Venture capital firms anted up $618 million to Colorado startups last year. Now, State House Minority Leader Mark Ferrandino is aiming to help state university research labs get a piece of the action.
Ferrandino’s bill (HB12-1044), cosponsored by rookie Greeley Democrat Rep. Dave Young, would establish a $5 million state fund to jump start basic scientific and tehnology research into viable commercial products.
It’s an interesting idea to help seed some potentially big bets from public university techology transfer offices. Implemented right it could become a self-sustaining pot for the state by following the lead of the universities that often take an equity stake in their spin-off businesses.
It’s also not a ton of money as startup investments go but it’s a fat wad for a cash-strapped state slowly edging out of an historic recession.
And it’s at this point where the House committee hearing went a little out of whack.
Rep. Larry Liston repeatedly waved a copy of a Jan. 20 Denver Post article on Colorado firms’ haul of venture capital investment during the hearing while questioning the bill sponsors and witnesses. It was quite the dramatic Law & Order moment. You can’t blame him—$618 million is a pretty enormous figure at the capitol where lawmakers have waged epic battles over slashing popular public programs, education, safety net services and other budgetary sacred cows for the last couple of years.
Understandably, Liston, a retired financial consultant from Colorado Springs and Republican chair of the House Economic Development and Business Committee, got a little cranky about the need for public dollars.
So we hunted down The MoneyTree™ Report on investments cited in the slim Denver Post article that Liston kept jabbing in the air. The numbers are compiled quarterly by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.
Boulder VC Brad Feld blasted the report as nonsense in a 2010 blog post.
Feld’s primary beef is how PwC classifies seed/startup funding and the ungodly sums, upwards of $30 million, that somehow qualify as seed rounds. Let alone the largest pool of honest-to-goodness seed investors, angels and friends/family, are curiously absent from the report altogether. The general rule of thumb is that angels invest in “pre-revenue companies” at a ratio of 27:1 compared to their VC compatriots.
But in the immortal words of Donald Rumsfeld, you go to war with the army you’ve got not the army you want. So we crunched the flaky MoneyTree numbers to figure out if a relatively modest public tech startup fund can even have an effect on the local, early deal flow.
Yes, we can
The bulk of last year’s $618 million venture-backed funding in Colorado went to established firms with demonstrated market traction. That’s not at all representative of the primordial sea most tech transfer firms emerge—puffing from gills and hoping tadpole-like to sprout legs to make it to land. From our calculations, just two percent, or $13,000,000, of private venture in 2011 went to local seed/startup stage companies.
Anemic as it may be it’s actually double the long term state trend.
Since we’re context nerds, we analyzed the MoneyTree numbers back to 1995—through the tech bubble, subsequent dot-bomb crash and the 2008-11 recession. The seed stage numbers barely budge from a 17-year average of 1.15 percent excluding two unusual outliers in 2000 and 2009. The median is an even more paltry 0.86 percent, after throwing out the two oddball deviations.
In that light, sorely missing during the committee hearing, the $5 million public fund proposed by Ferrandino and Young to kickstart tech transfer companies could add nearly 40 percent more available cash to the pool currently funded by VCs to cover basic startup costs.
Next: The tech transfer offices weigh in with one dissenting voice.