By Elliot Dater
Capital is the lifeblood of a technology company. An early stage technology company cannot be self-sustaining while it is developing its technology and products. Therefore, it is common for those companies to rely on investments from third parties. Those investments typically go through stages of friends and family investment, technology based economic development organizations and incubators, such as Innovation Works, Idea Foundry, the Pittsburgh Life Sciences Greenhouse, or the Office of the Chief Scientist in Israel, then angel investors, and if the company is successful, venture capital investors.
Often, the vitality of an area’s technology economy is judged by the number of investments made in its technology companies. Two recent surveys assessed the technology investment ecosystems in Israel and in Pittsburgh, respectively.
According to a report on venture capital investment in Israel in the first quarter of 2013 published by the IVC Research Center and accounting firm KPMG Somech Chaikin, 169 Israeli companies raised a total of $474 million from local and foreign investors. Of that total, $147 million was invested by Israeli venture capital funds. According to that same report, 17 companies raised more than $10 million each while 99 venture capital backed investments raised $364 million, or 77 percent of the total amount raised in that calendar quarter. The average company financing round was $2.8 million, while the average venture capital financing round was $3.68 million. In addition, 53 seed companies raised $31 million. Of the Israeli venture capital funds that made investments, 42 percent of those investments were first time investments and 58 percent were follow on investments. Of the total amount, 34 software companies accounted for 29 percent of investments, followed by the internet sector with 22 percent of investments.
Similarly, in Pittsburgh, Ernst & Young and Innovation Works recently published, “Optimizing Opportunities,” detailing investment in Pittsburgh’s technology sector from 2008-2012. According to their report, during that time period 217 companies raised a total of $1.3 billion in investment. In 2012, $329 million was invested in Pittsburgh technology companies by venture capital funds, angel investors, seed funds and other investment sources. Of those 217 companies, the largest number came from the software and information technology sector, including enterprise and consumer software, electronics, robotics, telecommunications and IT infrastructure. The second largest sector was the health care sector, including medical devices, health care IT, biotechnology and drug development as well as health care services. Of the capital invested during this period, nearly 75 percent came from venture capital funds, followed by angel and corporate investors, then seed funds and technology accelerators. While venture capital funds provided the largest amount of funding, almost 66 percent of the investment transactions were made up of smaller rounds made by angel investors or seed funds/technology accelerators as the lead investor.
Although Israel attracts a far larger amount of technology investment than Pittsburgh on an annual basis, Pittsburgh should be proud of the growth in this sector since the 1980’s. Similar to Israel, state, local and regional governments are making investments and are creating the infrastructure to encourage and retain technology entrepreneurs and the necessary capital in the Pittsburgh region. Israel, also known as the “Silicon Wadi,” is the second largest center of technology innovation in the world after the Silicon Valley. The Pittsburgh technology ecosystem is relatively young, dynamic and growing. Pittsburgh will never become the Silicon Wadi (for one thing, Wadi means a dry river bed, and I hope we will never see the Three Rivers run dry), but if the Pittsburgh technology ecosystem continues to grow, it can become the “Pittsburgh Technology Triangle,” a leading region for software, hardware, robotics and medical devices technology innovation.
If you don’t like the Pittsburgh Technology Triangle, send me a better name. If we like your idea, we’ll start using it.
Elliot Dater is a partner in Schnader’s Business Services Department, and represents Israeli companies doing business in the United States and U.S. companies and investors doing business in Israel, as well as emerging growth companies in the technology and medical device industries
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