Preface
Abstract
Introduction
Basic Information on Funds
Portfolio Company Data
Fund Performance Data
Criteria for Making Investments
Fund Administration
Viewpoints of Fund Managers
Conclusions of Author
APPENDIX A--Summary of Data from 1998 Survey (16 funds
reporting (5 from Kansas))
This survey of public and private early-stage venture capital funds was initiated in 1986 as a project of the Advanced Technology Development Center at Georgia Tech, University System of Georgia. Since then it has been conducted every two years under the leadership of Richard T. Meyer, Ph.D., with subsequent sponsors being the Emory University Business School, the University of New Mexico Anderson Schools of Management, and Orion Technical Associates. This 1998 edition is presented at a one-year interval from the 1997 survey.
At its peak period of 1991-1993, the survey covered 36 to 58 early-stage funds, encompassing public, private, and combination (public/private) funds, with nearly equal numbers of each. Beginning with the survey process for the 1995 edition, however, the responses from the private and combination funds diminished; the reason most frequently given by the fund managers was that they were too busy managing their funds to participate. So starting with the 1997 survey, only publicly-financed and publicly-affiliated funds and those funds participating in the National Association of State Venture Funds (NASVF) were invited to respond.
Of 45 state-affiliated funds invited to participate in this 1998 survey, 16 funds responded in full or in part; five were from Kansas and one completed only half of the survey instrument.
The 1998 survey instrument was made available via the internet, fax,
and mail. Most responses were by fax. It was introduced in early January
1998 to capture the year-end results of 1997; most responses were not received
until April or May. As a consequence, little priority was placed upon compiling
and evaluating the data.
Sixteen of 45 potential respondents from state-sponsored and state-affiliated early-stage capital funds participated in this 1998 survey. The founding year of those 16 funds ranged from 1982 to 1997, with an average age of 6.4 years. Total funds under management at the end of 1997 (EOY97) reported by 14 funds were $188,926,000, an increase of $15.9 million over EOY96. Of that total $79.32 million was invested, mostly in seed and start-up companies; further confirming the fact that the survey truly represents early-stage funds, 14 funds reported that 88.9% of their monies were designated for early-stage deals.
As of EOY97, 16 funds were invested in 298 portfolio companies, whose aggregate revenues totaled $668.42 million and which accounted for 6,777 full-time jobs. The funds had invested in 48 new companies during 1997, after reviewing in excess of 1,100 business plans (estimated). Also during 1997, 9 companies were harvested and 15 companies failed. The failures accounted for losses of $870 thousand and $6.925 million by the funds and other investors, respectively.
Sixty-eight of 224 portfolio companies were cited as having revenues in 1997 of $1,000,000 or more. Applying the "baseball analogy," 7.7% of the companies were classified as "home runs, " 30.4% as "flyouts" or "strikeouts," and 37.5% as "single hits." The remainder were "triples" and "doubles."
Looking to the future of early-stage capital financing, most fund managers
expect private investors to provide most of the new capital, and they look
to a capital gains tax reduction to be the principal initiative. On average,
they would each like to have their fund size increased to $20 million, so
that they could serve 10 additional companies each year. Thirteen of 15
fund managers believe that there still exists an entrepreneurial capital
gap in the United States and in their state or region.
INTRODUCTION
This 1998 survey covers data collected from 16 early-stage capital fund managers for the year ending December 1997 (EOY97). Its goal is to provide all seed and start-up fund managers and venture-capital seeking entrepreneurs with useful information and guidance on the investment practices and performances of state-sponsored and state-affiliated early-stage funds. Other parties that engage in the growth and development of entrepreneurial funds and companies should also benefit from the data, findings, and conclusions of this report.
The report is divided into six sections, consistent with the structure of the survey instrument: Basic Information on Funds; Portfolio Company Data; Fund Performance Data; Criteria for Making Investments; Fund Administration; and Fund Manager Viewpoints. It includes several charts of data. The findings are documented primarily in the same sequence as the questions posed in the survey instrument. There are a few inconsistencies in the data reported, because some fund managers did not always provide the same responses to repeated questions; no attempt was made to resolve these inconsistencies. The two appendices provide a summary of the 1998 data and a copy set of the data charts from the 1997 survey for EOY96 for comparison purposes.
For the 16 funds participating in the 1998 (EOY97) survey, the founding year ranged from 1982 to 1997, exhibiting an average age of 6.4 years; the median year of formation was 1994. For 7 of 15 funds, both business/job creation and capital return on investment were the primary objectives of their funds in 1997; the remaining 8 funds were split four for business/job creation and four for capital return on investment.
Fund management was almost equally distributed among state government entities (5), non-profit organizations (4), and private companies (6). Among the 15 funds, six operate under legislative authority, three by executive agency action, one by constitutional authority, and five are privately chartered. Various restrictions apply to the investments made by these funds: 12 are restricted to in-state investments, 8 to technology companies only, and 6 to early-stage companies. Only one fund had no restrictions.
The principal form of investment in 1997 was combined loan and equity (7 funds), followed by equity with preferred stock (3 funds); only 2 funds still use grants. Thirteen funds reported making 84 investments in 71 companies in 1997, of which 47 were first-time in seed or start-up companies. One fund reported investing $9.765 million in 1997; the remaining 13 funds invested a total of $12.35 million, for an average of $950,000 per fund.
Of 276 portfolio companies at the BOY97, only 7 were "harvested" successfully by M&As and IPOs. Twenty-two companies in total were added to the portfolios during 1997, an average of 1.4 per fund.
Only 9 funds set a ROI target for year 1997, at an average target value of 22%; only 3 of the 9 funds achieved or exceeded their goal--all through equity appreciation. Only 4 funds set business or job creation targets for 1997; but 9 funds did achieve small levels of business and job creation.
Twelve reporting funds cited the creation of 817 full-time jobs for an average of 68 jobs per fund; they also created 172 part-time jobs. An average of 2.2 jobs were lost by 14 funds. An estimated 6,777 full-time jobs were being sustained by 14 funds at the end of 1997.
Ten funds reported that 49 new products, 19 new services, and 33 new patents were generated by their portfolio companies during 1997. Seven funds reported that 30 portfolio companies had received SBIR or STTR awards. Three funds stated that 5 companies had received SBA financial assistance.
Thirty-one portfolio companies entered into strategic alliances, and 11 of those received capital from their alliances. Business angels invested in 24 companies, with most being in the range of $25,000 - $50,000; although 7 of the 24 received >/= $100,000.
Only 12 company failures were reported by 16 funds; the dominant reason cited for those failures was "management problems."
During 1997, 16 funds invested in 48 new companies, of which 34 were at the seed or start-up stage. The same funds made 33 follow-on investments in existing portfolio companies.
Total funds under management at EOY97 were $188,926,000, an increase of $15.9 million over BOY97; eight of 14 funds had increases and one had a decrease.. At EOY97, 42% of the funds under management were invested in portfolio companies. Legislative appropriations were the principal source of the increases in the funds under management.
Cash from liquidations accounted for $4.0 million in return on investments (ROI); $26.5 million in company value increases were reported. But these data are only from four and six funds, respectively. Of ten funds reporting on the increase or decrease of the value of their funds due to their investments, five reported increases >20%, one reported an increase of 5-10%, three reported no change in value, and one reported a decrease of 20%.
Fund managers believe that state-sponsored seed and venture funds of their type achieved an average ROI of 13% over the past five years and 15% for 1997. Yet only 8 fund managers reported their ROIs for 1997 (with the average being 19.6%) and only 6 gave values for the past five years.
In comparing their own fund's ROI with other investing entities, the majority of fund managers stated that their ROIs were greater than the ROIs of state-sponsored funds and U.S. securities but less than private early-stage funds, private later-stage funds, mutual funds, and the S&P500 stocks.
Among 224 portfolio companies of 14 funds, 30.4% had revenues in 1997 greater than $1 million and 15.6% had zero revenues. Aggregated portfolio revenues per fund in 1997 ranged from $60,000 to $302 million for a total of $668.42 million among 12 funds, with an average of $2.6 million per company. When the "baseball analogy" was applied to 168 companies by 14 fund managers, the following performances were cited:
| Home runs | 7.7% |
| Triples | 10.1% |
| Doubles | 14.3% |
| Singles | 37.5% |
| Flyouts & Strikeouts | 30.4% |
Eight funds reported that 35 of their companies had received infusions of capital from other venture funds totaling $118.5 million, for an average of $3.4 million per company.
Nine portfolio companies were harvested by five of fifteen funds in 1997; and nine of 15 funds reported a total of 14 company failures during 1997. A total of $870,000 was lost by the funds and $6.9 million by other investors due to those failures. On average, fund managers worked a year or longer to prevent their failures, with most companies needing a change of management or more capital to prevent the failures. Over the lives of their funds, eleven managers stated that they had lost a total of $4.554 million among 32 failed companies, or $142,000 per company.
CRITERIA FOR MAKING INVESTMENTS
Twelve of 15 funds reduce their investment risk by investing in a portfolio of diversified industries and technologies. Among economic investment sectors, eleven of 15 funds invest 100% in technology, two invest >/= 90% in technology, and two invest 60% in technology. Seven of the 15 funds invest in all technology segments, with no particular segment dominating..
In choosing their investments, fund managers place most emphasis on the "management team" and on "market potential," with "technology feasibility" being a close third. Most of the funded entrepreneurial teams originate , in decreasing order, from (1) private manufacturing industries, (2) private service companies,, and (3) universities and colleges.
Most funds (7 of 13) make their first investment in a company when the company revenues are less than $25,000; their first investment amount ranges from $25,000 to $1,000,000, with most being in the range of $25,000 to $250,000. Second investments typically range from $25,000 to $500,000..
Among 210 portfolio companies of 12 funds, 29.0% of the companies had fund investments in the amount of $500,000 to $1,000,000; 23.3% were below $100,000; and 73.3% of the investments were in amounts of $250,000 or less. On average, 88.9% of the investment dollars were in early-stage companies.
During 1997, 14 funds received 830 new business plans and invested in 36 (only 4.3%) of the companies; whereas they made 29 follow-on investments in their existing portfolio companies.
Seven of 12 funds had operating budgets in 1997 of $250,000 to $500,000; two funds exercised more than $500,000. Eight of 15 funds receive their operating funds from their sponsoring organization, with the sponsor putting up 100% of the amount. On average among 14 funds, there are 2.8 full-time managers and assistants supported by the annual operating budget.
Among 15 funds, the final investment decisions are made by an investment committee (7), or a board of directors (7), or a general partner (1). The investment decision-making process ranges from one month to more than six months, with three months being the median.
Fund managers maintain that the most important assets that they "bring to the table" to support the growth and development of their portfolio companies are: first--making the key investment; second--definition of the market opportunity, and third--recruitment of management.
Over the years among 14 funds, nine funds have made no change in their preferred form of investment, which has consisted either of combined loans and equity or of straight equity investments.
Thirteen managers stated that their average fund size needed to be $20 million to serve adequately the demand for early-stage capital in their service area; and that they each could invest in ten more companies per year with the additional funds; hence, an additional 130 companies per year would receive early-stage funding!
Thirteen of the 15 fund managers believe that there still exists an entrepreneurial capital gap in the United States and in their state or region.
On a scale of 1 to 5, with 5 being high, these managers ranked their expectations on the role that several initiatives might play on the availability of early-stage capital over the next three years, as follows:
| SCOR offerings within a state or region | 2.20 |
| Capital formation offerings over the Internet | 2.67 |
| Private venture-capital-industry investments | 2.67 |
| Newly-established state-sponsored funds | 2.73 |
| Capital gains tax reduction action | 3.57 |
Ten of 14 fund managers believe that "private investors" should be the principal providers of early-stage capital in this country.
Three of 11 states have a constitutional prohibition against state money being invested as equity in early-stage companies. Two states have attempted to remedy their constitutional prohibition, with one being successful and the second pending.
State-sponsored and state-affiliated early-stage capital funds are providing much-needed capital to seed and start-ups entrepreneurs to achieve both business/job creation and return on investment. However, the fund managers themselves recognize that the demand for early-stage capital far exceeds the supply. They declare that there remains an entrepreneurial capital gap in the United States and in their states and regions.
One must take note of the fact that the total funds under management at EOY97 by 14 funds was only $188,926,000, of which $22,113,000 out of total investments of $79,320,000 was invested in 1997. Compared to the $40+ billion of total private equity capital invested in 1997, of which nearly $7 billion was from the formal venture capital industry, this amount is disappointingly small. It reflects the fact that early-stage companies receive a minuscule amount of the capital available and invested in equity investments.
For those funds that did report return on investment data, the average ROI for 1997 was a highly competitive 19.6%; a potential message to state legislators is that the investments of state monies in both funds and their portfolio companies can be both secure and rewarding, even in high risk cases. But that value applies only to the eight funds that reported their ROIs. Hence, one must be concerned whether the eight funds that did not report had very low returns or did not know what their returns were for 1997; alternatively, they may consider that data to be confidential.
The real value of early-stage investments resides in the new jobs and the new revenues created by the portfolio companies. When one observes that 224 companies generated 1997 revenues totaling $668,420,000 and employed 6,777 persons, one has to conclude that the early-stage investments by state-associated funds are paying-off in a big way. This conclusion is further substantiated by the fact that, over the lives of eleven funds, only 32 of their portfolio companies had failed with an investment loss of only $4,554,000.
In order to achieve still greater economic benefits to their states and
to the nation, state legislatures should support the creation or enhancement
of early-stage capital funds in each of their states to a minimum recommended
amount of $20,000,000 per fund. The goal for the 50 states collectively,
therefore, should be to put in place a total of $1,000,000,000 for early-stage
capital investments; at this level the amount becomes a significant percentage
of the venture capital industry.
APPENDIX A--Summary of Data from 1998 Survey (16 funds reporting (5 from Kansas))
| Data Description | Survey Finding | # Funds |
| I. BASIC FUND INFORMATION | ||
| Total Funds Under Management (EOY97) | $188.926 million | 14 |
| Total Funds Invested (EOY97) | $79.32 million | 12 |
| Increase in Funds Under Management (1997) | $15.9 million | 14 |
| No. of companies invested in 1997 | 71 | 16 |
| No. of seed and start-up stage invested | 47 | 16 |
| No. of investments in 1997 | 16 | |
| -first investment | 47 | |
| -second investment | 16 | |
| -additional investment | 21 | |
| -total investments | 84 | |
| Dollars invested in 1997 | $22.113 million | 14 |
| II. PORTFOLIO COMPANY DATA | ||
| No. of portfolio companies: EOY97 | 298 | 16 |
| BOY97 | 276 | 16 |
| No. of successful liquidations | 7 | 16 |
| No. of jobs lost to failures | 31 | 14 |
| Total number of jobs EOY97 | 6,777 | 14 |
| No. of new jobs created | 817 | 12 |
| No. of new products | 49 | 10 |
| No. of new services | 19 | 10 |
| No. of new patents | 33 | 8 |
| No. of SBIR awards | 30 | 14 |
| No. of SBA financial assists | 5 | 13 |
| No. of strategic alliances | 31 | 13 |
| No. of strategic alliances with capital | 11 | 12 |
| No. of "angel" investments | 24 | 11 |
| No. of company failures | 12 | 16 |
| III. FUND PERFORMANCE DATA | ||
| No. of new companies-invested | 48 | 16 |
| -seed & start-ups | 34 | 16 |
| Return on Investment (ROI)(1997) | 19.6% | 8 |
| ROI Performance (relative) | 11 | |
| --greater than U.S. securities | 7 | |
| --greater than state-sponsored funds | 5 | |
| --less than private early-stage funds | 6 | |
| --less than private later-stage funds | 8 | |
| --less than mutual funds | 6 | |
| --less than S&P500 | 6 | |
| Total revenues of 224 portfolio companies | $668.42 million | 12 |
| --no. of companies w/revs >$1.0 million | 68 | 12 |
| No. of companies with 1997 revenues by ranges: | 14 | |
| --zero revenues | 35 | |
| --$1,000 - $25,000 | 20 | |
| --$25,000 - $100,000 | 15 | |
| --$100,000 - $250,000 | 25 | |
| --$250,000 - $500,000 | 25 | |
| --$500,000 - $1,000,000 | 36 | |
| -- > $1,000,000 | 68 | |
| Baseball analogy for 168 portfolio companies: | ||
| --Home runs | 7.7% | |
| --Triples | 10.1% | |
| --Doubles | 14.3% | |
| --Singles | 37.5% | |
| --Flyouts & strikeouts | 30.4% | |
| No. of company harvests (1997) | 9 | 15 |
| No. of company failures (1997) | 15 | 14 |
| No. of companies w/addl. VC infusions | 35 | 8 |
| --amount of VC infusions | $118.75 million | 8 |
| Dollars lost due to company failures (1997): | ||
| --by the funds | $870,000 | 7 |
| --by other investors | $6,925,000 | 5 |
| --total | $7,795,000 | |
| Failures over lives of the funds: | 11 | |
| --total dollars | $4,554,000 | |
| --no. of companies | 32 | |
| Dominant reason for company failures: | Management problems | 8 |
| Dominant fund actions to prevent failures: | Change management & provide more capital | 10 |
| IV. INVESTMENT CRITERIA | ||
| Dominant economic sector invested | Technology | |
| Dominant investment factor: | ||
| --first | Market potential | |
| --second | Management team | |
| --third | Technology feasibility | |
| Dominant source of entrepreneurial teams | Private manufacturing industries | |
| Company revenue level at fund's first investment | < $25,000 | 13 |
| Typical amount of fund's first investment | $25,000 to $250,000 | 15 |
| Typical amount of fund's second investment | $25,000 to $500,000 | 10 |
| Number distribution of total investment | 12 | |
| amount for 210 existing investments | ||
| --< $100,000 | 23.3% | |
| --$100,000 to $250,000 | 19.5% | |
| --$250,000 to $500,000 | 23.3% | |
| --$500,000 to $1,000,000 | 29.0% | |
| --> $1,000,000 | 4.8% | |
| Percent of funds under management designated for early-stage investments | 88.9% | 14 |
| No. of business plans reviewed in 1997 | 830 | 14 |
| --number invested | 36 | |
| --percent invested | 4.3% | |
| No. of companies receiving follow-on investments in 1997 | 29 (58%) | 15 |
| V. FUND ADMINISTRATION | ||
| Dominant size of fund operating budget | $250,000 to $500,000 | 7 of 11 |
| Primary source of operating funds | Sponsoring organization | |
| Final investment decision made by: | Investment committee or board of directors | |
| Time required to reach investment decision | 3 to 6 months | |
| Dominant form of investment | Combined loan & equity and equity only | |
| No. of full-time managers & assistants | 2.8/fund | 14 |
| No. of states w/ constitutional prohibitionS | 3 of 11 | |
| VI. FUND MANAGER VIEWPOINTS | ||
| Managers that believe an entrepreneurial capital gap still exists | 13 of 15 | |
| Principal providers of early-stage capital | Private investors | |
| Preferred size of fund to meet demand | $20,000,000 | |
| No. of new enterprises/year that amount would support | 10 | |
| Major factor that could influence the availability of early-stage capital | Capital gains tax reduction |