Recent research by an IU Kelley School of Business professor is good news for Hoosier entrepreneurs who may still be concerned about the increasingly out-of-date image of Indiana as ‘flyover country’ for venture capitalists based on the coasts.
A study by Xuan Tian, an assistant professor of finance at Kelley, finds that the level of venture capital received by start-up companies doesn’t appear to be impacted by geographic distance from the investor – lending credence to the assertion that if an idea is good enough, the smart money will find it. (The paper does note that the structure of funding is impacted, however, with companies further away receiving multiple smaller rounds of financing – portraying some level of caution on the part of investors about firms outside of their own backyards.)
The State Science & Technology Institute summarizes it this way:
“Companies located farther from their venture investors receive more frequent rounds of financing with lower cash amounts per round. According to the study, this difference is attributable to the higher cost of monitoring companies that are farther away.”
The lack of a location-based disparity is encouraging to Indiana as a Midwestern state without a strong heritage of VC involvement that has nonetheless made great strides in recent years. We experienced 50% growth in venture investment from 2002-2006, and as I’ve noted elsewhere on this blog, Indiana VC totals grew from $82.5M in 2007 to $123.6M in 2008 as the national venture market contracted.
Like Avis, sometimes states like Indiana have to try harder to get the attention of the coastal venture firms. Our BioCrossroads initiative raised more than $72 million for its Indiana Future Fund, a ‘fund of funds’ that invested in VC firms with the caveat that they more aggressively explore opportunities here in the state. We’ve also worked hard to develop homegrown sources of early stage capital that can help get young firms going, such as the HALO angel investor network managed by TechPoint.
Indiana’s position as ‘Crossroads of America’ is certainly a boon to our logistics industry. Fortunately, it doesn’t appear to be an impediment to our entrepreneurial sector, either.
(This topic was also recently noted in the Indiana Chamber’s excellent blog.)
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