In an important piece of research recently released, two smart analysts have put numbers to what many of us active in economic development in New York State have long been saying: there exists a deep, fundamental mismatch between the stylistic preferences of regionally based venture-capital firms and the kinds of innovation emerging from the state’s university R&D community.
The study by Judy Albers and Tom Moebus – both well known and respected players in the statewide innovation ecosystem1 – employs data from NVCA and other sources to nail the case that while the amount of venture capital under management in New York City is rising, it is specializing heavily in digital technologies (IT, software, media) and focusing on capital-efficient “quick hits,” often at the expansion phase, with high potential for fast liquidity and outsized returns. Almost none of that potential is available upstate, and consequently almost no regionally managed capital goes there.
The authors show that while the VC industry in California and Massachusetts is more eclectic in its tastes, only a very small share of that money comes to New York to begin with, and exceptionally little makes its way upstate. That leaves ventures in what Albers and Moebus call the hard sciences (subdivided into the engineering technologies and life sciences) a long, hard slog with few early-stage investors (and almost no seed investors) either based here or deploying money anywhere in the state.
This mismatch is particularly severe upstate, where it is not masked as it is in New York City by success in the so-called “tech” sector (which actually depends little on university intellectual property but rather mostly on university-trained talent). As the authors say, “… when investing in New York is being discussed for Internet deals, it is clear that ‘New York’ really means New York City.” But dissonance exists downstate as well. New York City, whose university R&D is dominantly biomedical, is not immune to the national downward trend in life-science investing.
As a consequence, New York State as a whole is out of balance: compared with the two other states of most interest, far less investment money is available in proportion to the amount of federal R&D funding expended at our universities. That mismatch is certainly leaving many opportunities in the hard sciences untapped. Even though the amount of capital under management in NYC has risen, and the share that remains in-state has almost doubled, the key equation remains (in the authors’ words):
The chances of a seed stage life science company in upstate receiving capital from a New York City VC is $1.7B (NYS total) x 21% (from NYC) x 8% (to life sciences) x 3% (to Upstate) x 3% (to seed stage) = almost zero. The chances are even worse for a physical science company, and the odds are also not good for science companies of either type in New York City.
So when you hear a New York-based venture capitalist say in a meeting (which I have), “upstate really isn’t very entrepreneurial, is it?” what they really mean is, “upstate is not producing the kind of opportunities I consider (or that I am conditioned to consider under current market conditions) attractive, and when it does, those companies migrate to the City any way so why exert myself out of my comfort zone?”
In fact, if I have any reservation about this excellent piece of work, it’s only that it gives inadequate attention to the reason that “tech”2 has thrived in New York City and is therefore the investment opportunity currently in vogue: as I’ve previously mulled3, New York City has succeeded at attracting capital for these deals precisely because these startups are finding immediate customers and partners in primary sectors like advertising, media, fashion and finance that are threatened by disruption and need direct pipelines to experimental startups in order to survive and thrive.
Above all else, we need to find or build similar supply chain relationships in the physical and life sciences, and this may have implications for how the state selects what I expect to be primarily large-company beneficiaries for its new START-UP NY tax-free zones. My prescriptions are for continued:
- exploration of “bootstrapping” strategies for physical science startups that bypass VC investors until customers and strategic partners are secured, emphasizing recruitment to START-UP zones of large employers with exactly that potential to work with and buy from hard-science startups.
- leveraging upstate medical districts to catalyze health-technology startups with strong IT components, whose success may eventually pave the way for startups in diagnostics, devices and therapeutics based on university IP but that require more capital and runway.
- pursuing similar opportunities in the clean-energy sector, starting with IT-heavy “energytech” and moving eventually into startups based on engineering technologies that are more complex and demanding.
- developing the pool of startup CEOs whose successes will build confidence among the national VC community in the ability of NYS deals (especially but not exclusively upstate) to make money for investors.
- outreach to venture capital firms based in California and Massachusetts that are interested in the hard sciences, exploiting competitive forces spurred by initiatives like CenterState CEO’s leadership on a Syracuse-domiciled VC fund.
The full report is embedded below (if you need the physical book it’s here):
- Judy, now an entrepreneurship professor at SUNY Geneseo co-founded the Pre Seed Workshop program, and Tom runs several innovation programs for the SUNY Research Foundation [↩]
- See my previous commentary on the word at http://tbed.org/2013/tech-technology-engineering-applied-sciences/. [↩]
- See http://tbed.org/2012/cufs-new-tech-city-report/. [↩]