generating ongoing revenue and probably positive cash-flow; not necessarily profitable but may be; may include spin-outs of divisions of privately operating companies.
U.S. VC Investments by Stage of Development – 2005 ($ Millions)

Stage of Development 2003 Investments 2004 Investments % Change 2005Investments % Change
Total U.S. Investments $19,586 $21,635 +10% $21,680 0%
Later Stage $5,674 $7,985 +41% $9,727 +22%
% of Total 29.0% 36.9% 44.9%
Expansion $10,100 $9,257 <8%> $7,821 <16%>
% of Total 51.6% 42.8% 36.1%
Early Stage $3,454 $3,987 +15% $3,396 <15%>
% of Total 17.6% 18.4% 15.7%
Start-up/Seed $357 $407 +14% $736 +81%
% of Total 1.8% 1.9% 3.4%

With those caveats, we see the good news: start-up/seed VC investments are growing rapidly and have more than doubled in the last 3 years; the bad news is that this segment is minuscule, representing less than 4 percent of total VC money.
If you also add in the early stage money, which represents about 16 percent of total VC money, the two categories, just about reach 20 percent of total VC investment.
This level is clearly NOT good news for the Midwest where most of our companies fall into these categories. Unfortunately, almost 80 percent of total VC investment is for later stage companies (Expansion or Late Stage).
This news would almost be depressing for the Midwest if we didn’t take into account another positive trend: the growth of angel investments. Remember from earlier articles that angels invest at an earlier stage than VCs, and angel investment in the U.S. is growing very quickly.
According to the San Francisco Business Times, and based on a University of New Hampshire study, angel investors in the U.S. invested about $22 billion last year, or the same amount as VCs, in 48,000 entrepreneurial ventures (this would average out to about $460,000 per venture). This is an amazing trend that needs to be clearly watched as VC money gets harder and harder to access.
Angels are getting more and more sophisticated and forming small funds, and are a welcome antidote to dwindling VC investment in start-up/seed ventures. Additionally if you add in key state-based incentives for angel investors, this group of investors has fueled the development of many new small companies.
If you add in angel investment to the above total mix, this segment of money in fact is as powerful as the VC segment, and is heavily backing start-up and seed companies.
As I have commented before, even in the Midwest, there has been a steady increase in new angel groups coming to the rescue of start-up companies. And just in time!
See you next week!

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services including financing, business and corporate development to start-up and early stage life science companies such as Renovar, a Wisconsin-based in-vitro diagnostics company. Rosen is also a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at rosenmichaels@aol.com

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