Access to Capital - 2014

Goal: Improve access to capital for new and expanding high-tech enterprises.

Access to capital is fundamental to Virginia’s innovation economy. Entrepreneurs need capital to start business ventures and grow existing businesses. Capital is used both to fund research and development (R&D) and to commercialize the findings of R&D. Access to capital here refers specifically to private investment, public sector investment, and state R&D tax credits.

Private investment, which includes venture capital and angel investment, declined in 2012 in Virginia, driven by a sharp decline in venture capital investment. Public sector investment remained stable from fiscal year (FY) 2012 to FY 2013. This investment included CIT’s Growth Acceleration Program (GAP) Funds, the Commonwealth Research Commercialization Fund (CRCF), and the Virginia Tobacco Indemnification and Community Revitalization Commission (Tobacco Commission) Research & Development grants.  While CIT’s GAP Funds deployed fewer public funds in FY 2013, CIT’s investment attracted more private funds. From FY 2012 to 2013, both CIT’s CRCF awarded dollar amounts and the Tobacco Commission’s R&D grants declined. R&D tax credits — including the R&D expenses tax credit, the qualified equity and subordinated debt investments tax credit, and the capital gains exemption for technology businesses — increased in taxable year (TY) 2012.


Why is access to capital important?
Capital is necessary for launching a business, expanding an existing business, investing in research & development, and commercializing the findings of research & development. Private investment is a crucial source of funding for innovative companies. Public sector investment is also important to fostering entrepreneurship and the development of novel ideas. Both public sector investment and the use of tax incentives reduce investor risk, thereby making capital more readily available to innovative companies. Without the proper funding at the right time, innovative ideas and entrepreneurs may never fully develop.

How has Virginia performed over the last five years?

ATC1Private Sector Investment
Venture capital activity is highly cyclical, reacting quickly to national economic trends like recessions. Over the past five years, the dollar amount of venture capital invested has declined significantly. In 2008, $534.6 million of venture capital was invested in Virginia, followed by a sharp contraction in 2009 as the national recession hit venture capital funding very hard. Investment in Virginia then climbed in 2010 and 2011 before falling to $272 million in 2012 — a 56% drop from 2007. By stage, seed investment fell 99%, early-stage investment declined 27%, expansion investment increased 21%, and later stage investment dropped 66% in Virginia from 2008 to 2012. The number of seed- and early-stage deals, however, has increased after falling off in 2009. In 2008, there were 30 seed- and early-stage venture deals funded in Virginia. The number of seed- and early-stage venture deals fell to 13 in 2009, then recovered slightly to 17 in 2010. In 2011, 33 seed- and early-stage venture deals were funded in Virginia; in 2012, the number of seed- and early-stage venture deals jumped to 40.

ATC2Over the same period, the number of venture capital deals also declined. In 2008, 88 venture deals were funded in Virginia, before sharply contracting to 48 deals in 2009 as the recession took its toll on venture investment. In 2010 and 2011, 56 and 77 deals, respectively, were funded in Virginia. In 2012, the number of deals stood unchanged from a year earlier at 77, although lower than the 88 deals funded five years earlier. As of October 2013, 38 venture capital investment firms were located in Virginia. 





ATC3Angel investment, which is often used to fund startup entrepreneurial ventures, appears to have experienced a similar setback due to the Great Recession. Angel investment in Virginia declined over the past five years, though the number of firms receiving investments increased between 2011 and 2012. In 2008, 110 to 220 companies were assisted by angel investments totaling an estimated $19 to $38 million. In 2009, an estimated 80 to 160 deals provided $10 to $19.8 million in funding and in 2010, 90 to 180 deals were funded by angel investors worth $26 to $52 million. In 2011, 50 to 100 companies were assisted by angel investors, receiving $14 to $29 million in investment; in 2012, 90 to 180 companies received angel investment worth an estimated $14 million to $29 million. The increase in the number of angel and early- and seed-stage venture capital deals helped offset the decline in early and seed-stage dollars invested.

Crowdfunding is an emerging source of capital that is typically easier and quicker to secure than capital via angel investors. Crowdfunding uses the internet to reach potential investors to help fund the startups of entrepreneurs and innovators. Crowdfunding is expected to expand and become a more important source of capital for young companies in the coming years as an easing of some of the government’s restrictions on fundraising has opened new doors for startups to obtain financing.

Increasing the availability of private funding for Virginia-based startups is critical to achieving growth in the innovation and entrepreneurship sector of the economy. The primary purpose for public investment is the leveraging of private funds. Expanding the pool of private, early-stage funding sources for entrepreneurs in the Commonwealth directly results in more high-tech startups and related jobs.  Therefore, CIT is actively engaged in regionally-led investment fund initiatives that focus on entrepreneurial activity within their geographic or industry footprint. Measuring the success of these initiatives will become a future goal for the IEMS.

Public Sector Investment
The Commonwealth of Virginia incentivizes innovation and entrepreneurship through numerous programs and policies. The CIT GAP Funds, the Commonwealth Research Commercialization Fund, and the Tobacco Commission’s R&D Grants are among the programs supported by the state to facilitate entrepreneurship and foster innovation.

ATC4CIT GAP Funds is a family of seed- and early-stage investment funds. CIT GAP Funds place near-equity and equity investments in Virginia-based technology, life science, and cleantech companies with high potential for achieving rapid growth and generating significant economic return for entrepreneurs, co-investors, and the Commonwealth of Virginia, using public dollars to attract private equity. From FY2009 through FY2013, CIT has deployed a total of $7.5 million of an $8.5 million appropriation. In FY2009, CIT invested $550,000 in six GAP projects. In FY2010 and FY2011, investments were made in six deals for $260,733 and $465,000, respectively. CIT invested $3.7 million in 27 deals in FY2012 and $2.6 million in 14 deals in FY2013. These investments leveraged public funding to attract additional funding from private sources. In FY2009, CIT GAP Funds investments attracted $25.9 million in private funding. In FY2010, the funds attracted $8.5 million in private funding, followed by $11.7 million in FY2011, $25.3 million in FY2012, and $36 million in FY2013.

The CRCF supports science- and technology-based research, development, and commercialization. The Fund, which began making project awards in FY2012, is designed to drive economic growth in Virginia and to promote collaboration among the state’s institutions of higher education and partnerships between these institutions and business and industry.  In FY2012, $5.8 million was deployed for 47 projects and in FY2013, $3 million was deployed for 42 projects. $4.8 million was appropriated for FY2014.

ATC5The Tobacco Commission provides grant funding to governmental or nonprofit entities working with private partners to conduct research. In 2009, it committed $100 million to a new grant program supporting applied research with significant commercialization potential in the tobacco-dependent region. In FY2010, nine awardees received a total of $12 million in R&D grants from the Tobacco Commision, and in FY2011, 12 awardees received a total of $23.8 million. Awards declined in FY2012 and FY2013, with seven awardees receiving $16.6 million, followed by 5 organizations receiving $8 million, respectively.



R&D Tax Credits
The Virginia General Assembly passed legislation during the 2011 Session that created a refundable income tax credit good for tax years on or after January 1, 2011 and before January 1, 2016 for qualified R&D expenses paid or incurred during the taxable year. The amount available for this program is $5 million per year. Sixty-four applications were approved for TY2011 for a total approved amount of $2.1 million. In TY 2012, 135 applications were approved for a total of $4.5 million.

The Qualified Equity and Subordinated Debt Investments Tax Credit provides an incentive for angel investors to invest in pre-qualified small business ventures. The credit offers a 50% leverage of the first $50,000 an investor puts into a qualified Virginia technology startup. The cap has ranged from $3 to $5 million per year. In TY2010, 110 applications were approved for a total of $3.7 million; in TY2011, 200 applications were approved for a total of $3 million — the cap for that year; and in TY2012, 65 applications were approved for a total of $2.5 million.

In addition to the refundable income tax credit for qualified R&D expenses and the qualified equity and subordinated debt investments tax credit, the state offers exemptions for qualified investments in early-stage technology, biotechnology, and energy startups in Virginia made from April 1, 2010 to June 30, 2015. Any long-term capital gains attributable to the qualified investment will be exempt from state income tax. In TY 2011, 13 corporations claimed $10.0 million in subtractions related to the capital gains tax exemption for technology businesses, with a general fund impact of $8,732. The subtraction can also be claimed by individuals but those data are unavailable as of November 2013. Additionally, because the subtraction is for any long-term capital gains attributable to a qualified investment and may be claimed in the future, the total general fund impact is unknown and is likely to be significantly higher than the TY2011 impact.

What are the implications?
Innovative companies cannot succeed without capital. Early-stage companies need capital to develop their ideas into commercial products and services, while more mature companies need capital to expand their businesses. Private investment is a crucial source of funding for innovative companies and entrepreneurs, historically providing the bulk of capital available to these companies and innovators; the landscape of private investments, however, may be changing with the emergence of crowdfunding making it easier for startups and small business to gain access to capital. Public sector investment deploys capital in innovative companies with the expectation that their growth and success will ultimately benefit the Commonwealth. While public sector investment is small compared with private investment, the public investment is leveraged with private dollars so the total investment is much larger. The Commonwealth also incentivizes innovation with targeted tax credits, although these are relatively new programs which are capped annually.

Data Sources and Definitions:
Each IEMS indicator reflects the latest available data and includes a discussion of trends in up to five years of historical data, depending on availability.

Private Investment:
PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data:  Thomson Reuters

The 2012 Seed and Start-up Equity Capital Market in the Commonwealth of Virginia: Jeffery Sohl, University of New Hampshire
The 2011 Seed and Start-up Equity Capital Market in the Commonwealth of Virginia: Jeffery Sohl, University of New Hampshire
The 2010 Seed and Start-up Equity Capital Market in the Commonwealth of Virginia: Jeffery Sohl, University of New Hampshire
The 2009 Seed and Start-up Equity Capital Market in the Commonwealth of Virginia: Jeffery Sohl, University of New Hampshire
The 2008 Seed and Start-up Equity Capital Market in the Commonwealth of Virginia: Jeffery Sohl, University of New Hampshire
The number and dollar value of angel investment deals is estimated based on survey data.

Number of Venture Capital Firms: Data from

Public Investment:
The Virginia Tobacco Indemnification and Community Revitalization Commission Research & Development Grant Awards. See for a list of counties and cities eligible for Tobacco Commission Funding.

Center for Innovative Technology 

R&D Tax Credits:
Virginia Department of Taxation

Virginia’s fiscal year (FY) begins July 1 and ends on June 30. FY2013, for example, begins July 1, 2012 and ends June 30, 2013. The taxable year (TY) is the 12-month period an individual or business uses to report income for income tax purposes. For most individuals and businesses, their tax year is the calendar year.

CIT acknowledges the important contribution of Chmura Economics & Analytics in preparing the IEMS.