Investors shy away from region: Venture capitalists seeking to fund more established companies

Aug. 22--Upstate New York continues to see lackluster venture capital investment, suggesting to some its failing to develop the innovative new companies that drive job growth.

Upstate received $16 million in venture capital investment during the second quarter, according to a new report by consulting firm PricewaterhouseCoopers and the National Venture Capital Association.

FlatBurger Inc. of Troy was the only Capital Region company to see any investment during the period. The company received $5 million from two Virginia venture capital firms.

In contrast, the New York metropolitan area saw $446 million invested during the second quarter. New England got $862 million, mostly to Boston-area firms.

But even the state of New Hampshire, with a population not much greater than that of the Capital Region, received $54.7 million in second-quarter venture capital investment.

To some, the lack of investment upstate suggests the region is lacking in entrepreneurial energy.

"That is bad news, because that means startup companies are not here," said Kajal Lahiri, an economics professor at the University at Albany. "It's suggesting that this region is depressed and ideas are not coming out of here."

Simply put, venture capital is money invested in newer companies with potential for fast growth. It is often considered the money that takes an idea and makes it a product.

Upstate New York saw $28 million in venture capital investment for the first half of the year, the PricewaterhouseCoopers report says, a significant drop from the $77 million invested during the first half of 2006.

Richard Honen, head of the Capital and Innovation Group at the Albany office of law firm Phillips Lytle, links the decline to a simple trend: Venture capitalists have begun avoiding new, or early-stage, companies.

Instead, they are looking to put their money in slightly older, late-stage companies that offer a better chance to make money. "And we don't have that many late-stage companies in upstate New York," Honen said.

So to whom does a new company turn for investment?

"It hurts me as a fiscal conservative to say this, but early-stage technology is the economic driver for upstate New York, and the funding for that has to come from the government," he said.

Still, Honen concedes many venture capitalists believe upstate suffers from a lack of ideas and entrepreneurship, even as he disputes the assertion.

If those venture capitalists are correct, it's problematic for a broad swath of eastern New York's development as Tech Valley.

After all, Austin, Texas, for example, probably wouldn't have become a high-tech mecca without a young student named Michael Dell starting a computer company -- and similar moves by other risk takers.

FlatBurger is one of the Capital Region's newer companies. It essentially operates an Amazon.com for software buyers.

Kim Lloyd, the vice president in charge of marketing, said venture capital investment is allowing the company to get its product on the market more rapidly.

"It's also a huge validation for us," she said. "It means that people see potential in it and think we'll be profitable."

But Lloyd notes there are few larger venture capital firms in upstate New York. That makes it harder for companies to attract investment, she said.

Together, California's Silicon Valley and the Boston area attract nearly half of the nation's venture capital investment.

Peter Pritchard, director of venture programs at the Center for Economic Growth, a regional economic development group based in Albany, said the Capital Region is unlikely to ever attract such high levels of venture capital funding.

He said the area would benefit from rising levels of venture capital funding by attracting established high-tech companies such as Sematech International, which is moving its headquarters to Albany.

"You have to create an environment where opportunities can take root and companies can try themselves in the marketplace," Pritchard said. "I think we're moving toward creating that kind of environment." Churchill can be reached at 454-5442 or by e-mail at cchurchill@timesunion.com

Disparate funding

Upstate New York lags other markets for venture capital investments Area /// First half 2007 /// 2006--/// 2005--Upstate New York /// $28 million /// $149 million /// $59 million New York metro /// $828 million /// $2.018 billion /// $1.956 billion Massachusetts /// $1.682 billion /// $2.841 billion /// $2.531 billion --Full year Source: PriceWaterhouseCoopers and National Venture Capital Association

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