Using the same data set from the Pricewaterhouse Cooper/National Venture Capital Association Money Tree report, I’ve done some additional analysis into venture activity exclusively in the US Southeast. I think you’ll agree that the US Southeast is a sample under-ventured geography.

 Total deal activity reported in the US for 2012 was 3,698 with only 266 deals or 7% of the total reported in the US Southeast.  Those hot spots of California, New York, and Massachusetts reported 2,262 deals or 61% of the total.  Three states compared to twelve states.

 Total invested dollar activity reported in the US for 2012 was $26.5B with only $1.23B or  5% of the total reported in the US Southeast.  Those hot spots of California, New York, and Massachusetts reported 2,262 deals or 61% of the total dollars invested.  Again, three states compared to twelve states.

Represented a different way, here is a map of the US with the top 10 deals by dollars invested for 2010, 2011, and 2012.  Note the concentrations activity — 17 of the 30 deals in California’s Silicon Valley area alone!

So, does this leave you feeling depressed? Discouraged? Frustrated? Yes, yes, and yes! But all hope is not lost! In today’s world the advent of cloud computing and cloud-based business services has gone a long way to level the playing field.  Promising companies in Atlanta, Knoxville, Louisville,  Memphis, and other places have access to the services, computing power, and internet bandwidth previously reserved only for companies starting in a concentrated hot spot. In addition, the maturing global supply chain lets those same under-ventured regions have access to suppliers and raw materials historically too expensive for areas outside of major port cities. Lastly, the ability to reach the customer has flattened. Value-add innovation and technology can impact the bottom line regardless of whether it’s two blocks, two states, or two countries away.

Venture is always a struggle, whether well funded (is there such a thing?) or under funded. The thing to remember is that it isn’t the money that creates success. Rather, it’s the people and their attitudes that contribute most to the success of a business. I’d wager some of the best attitudes and hardest workers come from those under-ventured footprints — entrepreneurs because it’s wired in their DNA. Those people are risk takers and survivors, but they carry themselves with a sense of humility and appreciation for the unique nature of what they are trying to accomplish.

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I’m very excited to share this video, and I hope watchers get a better understanding for the important role developmental capital plays in our economy and in entrepreneurship.  Those under-ventured areas of the country need the job and wealth creation that comes with venture investing.

Grab your popcorn and enjoy the video!

Meritus Ventures – Business Update from DMG Productions on Vimeo.

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Venture Capital Deals and Terms General Comments

• General industry health –> Stable but weak.  We are still battling a serious cold, but I think we’ve fought our way past the risk of pneumonia.
• Venture continues to experience consolidation and shrinkage.  While the numbers aren’t optimistic, they do support that the bleeding in the industry has slowed.
• In 2012 transactions were slightly up while dollars invested were slightly down.  Average deal size was around $7.2 to $8.8 million.
• Average IPO exit was $$94 million (see note below on outlier) and average M&A exit was $93 million.  I still think the industry, and the entire economy for that matter, continue to  struggle until we get better regulatory grasp on the IPO process.
• Although the angel and accelerator activity continues to be very strong around seed transactions, closing a Series A financing continues to be a challenge.  With the movement of most venture fund management teams downstream to growth/expansion investing, Series A will continue to be a challenge for the near future.  45% of VCs surveyed expect Series A deals to be the most difficult to close in 2013.
• Average deal terms appear to be more entrepreneur friendly, but this still isn’t a snuggle bear environment for unsophisticated entrepreneurs.  Also, regional investment activity is very different.  Since almost half of all deals are done in California, California terms tend to overwhelmingly influence this data.  I can promise you that southeast funds structure deals very differently.

Venture Capital Investment Activity

• Dow Jones reported $29.7B in 3,363 deals for an average deal size of $8.8 million.  This was a 9% decrease in 2011 dollars and a 5% increase in 2011 deals.
• PWC/NVCA reported $26.5B in 3,698 deals for an average deal size of $7.2 million.  This is a 7% decrease in 2011 dollars invested and approximately the same number of deals.
• The only sector showing strength was software with digital health showing exceptional growth of 45% from 2011 to 2012.  Life science was weak with both biotech and medical device investing down.  Clean tech continues to decrease significantly.  Even internet investing was slightly down, although 2011 was a record year for that industry.

IPO Market for Venture-Backed Companies

• Dow Jones reported 50 U.S. venture-backed IPOs, a 10% increase over 2011′s 45, for $11.2 billion.  The average was $225 million per IPO.  OUTLIER ALERT!!!  The Facebook IPO was $6.6 billion of the $11.2 billion total.  That is almost 60% of the total dollars for 2% of the transaction.  If you toss Facebook as an outlier, you have 49 deals generating $4.6 billion in proceeds for an average of $94 million.  I’d take $94 million, but that’s a little “meh.”

M&A Market for Venture-Backed Companies

• Dow Jones reported 433 acquisitions for $40.3 billion, an average of $93 million.  This represents a 9% decrease in deals from 2011′s 477 and a 16% decrease in dollars from 2011′s $47.8 billion. 
• PWV/NVCA reported a 1% increase in 2012 to 435 from 429 in 2011.

Venture Fund Fundraising

• Dow Jones reported 154 funds raising $20.3 billion in 2012 for an average fund size of $132 million, a 14% increase in number of funds and 25% increase in dollars raised.  OUTLIER ALERT!!!  Of the $20.3 billion raised, 11 funds raised $11.3 billion of that amount.  That is 7% of the funds raising 56% of the capital, and at an average fund size of over $1 billion. Whoa…  Take those out and you’ve got 143 funds raising $9 billion in capital for av average fund size of $63 million.
• PWC/NVCA reported 182 funds raising $20.6 billion in 2012 for an average fund size of $113 million, a 8% increase in funds raised and a 13% increase in dollars from 2011.  I don’t have the data on how concentrated the raising among the top 10%, but I assume it will be similar.
• NVCA reported membership at 401 for 2012, compared to 470 in 2008.

Q4-12 Average Deal Terms

• Transaction size:  $9 million in 2012, $8.4 million in 2011
• Round direction:  71% were up, 21% were flat, and 8% were down
• Senior liquidation preference:  23% of deals, compared to 34% in Q4-11
• Liquidation preference size:  only 4% of those with liquidation preference had a greater than 1x, compared to 15% in Q4-11
• Participating:  40% of deals, compared to same percentage in Q4-11
• Uncapped participation:  57% of those with participating, compared to 47% in Q4-11
• Cumulative dividends:  6% of deals, compared to 4% in Q4-11
• Anti-dilution: 100% of deals with 98% having weighted-average and 2% having full ratchet, compared to 97% and 3% respectively in Q4-11

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Why an Advanced Manufacturing Cluster?

The outsource movement of the past thirty years taught American business that foreign providers could handle manufacturing for a much lower price than domestic competitors.  This is particularly true of assembly line style production where a worked does a redundant task in a larger system.  While that mostly works for simple production (note, I’m aware that there are ethical and quality concerns), the market quickly learned that the cost savings of outsourcing some advanced and technical manufacturing was offset by other issues.  The last ten years in particular have seen example after example of major companies struggling with issues of quality in product delivery and reliability in supply chain from outsourced partners.  That has presented an enormous opportunity for domestic high-end manufacturing.

The Knoxville/Oak Ridge region has some valuable resources that play to an advanced manufacturing focus.  This includes the deep physical and intellectual resources of  the partners listed above.  I’m really optimistic about the ability of manufacturers to leverage ORNL’s research focus around energy and material science.  Knoxville also has a great location at the intersection of interstate’s 40 and 75, and the region has a number of companies that have a vested interested in advanced manufacturing.  On the talent equation, I think community college’s like Pellissippi State and university like Tennessee-Knoxville can produce a robust pool of talent than cover the talent needs of manufacturers.

What is Cluster Theory?

Cluster theory is a child of economic dating back to the late 1800′s that attempts to explain the potential value of local economies developing around concentrated specialties.  The goal is that as these clusters mature the region and the companies enjoy benefits of less competition and higher profits with niche focus, a steady and stable market, a developed and reliable supply chain, and more productive and profitable interactions with one another.  It’s pretty easy to see the results of regions that have benefited from cluster theory in practice –Nashville’s country music industry, Silicon Valley’s tech scene, Detroit’s automobile industry, etc.  While challenges and risks  do exist in cluster-driven economies — case-in-point, look at Detroit for the last decade — most economic development professionals and economists acknowledge the vital and significant role of cluster development in growing regional economies.  Harvard economist and former presidential economic adviser Michael Porter even identified cluster development as a critical part of sustainable competitive advantage.

That being said, I’m a big supporter of cluster driven economic development.

A Regional History of Cluster

In case you are curious, Knoxville isn’t a stranger to cluster theory.  In the last one hundred years, Knoxville has been known as both the Marble City, due to the business community that developed around the native marble of the region, and as the Underwear Capitol of the World, due to the large number of textile manufacturers operating out of the city.  Oak Ridge really came into existence as a cluster around nuclear research and the Manhattan Project.  The Atomic City continues to enjoy that legacy with the existence of the labs and a number of smaller industrial clusters around imaging, nuclear safety, and environmental remediation.

I don’t know about you, but I’d much rather be known for our advanced technology and manufacturing over underwear production.

I’d also like to credit Tom Ballard and the articles he has produced on Teknovation.biz on AMP and it’s director, Buzz Patrick.

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