Where Venture Capital Ventures
It's hardly a surprise that the U.S. economy and the nation's venture capitalists are both on a roll. For it is the latter group, lured by the specter of huge stock market gains, that has funded the new technologies that many experts think have led the economy into the promised land of strong, inflation-free growth.
What many people may not appreciate, however, notes economist Steven G. Cochrane of RFA/Dismal Sciences, an economics consultancy, is how concentrated venture investment is becoming. "California and the Northeast are benefiting enormously," he says, "while most other areas are being ignored." Similarly, knowledge-intensive industries are garnering the lion's share of funds, while other industries are left out in the cold.
The investment pace is little short of breathtaking. PricewaterhouseCoopers reports that U.S. venture-capital firms shelled out a record $9.04 billion in 1999's third quarter, up 138% from the year-earlier level. That brought the nine-month total to $21 billion, 50% more than funds invested in all of 1998 and nearly four times the 1995 tally.
Unfortunately, many regions aren't sharing in the bonanza. At last count, only half the states had garnered more venture capital in 1999 than 1998, and six--California, Massachusetts, New York, Texas, Washington, and Colorado--were accounting for nearly 75% of the total, compared with just over half as recently as 1995.
Cochrane attributes the increasing regional focus to several factors. First, technology advances, as measured by new patent activity, are highly concentrated in the Northeast and West. Second, venture capital often comes from wealth created by earlier high-tech entrepreneurs. And these techie millionaires and billionaires tend to reside in such areas as Silicon Valley and Boston, and to favor investing in nearby companies, which they can readily monitor and advise.
Venturing's stress on cutting-edge technology is also enabling these regions to overcome a number of relative competitive disadvantages. While fast-growing areas, such as the Southeast and Mountain West, can offer businesses lower taxes and lower energy and housing costs, California and the Northeast can supply the skilled workers and research produced by their college and university systems.
Meanwhile, the industry focus of venture capital is becoming increasingly concentrated--as Internet-related companies claim an ever-larger piece of the investment pie. By late 1999, communications, software, and information-processing businesses were garnering nearly 60% of venture funding, up from 41% in 1995. At the same time, the shares going to health care and biotechnology have fallen sharply, from 12% and 8%, respectively, to 4% and 3%.
Can venture capital maintain its momentum? Continuing rapid technological advances and the buoyant stock market say yes. But Cochrane warns that a sustained stock market correction or the failure of current ventures to pay off (as the biotech industry found in the early 1990s) could quickly upset the apple cart. In that case, the regions and industries riding the current venture boom could face a rude awakening.