Harrisburg Inc.?

Hello Pittsblog! We spend a lot of time talking about local efforts and promoting innovation and entrepreneurship, but the elephant(s) in the china shop remains state governments across the US. Especially in terms of sheer financial resources, but also in terms of tax and other policy tools available: state government is always a player. How state governments interact in the venture capital world is surveyed in this report just released:

Seed and Venture Capital: State Experiences and Options, by the National Association of Seed and Venture Funds

According to the report, Pennsylvania had $585mil invested by institutional venture capitalists in 2005. That amount would rank it a seemingly respectable 8th among all states. However, it is only a small fraction of the $9.3 billion invested in California that year, and less than the $868mil in the much smaller Washington State. Institutional venture capital may be far more concentrated within the US than you realize. Two states California and Massachusetts accounted for an amazing 58% of all institutional venture capital invested in 2005.

Most of the report focuses on state programs (151 different programs in 44 states) that interact with the VC world. These programs include:
1. Direct investments by state agencies
2. State Investment in privately managed, geographically restricted funds
3. Investment in a portfolio of private seed and venture capital partnerships
4. Tax credit incentives for private direct investment
5. Tax credit incentives for private indirect fund investment
6. Mobilizing Angel Networks
7. Matchmaking Services
8. Culture Bending Initiatives

Getting governments, especially large state governments, to act as profit-seeking, risk-taking entrepreneurs is a difficult and almost contradictory goal. Governments are almost by very definition averse to the risk taking that culture that is at the heart of the VC world. The report acknowledges that there have been both successes and failures in state polices aimed at building VC. Because states have policy motivations that go beyond just pure profit making, these programs are almost always targeted on certain industries or on certain regions. That in itself makes state-induced venture capital a different creature than most private sector capital which is free to go wherever necessary to get the best returns.

Even a thorough report like this is really only a small peek into the VC world. VC funding is split between institutional VC funds and informal funding sources. As this report points out, informal venture capital is motivated more by the “three F’s” or “love capital”: the business’s founders, family and friends. If it is difficult to get states to act as large institutional venture capitalists, it may be nearly impossible to get states to behave as investors do in the informal capital market.

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

All opinions expressed at Pittsblog 2.0 are those of their respective authors and of no one (and no thing) else, least of all the University of Pittsburgh.

Pittsblog 2.0 has a motto: "It's steel good in Pittsburgh." Say it aloud, with a Pittsburgh accent.

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