VC funding falls short in Alabama; Report: State places 41st in venture capital ranking

Alabama lags behind competing Southeastern states - and most of the country - when it comes to venture capital funds invested in start-up businesses.

According to the 2007 Kauffman Foundation New Economy Index, the state ranked 41st in the number of venture capital-backed companies in its economy.

Another report, the PricewaterhouseCoopers Money Tree survey, shows that Alabama brought in $18.9 million in 2006, while companies in other Southeastern states, such as North Carolina and Georgia, raked in $472 million and $353 million, respectively.

Birmingham professionals involved in the local venture capital industry say state and city officials should collectively offer more incentives to attract entrepreneurs to start technology-based companies - a sector most venture firms invest in.

"It's not like we're some backwards place that we can't handle this," said Greg Foster, a recent University of Alabama Law School graduate who has studied venture capital for more than 10 years. "Birmingham is very well capable of having more venture capital (investments)."

Compared to earlier studies conducted in 1995 and 2000, North Carolina lagged behind Alabama but began to offer incentives to encourage more innovative technology companies to set up shop. Venture capitalists then jumped at the opportunity to invest their money.

For example, Birmingham experienced an 11 percent rate of growth between 1995 and 2000 in venture capital flow while Charlotte, N.C., grew at 312 percent, Foster said.

"North Carolina has made a significant move and is now one of the top 10 states for venture capital," he said.

North Carolina offers a Credit for Technology Commercialization program, which provides eligible companies with up to 20 percent in tax credits for investing in machinery and equipment used in production directly related to technology that is developed by and licensed from a research university.

The state also offers investors who pump money into young companies a tax credit, said Alex Leath, economic development lawyer at Birmingham-based Balch & Bingham LLC.

"That's given investors an economic incentive to invest in small, high-gross companies," Leath said of the incentives. "It seems to be a good tool."

Alabama, on the other hand, doesn't have detailed incentive packages to recruit technology-based companies, which would bring in more venture capital, Leath said.

Alabama's incentive programs are geared toward industries that offer primarily blue-collar jobs.

Studies show that venture capital industry plays a major role in nourishing the U.S. economy by bringing in more white-collar, high-paying jobs.

The nation's venture capital-backed companies employed more than 10.4 million workers and generated $2.3 trillion in revenues in 2006, according to a report by Global Insight dubbed "Venture Impact: The Economic Importance of Venture Capital Backed Companies to the U.S. Economy."

Ed Fields, executive secretary of the Birmingham Venture Club, said the city needs more businesses in the area that are poised for substantial growth because venture capital firms expect to see a more than 20 percent return on their investment.

"There are some venture capital firms in the Birmingham area that invest outside of the Birmingham area because that's where the opportunities are - that's just the name of the game," he said.

Curtis Palmer, CEO of the nonprofit organization TechBirmingham, which recruits more technology-based firms to the city, said most of the studies rank Birmingham low because venture capitalist firms are private businesses that don't tout their investment projects.

"The problem with any study like that is our venture capital is off the radar and it doesn't get reported," Palmer said. "There's more venture capital firms in Birmingham than Atlanta, but you would never know by seeing these studies - our (investors) tend to be quieter."