Mixed Venture News

Surely there is muted cheering in Hazelwood, at the South Side Works, in Wexford, and on Craig Street. Pittsburgh finished near the top in a recent survey that measured venture capital growth. As the Post-Gazette put it:
The MoneyTree report, by PricewaterhouseCoopers and the National Venture Capital Association, used information from Thomson Financial to determine the five fastest growing regions for venture capital investment.

And where was Pittsburgh?

Second, right behind New Mexico.

Pop City helpfully provided a link to the report itself.

And nice as this is, now for some friendly criticism:

First: When it comes to both the pace of investment and the absolute dollar amounts invested, Pittsburgh has nowhere to go but up. This Yahoo! News story shares the details. The periodic Money Tree report (not the data excerpted for this bit of news) doesn't even include Pittsburgh as one of its default "regions" for benchmarking venture capital investments. "Western Pennsylvania" is part of the "Midwest," which also includes Illinois, Missouri, Indiana, Kentucky, Ohio, and Michigan.

Second: PR surrounding the report, like this very interesting Pop City feature about Pittsburgh's being on the cusp of being an angel "darling," tends to obscure some key data about local capital markets. Pop City buries this nugget in the very last graf. Silicon Valley angel investor John Cornwell says:
Right now, Pittsburgh does not have a critical mass of institutional investors and VCs who are local. When you are dealing with early stage companies, they need a lot of hand-holding. It requires a local presence. To break that geographic barrier, Pittsburgh needs development of a local critical mass of funding capability. As deals are funded locally and you raise serious seeds of $50 million…it’s just a matter of time before you have the big players setting up shop locally.

Meaning, of course, that the big players aren't here yet. I read the Pop City feature as arguing that local angel funders and service firms are regarded by the Silicon Valley investment community as too unsophisticated, on the whole, to justify a serious look. In venture terms, Pittsburgh is not the big leagues. Maybe we're a AAA city (he wrote, hopefully). Maybe we're AA. To move up a notch or two, Pittsburgh needs to do some of the things that San Diego (for example) did 15 or 20 years ago -- welcome outside expertise, and turn up the heat on the native business community.

Third, venture capital investments (and friends-and-family money, angel funding, and so on) don't translate into a lot of near-term job growth. Or, they generate and sustain jobs only indirectly, because lawyers and accountants and printers and food servers, and lots of other people in service businesses feed off of new investment in their clients. The deals noted the MoneyTree report may turn into long-term job growth supported directly by funded companies, but that's a very, very uncertain proposition.

Fourth, the uncertain prospects for funded companies include (i) a very high failure rate, and (ii) the fact that lots of early-stage companies that are founded locally may succeed somewhere else. Highlighting the growth rate and the raw dollars invested is a good thing. Even better would be to highlight the failure rate -- not to pick on losers, but to point out that in a risk-oriented economy, risk-takers often fail, yet they should be praised for taking risks. Couple data on the failure rate with what I hope would be improvement in the rate at which folks who fail in company A (or, for that matter, succeed with company A) get back in the local start-up game with company B.

Both phenomena are natural parts of the national and international entrepreneurial ecology.

So, here's the report that I'd like to see -- but doubt that I will:

1 - Local companies receiving VC and angel funding in 2005 and 2006
2 - Companies on that list that are still operating in 2008
3 - Companies on that list that are still operating locally in 2008
4 - Local companies founded since 2005 or 2006 by people who were employed in 2005 or 2006 by companies on list (1)

Comments

8 Responses to "Mixed Venture News"

Anonymous said... 3/12/2008 1:27 PM

Well, I think PopCity (and the PG the day prior) did a nice spin on this, but the facts are that Pittsburgh's % growth was only high because there was near-zero ($32M) invested 10 years ago and that was how they figured their growth figures.

Pittsburgh had $200M in VC at a $4.5M avg deal size.
By comparison, Seattle was 6x bigger at $1.2B with a 2x avg deal size of $9.5M. I imagine Silicon Valley, Boston, etc. are off the chart.

Nice spin, but the fact is it's just that. In reality there is actually very little invested in this area and while the growth is nice, it's no time to celebrate.

Anonymous said... 3/12/2008 7:13 PM

Ok, we get it. Pittsburgh's VC funding didn't come anywhere close to Silicon Valley, San Diego, Seattle, Boston, DC, etc. But these are special cases that got a very early jump on the game and have developed a sophisticated economic agglomeration and start-up culture. While Pittsburgh was dramaticaly restructuring its economy in the wake of the traumatic steel collapse 20 years ago, the west coast superstars were laying the foundations of innovation for the digital age. Additionally, all of these regions (sans San Diego) are much larger than Pittsburgh.

While Pittsburgh certainly doesn't play in the major leagues with the West Coast / Boston, there is no reason to scoff at Pittsburgh's "2nd highest growth rate performance". As the Post-Gazette article states, "PricewaterhouseCoopers analysts disregarded any areas that had less than $100 million in venture capital investment for 2007.


Now unfortunately I can't seem to find the link to the more detailed report which had the numbers for each region considered in the study. However, a lot of Pittsburgh's "peer/benchmark" regions were not included. I assume this is because they did not meet the $100 million threshold. I don't remember seeing places like Cleveland, Cincinnati, Detroit, etc. Even Philadelphia, a region about 2.5 times the size of Pittsburgh (depending on how they're measuring these regions), only had about 50% more VC (if I recall correctly). Pittsburgh seems to be performing well in comparison to many of its peers. To jump from such a miniscule amount to where we're at now is worth applauding... even if it may seem insignificant compared to the West Coast. It's gonna take a huge transformation for Pittsburgh to become an elite player, but there's no point in tempering the enthusiasm for the real progress that has been accomplished here.

Mike Madison said... 3/12/2008 8:47 PM

I don't think that it's fair to argue that (just about every place higher on the list than Pittsburgh) is a "special case." By your criteria, just about every success story in the report is a "special case." The question is baselines, and to me Pittsburgh looks more "special" than Boston. Pittsburgh's growth rate looks great because bigger markets are more mature. Pittsburgh's market is in its infancy. Even at maturity, however, Pittsburgh will never, ever be the Silicon Valley, and that's fine. It might aspire to be something more like San Diego (which, by the way, didn't get any "early jump on the game." San Diego's CONNECT program, which is something of a model for regional economic development efforts, was founded in 1988.). To get even to San Diego's level, however, will take a lot more work; cheerleading the success to date isn't enough.

It's also not fair to argue that Pittsburgh has been busy dramatically restructuring its economy for the last 30 years. Steel went away, traumatically to all, unexpectedly to some. But there's little evidence that the region has been dramatically restructuring itself ever since. If the restructuring -- such as it is -- were so dramatic, then why is growth -- such as it is -- still so slow? I'd define the first 20 years of the post-steel era in Pittsburgh as "grieving," not restructuring. Only in the last 10 years has the region collectively started to figure out what it wants to do next.

I'm not raining on the VC parade; the post was explicitly framed as *friendly* criticism. Pittsburgh is far from being out of its woods.

Anonymous said... 3/12/2008 11:51 PM

I'm wondering:

Why did you choose to blog with *friendly* criticism, rather than *unfriendly* praise? ...like the Boston Globe had done when they criticized how Pittsburgh was getting more credit for being "roboburgh" than Boston...

Why does everyone have great skills at finding what is wrong with the relative numbers, but are missing the skill to find what is the one absolute right in the whole story? ...that when compared to the region's OWN benchmark of 10years ago, the Pittsburgh region has made GREAT progress on this dimension of economic development

Why is it not the time for us to celebrate when outsiders are celebrating us now?...what are you waiting for?

Why is it that everyone can talk for days and years about many negative or stagnant trendlines concerning the Pittsburgh region, but they can't talk one minute about one trendline that is so positive?

Mike Madison said... 3/13/2008 7:37 AM

That's easy. Because Pittsburgh doesn't exist in its own navel-gazing, "we're doing great" bubble. Pittsburgh exists in an international economic development marketplace, and it's foolish and shortsighted to get overly excited about what happening locally and to ignore the broader context. There are lots of reasons to be (cautiously) optimistic about local economic development, and I've been writing about many of them for years. There are few reasons to blow out candles on our own cake.

Jefferson Provost said... 3/13/2008 11:49 AM

Yeah. Stop beating up on the poor defenseless Burgh, Mike, you big bully.

Don't you know we're a bunch of pussies who can't take honest criticism? Any news that gives us the tiniest glimmer of hope that we don't suck should be accepted with hallelujahs.

Let's not start arguing that Pittsburgh should start comparing itself with other regions and perhaps aspire to be the best at something. Something other than Football, that is.

After all, if you do that it might start changing the culture within the city to one where people and businesses actually compete with one another. Then all the working joes might actually be forced to work hard, instead of punching the clock, and parsing their job descriptions with a fine toothed comb to make sure they're not actually working any more than their supposed to.

Then god forbid, the workers we have to deal with every day might actually start going the extra mile to try and please us. Busses might start running on time, instead of hitting their scheduled timepoints anywhere from 5 minutes early to 20 minutes late. The roads might start getting salted before they freeze, instead of after. Geez, this city might actually become efficient. That would be hell.

I shudder to think of a city where workers don't leave work before 5pm on Friday. Where people look at mediocrity and say "that's not good enough." Where they look at improvement and say "we can still do better." Oh God! Make it stop!

ah well... at least we'll still have the Pirates.

Jefferson Provost said... 3/13/2008 1:23 PM

Er... "their supposed to" -> "they're supposed to".

I is literate. Rilly!

Anonymous said... 3/17/2008 9:15 AM

http://vivisimo.com/html/newcapital-20080317

Not gigantic but exciting nonetheless.

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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.

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