Comprehensive review of VDO investments highlights multi-billion-dollar economic impact of investing in early-stage innovation

SSTI recently examined the investment histories of 31 Venture Development Organizations (VDOs) across 20 states to quantify their impact and help to characterize how the broader technology-based economic development (TBED) community supports long-term innovation-driven economic and financial returns. Our top-level findings showed that 

The long histories, large investment portfolios, and wide geographic distribution of these VDOs helped draw conclusions that can be applied in many markets throughout the country.  

Venture Development Organizations (VDOs) are regional nonprofits that offer entrepreneurial development services and risk capital to tech and innovation-based startups in the communities they serve. These organizations play a critical role in supporting the development of companies, fulfilling the economic and fiscal potential of innovations, and driving significant long-term economic impact. 

The VDOs SSTI examined (using PitchBook data) have invested in almost 4,600 companies through over 6,000 deals in the past 45 years, with the vast majority of that activity occurring since 2000. VDOs have significant investment reach and are helping to create local innovation-driven entrepreneurial cultures in regions long overlooked by the majority of private venture capital investment. 

VDOs typically invest in technology and growth-oriented companies early in their development when there are just a few employees. As these innovation-driven companies grow, they create tens, hundreds, or thousands of new high-wage jobs. The 3,500 active companies backed by VDOs currently employ over 323,000 people with an estimated annual payroll of $28.8 billion based on federal industry and occupation data. Those wages, by their injection into their local economies, increase state and local tax revenues and job opportunities in other sectors, such as the restaurant, retail and entertainment sectors. 

VDO-backed companies have raised nearly $25 billion, with VDOs as small participants in over $11.5 billion of those deals. These results confirm that by investing in undercapitalized markets, VDOs are spurring innovation-driven investment opportunities and creating opportunities attractive to downstream private investors and markets. In addition to supporting companies and positioning them for larger private funding, VDOs closing deals and aligning with co-investors helps to positively influence local attitudes toward risk tolerance and innovation finance.  

The primary industrial sectors for VDO investment are information technology and healthcare. Over one-third of investments are in the IT sector, and over 27% are in healthcare. Business and consumer products and services are approximately 17% and 15% of deals, respectively. The venture development model, with its need to raise investment funds from the private sector and invest alongside private financiers, is somewhat captive to larger equity market trends. A critical role for VDOs is to work within smaller markets, many of which may have innovation and industry concentrations, and bring local companies to the attention of private investors, increasing the likelihood of further investment and success for local startups. 

Of the 4,343 deals with known investment amounts, the average deal size is $2.71 million with 2.2 investors per deal. The median deal size is notably smaller at $260,000 and likely represents the typical first or second funding rounds where VDOs make initial investments. The difference in median and mean deal size is potentially driven by VDOs investing a portion of their funds in large late-stage follow-on transactions to gain value as a successful company matures but also showcases how companies leverage initial investments to generate market interest. 

VDOs have a combined active portfolio of 2,543 companies and 2,130 exits listed in PitchBook. Of those exits, 1,240 companies are identified as out of business, though they may have provided a positive return to investors before closing their doors (PitchBook tracks the last known status of a company). With a conservative approach to the analysis, we can presume that VDOs have recognized at least 890 positive exits, providing a 42:58 positive exit ratio. Notably, the group includes strong performers, with ten organizations achieving more than 50% positive exits. These results fall in line with the expectations of private venture fund managers in more established technology markets who develop portfolios capable of absorbing total losses from 50% of their investments. The exit numbers, combined with the large active portfolios, indicate that VDOs are selecting high-performing companies that provide strong economic returns.  

The conclusion drawn may be that good deals exist in undertapped regions of the country. This SSTI study further supports an assertion that, without the support of well-designed and sustained VDOs, many companies would not have the resources to advance their businesses or prove to a skeptical market that their ideas—many of which rely on unproven technologies or concepts—can succeed. Not all the companies VDOs support will succeed, and some of the most initially promising will fail. In the long run, however, their work can help transition economies, support new high-wage employment opportunities, and create value for the public and private sectors.  

If you are interested in working with SSTI to support venture development and tech-based economic development strategies, please contact us with any questions and consider joining our TBED Community of practice.