Access to Capital

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

The success of companies depends on adequate access to different types of capital during various stages of growth. Entrepreneurs rely on debt and equity financing to start and grow their businesses. These resources are used by entrepreneurial ventures to support fundamental business functions such as marketing, manufacturing, and sales, as well as innovation-boosting research and development and commercialization activities. Access to capital here encompasses risk capital used to fund innovation in early-stage companies, including private investment funds, public sector investment programs, and state research and development (R&D) tax credits.

Virginia’s venture capital investment dropped in 2017, following an unusually large spike in investment in 2016 attributable to one large investment. The number of deals also decreased. Private angel investment increased in 2017. Investments by public sector programs, which included CIT’s GAP Funds, the Commonwealth Research Commercialization Fund (CRCF, the Fund), and the Virginia Tobacco Region Revitalization Commission (Tobacco Commission), decreased in aggregate due to fewer awards being made by GAP Funds and the Tobacco Commission’s R&D grant program in FY2018. Private sector leverage is also an important consideration. When funds leveraged from other sources are included, the total investment impact of GAP was $90.8 million in FY2018. R&D tax credits, which include the R&D expenses tax credit, the qualified equity and subordinated debt investments tax credit, and the newly created major R&D tax credit increased markedly from taxable year (TY) 2015 to TY2016 (the most recent year of available data) as a result of the new program and an increased cap for the R&D expenses tax credit.

Why is access to capital important?

Access to a variety of sources of capital is important for business startup, expansion and investments in research and development, and commercialization of research. Many promising entrepreneurial ventures fail because of the difficulty of securing funding to cover negative cash flow during an early stage. Private investment provides the largest source of funding for innovative companies. The public sector plays a facilitating role by offering tax credits and providing funding to innovative companies to support applied research and commercialization activities in high-risk areas and leverage additional private investment. 

How has Virginia performed over the last five years?

Private Investment
Angel investment typically provides seed capital for the earliest stage of business startup activity. Angel investment in Virginia is below that of five years ago, although it has been on an upward trend for the past three years. Investment decreased from an estimated $18-35 million in 2014 to $10-20 million in 2015. Since then, angel investment has increased to $12-25 million. The number of deals financed follows a similar path. There were an estimated 100-200 angel investments in both 2013 and 2014. This decreased to 70-140 deals in both 2015 and 2016. In 2017, deals increased to 80-160. Nationally, angel investment has decreased slightly over the last three years. The amount of angel investment decreased from $24.6 billion in 2015 to $23.9 billion in 2017, although the number of angel investment deals decreased sharply from 71,110 to 61,560 over the same period. Virginia attracts a relatively small amount of national angel investment, with approximately 0.08% of national angel investment and 0.19% of angel investment deals in 2017.


Venture capital investment is an important source of capital for more established early- and later-stage startups that need funding to accelerate growth. Venture capital has increased markedly since 2013, surging from $527.0 million in 2012 to $2.2 billion in 2016 before dropping back to $1.015 billion in 2017. A significant cause of the 2016 increase from 2015’s $1.039 billion was a $1.2 billion venture deal for Arlington-based telecommunications firm OneWeb. Venture capital investment expanded for both seed- and early-stage investments and expansion and later- stage investments over the 2013 -2016 period, but decreased from 2016 to 2017. The former dropped from $204 million in 2016 to $178 million in 2017. Expansion and later stage investments decreased from $1.996 billion in 2016 to $837 million in 2017 over the same period. The number of venture capital deals also decreased year over year. There were 98 venture deals in 2016 and 82 in 2017. Seed- and early-stage venture deals decreased from 47 to 41, while expansion- and later-stage deals decreased from 51 to 41.



Venture capital spending as a percent of 2017 state gross domestic product (GDP) was 0.20, a drop from the prior year. Virginia ranked 13th among U.S. states in venture capital spending as a percentage of state GDP. This rate was lower than the national average of 0.37% and was lower than three benchmark states: California and Massachusetts (both 1.27%) and Maryland (0.23%). However, it was higher than North Carolina (0.16%), Texas (0.10%), and Pennsylvania (0.09%). California was the national leader.


As a result of the growth of the internet and social networking in recent years, several new financial technology tools have arisen that offer additional funding options for entrepreneurs. Crowdfunding provides startup funds through monetary contributions provided by numerous investors over the internet in return for initial batches of the startup product or firm equity. Peer-to-peer electronic platform business lenders take advantage of big data processing capabilities to rapidly assess firm credit risks and serve as a broker for small loans. These new financial technologies will likely provide new avenues for entrepreneurial funding in the future as government restrictions are eased.

Public Sector Investment
The goal of public sector investment is to stimulate private investment. Diversifying the sources and expanding the pool of private seed and venture capital for entrepreneurs in the Commonwealth generates more innovative startups and creates jobs.

The Commonwealth of Virginia promotes innovation and entrepreneurship through various incentive programs. The CIT GAP Funds, the CRCF, and the Tobacco Commission’s R&D grant programs are among the most important programs.

The CIT GAP Funds provide seed- and early-stage near-equity and equity investments in Virginia-based technology, life sciences, and clean technology firms that exhibit a high potential for achieving rapid growth, generating significant economic returns, and leveraging private investment. Over the past five years the program has seen a significant increase in leveraged dollars. In FY2013, $2.80 million was invested in 15 GAP projects, which attracted additional private funding of $36.0 million. In FY2018, based on preliminary data, CIT invested $1.8 million in 24 projects and leveraged $90.8 million in additional funding.


The CRCF promotes science- and technology-based research, development, commercialization, as well as company formation and growth. The Fund, which was initiated in FY2012, makes awards to projects that align with sectors in the Commonwealth Research and Technology Strategic Roadmap (R&T Roadmap) and works in tandem with other federal and state programs to leverage matching funds. A significant portion of the funded activity occurs in partnership with Virginia universities. Between FY2014 and FY2018, 212 awards have been announced. In FY2014, $4.2 million was awarded for 52 projects, in FY2018, 34 projects received $2.7 million in funding. 

TheVirginia Tobacco Commission established the $100 million R&D fund in 2009 to provide grant funding to public and non-profit organizations and educational institutions in support of conducting research and development and commercializing technology. The funded projects are selected to maximize the economic development impact on the 41-locality tobacco-dependent regions in Southern and Southwest Virginia. FY2014 saw the largest project outlays with $13.2 million for nine projects. Project awards and funding totals dropped in FY2015. The program was put on hold in FY2016 while new guidelines for awards were developed, and thus no awards were made in FY2016. The program resumed the following year, and awarded $5.6 million for six projects in FY2017. In FY2018, $3.4 million was awarded for two projects.


R&D Tax Credits
The Commonwealth of Virginia offers three R&D tax credit/exemption programs to eligible firms and private investors. The Research and Development Expenses Tax Credit, established in 2011, provides a refundable individual and corporate income tax credit for qualified R&D expenses. The amount available for this program was recently boosted from $5 million to $6 million in TY2014. The Qualified Equity and Subordinated Debt Investments Tax Credit offers angel investors a 50% tax credit for pre-qualified small business ventures involved in technology fields. The cap has been adjusted from year to year within a range of $3-5 million. In 2016, this annual cap was raised to $7 million. The state also offers individual and corporate income tax subtractions for long-term capital gains attributable to qualified investments in early stage technology, biotechnology, and energy startups. In addition, the state established a new tax credit program in 2016. Called the Major R&D Expense Credit, it is targeted for companies that spend more than $5 million per year on research. The annual cap for this credit is $20 million.

The Virginia Research and Development Expenses Tax Credit saw increases in approved applications and tax credit amounts from TY2012 to TY2016. In TY2012, 135 applications were approved for a total amount of $4.5 million. Approved applications increased to 440 in TY 2016. The total approved amount was $7.0 million, which was $1 million more than the prior year and the maximum amount allowed by the program.

The Major R&D Tax Credit approved 38 applications in its inaugural year and approved $20,000,000 in credits, the maximum allowed.

Qualified Equity and Subordinated Debt Investment Tax Credit use has fluctuated from year to year, in part because of changing program caps. In TY2012, 65 applications were approved for $2.5 million. In TY2013, 140 applications were approved for $4.5 million, the program cap for that year. TY2014, TY2015, and TY2016 saw 127, 162, and 132 applications respectively and reached each year’s program cap of $5.0 million.

In TY2011, 13 corporate investors claimed $10.0 million in deductions based on the capital gains tax exemption for technology businesses, with a general fund impact of $8,732. In TY2012, 30 corporate investors claimed $172.3 million in deductions for a general fund impact of $27,379. The number of corporate claims and deductions fell to 17 and $16.0 million in TY2013, while the general fund impact increased to $150,000. TY2016 saw 17 claims and subtractions totaling $10.3 million for a general fund impact of just $10,000. The large fluctuations observed in general fund impact over time occurs because of differences in the applicant pool, volatility in the corporate income tax deduction liability, and differences in the extent to which applicants are able to utilize the subtraction to reduce their tax liability. Individuals could also claim this deduction but those data are not yet available. It should also be noted that because the deduction is for any long-term capital gains resulting from a qualified investment and may be claimed in the future, the total general fund impact is unknown and may be higher than the reported tax year General Fund impacts.

What are the implications?
Capital investment is a key input in building innovative companies. Early-stage companies use seed investment to transform applied research into commercial products and services, while later-stage companies use expansion capital to boost growth. Private investment is a critical catalyst for innovative companies and entrepreneurs and accounts for most of the funds invested in new ventures. Public sector investment is smaller but is made in innovative companies that stimulate additional private investment and add value to the state economy. In recent years, the Commonwealth has created additional R&D investment tax credits and deductions to expand capital access. In the future, business startups may be able to more fully utilize additional private investment channels though new financial technology tools such as crowdfunding and peer-to-peer business lending.

Data Sources and Definitions:
Each IEMS indicator reports data available as of June 22, 2018 and provides a description of trends for five years of historical data when available.

Private Investment:
Angel Investment: Data obtained from Seed and Start-up Equity Capital Market in the Commonwealth of Virginia (2011-2015): Jeffery Sohl, University of New Hampshire.
Angel investment deals and values are estimated based on survey data.

Venture Capital data is obtained from PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report: Thomson Reuters:
PricewaterhouseCoopers changed its source of venture capital data in 2016. Previous estimates are not comparable to current ones. Available every year in January.

Nominal Gross Domestic Product by State data is from the Bureau of Economic Analysis: Available in June.

Public Investment:
GAP Funds. Data obtained from the Center for Innovative Technology (CIT).

CRCF Funds: Data obtained from the Center for Innovative Technology (CIT).

Tobacco Commission R&D Grant Awards: Data from the Virginia Tobacco Region Revitalization Commission. Counties and cities within the Tobacco Commission funding region are shown at: . Program guidelines target entities that “engage in applied research that is post proof-of-concept; invent and/or improve products, processes, or services that or whose value is substantially increased in the region; pursue commercialization within 36 months; and conduct research and development in: energy, biomedical and health care, information technology, chemical and materials, environment.”

R&D Tax Credits: Data obtained from the Virginia Department of Taxation. The state fiscal year (FY) begins July 1 and ends on June 30. The taxable year (TY) is the 12-month period used by individuals or businesses for income tax reporting purposes. The tax year is the calendar year for most individuals and businesses.