From business books to startup blogs, the common methods discussed for acquiring investment seed funding range from rallying friends and family to endless rounds of meetings with angel investors and venture capital firms. Crowdfunding is emerging as another source of investment capital for fledgling startups or early-stage firms looking to grow.
But did you know that certain states also provide funding to attract new businesses and to help home-grown businesses grow? Yes, several forward-thinking state governments have found that state-managed venture capital programs can be an effective way to attract innovation-focused businesses and grow the economy.
State-sponsored venture capital funds
State-sponsored venture capital programs provide investment capital to create and grow start-ups, early-stage and mid-stage businesses, often in one of two forms: (1) a state-run venture capital fund (which may include other private investors) that invests directly in businesses or (2) a fund-of-funds, which is a fund that invests in other venture capital funds that in turn invest in individual businesses. Many factors, particularly resources and available talent, inform a state’s decision on which form to choose.
In 2010, state level investing got a boost when former President Obama signed the Small Business Jobs Act. This measure drove $1.5 billion into supporting small businesses, with a heavy focus on high-growth tech firms. The logic in providing seed funding for proof of concept venture or capital to expand established companies is to help states move their economies into the 21st century by attempting to produce micro-silicon valleys.
For example, Northeastern Ohio doesn’t typically come to mind as a center of innovation but thanks to Ohio’s Innovation Fund, the region now has a bustling, emerging tech scene. The Innovation Fund, is the region’s most active state-sponsored startup funding program for tech-focused businesses. Having invested more than $11 million dollars since its launch, the fund has helped start 168 companies and created 675 jobs in the region. The capital funding is accompanied with vigorous professional business mentorship. Most advantageous of all, the fund does not take equity. The incentive for the startup is that the fund’s contributions to the startup do not dilute ownership; in return, the state attracts innovative companies that bring well-paying jobs and spur new growth.
State-sponsored seed funding and venture capital also allows for an expansion of mission-driven investment. The CalSEED Fund is a California-based state initiative to fund and support startups that are working to bring innovative clean energy concepts to the market. In true venture capital fashion, the CalSEED Fund also provides mentorship on both the technical and the business side. It’s not easy; energy businesses typically have high startup costs, operational expenses, and need to navigate complex legislation. But this is precisely why the fund exists—to help innovative clean energy startups overcome these barriers.
The seed round of funding is an incredibly important and difficult step to building a successful startup. And the fact remains that raising investment capital is tough. Because they tend to have more access to investment capital, many startups gravitate towards hubs like Silicon Valley and NYC where it can be easier to meet with potential investors and raise capital. State funds pitch a different value proposition–you can start your company in a less competitive environment, with less competition for high-end talent and receive state funding and quality mentorship. The next generation of high growth startups may come from surprising places: on the backs of state funding, in the American desert, Midwest, or anywhere in between.
