It takes a hotbed

Some people call them ?VC hotbeds? – regions known for their high concentrations of entrepreneurs and venture capital influx. But more is at play than just money and business plans in these centers of US venture activity. Technology hubs like Silicon Valley and Boston's Route 128 can be thought of as support networks linking entrepreneurs with capital and operating assistance.

In most cases, VC hotbeds have grown up around major universities and research and development facilities from whence spring technological innovation. The academic institutions also produce armies of scientists, engineers and savvy graduates with business ambitions.

Major corporations often play important roles in technology clusters, too, supplying critical human, financial and technological capital to spur on development. Entrepreneurs often receive training at large companies before spinning out to start independent operations, frequently with private equity backing.

Some hotbeds have grown organically, others by design. North Carolina's Research Triangle Park, surrounded by three important universities (Duke University in Durham, State University in Raleigh, and the University of North Carolina at Chapel Hill), is a prime example of a centre of innovation emerging from institutional planning and coordination.

Of some importance, too, are quality-of-life issues, such as low housing costs and pleasant weather. These play a secondary role in luring fresh talent and ideas.

Uptick
Venture capital activity in the US has returned to the more sober levels seen prior to the investment craze of the late 1990s, according to the MoneyTree quarterly survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. At approximately $4.5bn, nationwide funding for the second quarter of 2003 was roughly equal to the figure reported at the close of the 1997 fiscal year. The figure is a far cry from the all-time high of almost $29bn in venture funding reported for the first quarter of 2000, but at least there are signs of a recovery: for the first time in two years, venture investments was showing an increase, from $4bn in the first quarter to the $4.5bn in Q2.

In addition, Thomson and the NVCA also reported strong IPO activity in the third quarter of 2003. Nine venture capital-backed companies went public in the third quarter, valued at $733m, as opposed to a mere eight venturebacked IPOs total in the previous four quarters that brought in a little more than $500m.

Just as was the case before and during the boom, by far the most active area on the venture capital map is still Silicon Valley, which, according to MoneyTree, completed deals valued at nearly $1.5bn for the second quarter of 2003, snagging a third of all US venture funding for that period. This isn't surprising – the area still boasts a good mix of different industries and remains at the geographic and cultural epicenter of America's venture capital industry.

?It's been a busy stretch with activity picking up,? says Tim Hardin, chief operating officer of Silicon Valley Bank's merchant banking division. ?We've been getting complaints of increased competition among venture capital firms for deals. There's still the sheer number of [VC] dollars to be invested. The pace and activity of development is pretty strong. There's still a lot of money, a lot of entrepreneurs and a lot of talented managers out there waiting for investments to pick up.?

Hardin says more dollars are beginning to flow into other VC hotbeds. The Boston area comes closest to matching Silicon Valley's might, with a diverse mix of companies as well as an entrepreneurial and venture capital community that predates Silicon Valley's. According to MoneyTree, Massachusetts received roughly $417m in VC funding for the second quarter, almost 10 per cent of total VC funding for that time period.

Other regions, such as North Carolina's Research Triangle Park, the Washington DC/Metroplex region, and Austin's Silicon Hills have become major clusters of venture capital activity in their own right and are angling for a bigger piece of the pie over the next decade.

Coast to Coast
A quick tour capital hubs.

VC hotbed: Silicon Valley

Regional funding for the year ending June 2003: $5.704bn

Major sectors:

Software, networking, telecommunications, biotechnology, medical devices, semiconductors, computers and peripherals, IT services

Notable VC-backed companies:

Yahoo, Cisco Systems, eBay, PayPal, Netflix, NetGear

Prominent VC firms:

Accel Partners, US Venture Partners, Sequoia Capital, Draper Fisher Jurveston, Mobius Capital Partners, Kleiner Perkins Caufield & Beyers, Redpoint Ventures

With approximately a third of all US venture funding raining into Silicon Valley, this area remains the leader among all technology hubs and is certain to retain that position in the years to come. Top-notch schools such as Stanford and the University of California, Berkeley, regularly churn out new technologies and fresh pools of engineers. The region's infrastructure for venture capital and entrepreneurial activity is entrenched, and existing high-tech companies constantly spin out new, entrepreneur-led, venture-backed companies. The investment climate in Silicon Valley has changed slightly, with more emphasis on cooperation among VC firms, rather than the cutthroat competition of the tech boom days. Telecommunications companies are still hurting, though there has been a recent interest in community-based Web applications, such as Friendster and Spoke. Heidi Roizen, a partner at Palo Alto-based Mobius Venture Capital, says she sees a strong environment for early stage companies, especially in the consumer space, though nothing near the levels of 1999. Silicon Valley, like the rest of the country, learned that successful companies require more than a domain name. Entrepreneurs should see significant VC financing rounds as firms begin unleashing the war chests of capital they've kept in reserve for the last couple of years.

VC hotbed: Boston's Route 128

Regional funding for the year ending June 2003:

$2.025bn&#42

Major sectors:

Software, biotechnology, networking, industrial energy, semiconductors, medical devices

Notable venture-backed companies:

Millennium Pharmaceuticals, Parametric Technology, Sycamore Networks

Prominent VC firms:

Battery Ventures, Atlas Venture, Highland Capital Partners, BainCapital Ventures, Polaris Venture Partners, Charles River Ventures

Before there was Silicon Valley, there was Boston. Not until the 1970s and 1980s did the concentration of technology businesses shift westward. But that doesn't mean Boston has been abandoned by tech. On the contrary, the metro region claims the second highest level of venture capital activity in the country after Silicon Valley. The legacy of entrepreneurial development and the presence of academic institutions such as Harvard University and the Massachusetts Institute of Technology, fuel growth and innovation. In fact, the schools have helped boost Boston's life sciences sectors in recent years: Harvard's president Lawrence Summers for instance has elevated life sciences development on the university's agenda. Chris Gabrieli, a former Boston-area venture capitalist who is chairman of the non-profit economic development organisation, Massachusetts 2020, says although information technology will continue to be the single largest segment of VC activity, he thinks Boston will continue to surpass Silicon Valley and others in the life science and medical technology sectors. Though it lacks Silicon Valley's girth, Gabrieli says Boston's established entrepreneurial base and especially its research universities provide the foundations for new companies to emerge and become successful. The energy/environmental sector and nanotechnology are also expected to rise in importance in the near future.

VC hotbed: New York Metro Region

Regional funding for the year ending June 2003:

$1.143bn

Major sectors:

Biotechnology, software, media & entertainment, telecommunications, business products and services, medical devices

Notable venture-backed companies:

Cosi, JetBlue, FreshDirect, The Princeton Review

Prominent VC firms:

Venrock Associates, JP Morgan Partners, Canaan Partners, Warburg Pincus, Greylock, Constellation Ventures

Once upon time in New York, the city could claim its very own ?Silicon Alley.? No more. The alley was nothing more than a collection of media-related Web sites that went bankrupt along with most other dotcoms when the tech bubble burst. But that doesn't mean the entrepreneurial spirit, or venture capital, has left the city. On the contrary, New York City boasts a healthy, innovative climate bolstered by a high concentration of creative talent and financial resources, not to mention being the centre of US media and advertising. Beyond Manhattan, the New York metropolitan region also includes a burgeoning pharmaceuticals corridor located around Princeton, New Jersey and supported by schools such as Columbia, New York University and Rockefeller University. Dennis Miller, managing director at New York-based Constellation Ventures, says one of the lures of the New York area is that most resources a young company may need to be successful are within close proximity to each other ? perhaps even a short train ride away.

VC hotbed: Austin's Silicon Hills (Texas)

Regional funding for the year ending June 2003:

$1.103bn&#42&#42

Major sectors:

software, telecommunications, networking, semiconductors, computers and peripherals

Notable venture-backed companies:

Pervasive Software, National Instruments, Tivoli, Catapult Systems

Prominent VC firms:

Austin Ventures, Techxas Ventures, Agave Capital, G 51 Capital, Gefinor Ventures

Austin is well established as a high-tech city. Its many technology or telecom startups have mushroomed in the huge shadows of Dell Computer and Motorola. The region was called a ?thriving clone? of Silicon Valley by BusinessWeek magazine back in 1997, and with good reason: low-cost land, low wages and a big pool of university grads fed high-tech growth. The area has been successful in recruiting and keeping programmers, and receives a fair amount of entrepreneurial transplants from Silicon Valley due in part to its more relaxed pace of life. Steve Vandegrift, a partner at Austin-based Techxas Ventures, says Austin is where Palo Alto and Silicon Valley were 20 years ago ? the city has an increasing number of home-grown VCs as well as outposts of non-Texas based firms The investment climate is collegial with plenty of deal flow to go around, Vandegrift says, and the town is full of ?creative types? looking to work with other creative types.

VC hotbed: Washington DC/Metroplex

Regional funding for the year ending June 2003:

$984m

Major sectors:

Telecommunications, software, computers and peripherals, biotechnology

Notable venture-backed companies:

Amerigroup, Veridian, MCG Capital, webMethods

Prominent VC firms:

New Enterprise Associates, The Carlyle Group, Sterling Partners, Toucan Capital, Novak Biddle Venture Partners, Draper Atlantic Venture Fund

Back in 1997, there was little early stage activity in the DC/Metroplex region, which encompasses Northern Virginia, Maryland and the District of Columbia. But with the acceleration of the markets during the 1990s, the venture capital activity in the area surrounding the nation's capitol picked up, making it one of the fastest growing clusters for biotechnology, healthcare and advanced technology including information security, satellite communications and sensors. The region boasts numerous government-funded R&D facilities, including those owned by the Navy, the Army and NASA, not to mention top-tier research universities, such as John Hopkins University, Virginia Tech and Georgetown University, which have produced a large cadre of engineers eager to start up their own operations. Roger Novak, Jr., co-founder and partner at Maryland-based Novak Biddle Venture Partners, says that one of the draws of the DC area for entrepreneurs is that if a company goes bust, there are always alternative employment opportunities available thanks to government contractors in the area. That, along with the nearness to the seat of power and the government's ear, makes the DC/Metroplex area one of the strongest up-and-coming VC hotbeds in the country.

VC hotbed: Colorado Front Range

Regional funding for the year ending June 2003:

$573m

Major sectors:

Telecommunications, software, industrial energy, networking

Notable venture-backed companies:

McData, Myogen, Lefthand Networks, Creek Path Systems

Prominent VC firms:

Sequel Venture Partners, Wolf Ventures, Boulder Ventures

Colorado isn't abuzz with as much VC funding volume as Boston or even Washington DC. But it does have an atmosphere of cooperation among the small number of local VC firms that supports entrepreneurship in what is locally called the ?Front Range? ? the area covering Fort Collins in the north to Colorado Springs in the south and including Boulder and Denver. Colorado has seen its economy and small business employment grow faster than the national average over the last decade. Tim Connor, a partner at Boulder-based Sequel Venture Partners, says that although there isn't a large base of local investors, the VC firms in the market work cooperatively with each other to develop the region and attract outside VC firms to invest alongside them in local deals. The competition for investment is nowhere near Silicon Valley levels, and Connor says entrepreneurs benefit from the hands-on support that local investors provide. Once known for its strong telecommunications sector, including its cable companies, the industry took a major hit following the market crash. Network storage is a key area right now, and there is an increasing flow of innovation in health sciences coming from local schools, such as Colorado State and Denver University.

VC hotbed: North Carolina Research Triangle Park

Regional funding for the year ending June 2003:

$494m&#42&#42&#42

Major sectors:

Software, medical devices and equipment, biotechnology

Notable venture-backed companies:

Inspire Pharmaceuticals, Pozen, Fuzeon, RedHat

Prominent VC firms:

Aurora Funds, Academy Funds, Research Triangle Ventures, InterSouth Partners

Research Triangle Park was created to feed off three major North Carolina academic institutions: Duke University in Durham, State University in Raleigh and the University of North Carolina at Chapel Hill. With research expenditures in the billions, the three schools have generated new technologies that have been the foundation of many startup companies in the region. After 45 years, today Research Triangle Park is gaining significant momentum in a variety of areas, particularly life sciences and drug discovery. Jeff Clark, a managing general partner at Durham-based Aurora Funds, says the region's entrepreneurial fertility is due to university-based initiatives as well as a strong corporate base that includes Biogen, GlaxoSmithKline and Cisco. In cooperation with the promotional organizations such as the Council for Entrepreneurial Development, Clark says Research Triangle Park will most likely mature into an important VC hotbed within the next five to 10 years.