The state of Florida is, by any measure, an economic powerhouse. The 2017 Florida GDP makes it the fourth most productive US state and would secure it a position as the sixteenth largest national economy, if Florida were treated as its own country. Despite this relative economic strength, Florida falls well behind the leading states in terms of venture capital activity, ranking ninth in terms of both invested VC dollars and eighth in terms of number of deals. However, given our economic size as a state, these rankings don’t tell the real story. If we normalize our analysis to look at VC investment per dollar of GDP, then Florida falls all the way to twenty third place, behind not only the likely leaders such as Massachusetts, California, Illinois, New York, and Washington, but also behind states like Utah, Maine, Connecticut, Montana, Idaho and New Mexico. In fact, Pitchbook recently compared the local capital per funded startup in Florida ($286k) to California ($5.48m) and Illinois ($1.48m), putting us at over 19x and 5x lower capital investment respectively. This raises the fundamental question of why, exactly, the Florida venture capital ecosystem is so small relative to the robustness of the overall Florida economy.
Upon reflection, the first question that came to my mind is whether there is sufficient innovation in Florida to even support a larger volume of venture activity than we are currently seeing. After all, it is hard to be a venture capital mecca if you don’t have any great ideas to invest in. But all it takes is a little exploration to discover a tremendous idea and intellectual property generating engine within our state borders. Florida serves as a key host to NASA and a hot-bed of research around aerospace and space travel. Our academic community, including research at numerous universities such as UCF, USF, Florida St., FIT, University of Miami, Embry Riddle, Rollins and so many others, is actually quite prolific at creating intellectual property, rivaling the top academic ecosystems like Research Triangle Park in terms of number of patents granted. Add to that our tremendous clusters of innovation in medical research, specialty pharma, virtual reality, entertainment, agriculture, and hospitality, and it becomes pretty clear that the idea side of the equation is not the problem.
So, if we are now satisfied that there are sufficient ideas to warrant more venture capital, then the focus needs to turn to better understanding what is driving the lack of supply. In this context, the existence of venture capital supply is either a question of aggregate wealth or one of asset allocation. Again, without working very hard, it is quite easy to determine that the state of Florida is not short on capital. In fact, according to Forbes, Florida ranks fourth in terms of number of billionaires, behind only California, New York, and Texas and is well ahead of #5. Additionally, any study of Florida’s current booming real estate activities, which are very capital intensive, further confirm that we are not a state devoid of investment capital. As such, I believe the real challenge is one of asset allocation–and particularly a question of risk-adjusted returns. In all legitimacy, with the state’s real estate market performing the way it has since the “financial crisis,” it is hard to argue that very much money should be flowing elsewhere, especially for skilled real estate investors who are highly capable of generating strong returns with low risk profiles and who like regular income streams. However, it only requires that we turn back to clock to early 2007 to realize that, as a state, we are setting ourselves up again for the next real estate crash (when, suddenly, that low risk profile with regular income returns completely flips on its head). Hence, are we really doing enough to sufficiently diversify our economy, and even our individual portfolios, away from that concentrated cyclicality? This prevailing investment trend not only has implications on investment returns when markets don’t cooperate but can also lead to huge negative societal implications to our communities as well.
Furthermore, we suffer from a “chicken and egg” scenario as a start-up ecosystem. Highly successful exits of venture backed companies, particularly a series of them in short order, tend to create a virtuous cycle of future investment, but unfortunately you need to properly support your early stage ecosystem for a period of time in order for them to stay local through those successful exits. We only need to review the recent experience of one of our local entrepreneurs who was told by a West Coast VC during a pitch competition that if they wanted to be successful, they needed to leave Florida, to really understand the challenge we face. Founders need to be properly funded, properly advised, and properly supported in order to turn their great ideas into great businesses. If they can’t get the capital and support they need locally, then the industrious and highly motivated entrepreneurs will travel elsewhere to get it, each time creating the risk that the most attractive and highest potential entrepreneurial companies will leave our community to seal the deal for themselves. As an early stage VC firm, Kirenaga has invested nearly $5 million dollars into local companies in the last three years, and we ended up raising almost 90% of that capital from outside of Florida because we couldn’t get sufficient local investment, with majority of it coming from the states you would expect – New York, Connecticut, Massachusetts, Illinois, and California.
Author Joseph Sugarman once wrote, “Each problem has a hidden opportunity so powerful that it literally dwarfs the problem. The greatest success stories were created by people who recognized a problem and turned it into an opportunity.” When my business partner, David Scalzo, and I came down to Florida in March of 2015 for our first Kirenaga Strategic Retreat, we very clearly saw what was happening in this community (which my wife and I had left back in 1995 after we separated from the Navy) and were blown away by the potential of what this community could become. While we could see the problems, all we honestly wanted to talk about and strategize about was the opportunity and the different ways to unlock it. Literally over that one week, we made it one of our missions to find, organize, motivate, and support like-minded people to take this ‘problem’ and turn it into a tremendous ‘opportunity’, one that becomes a distinguishing strength for this state, for the Central Florida region, and specifically for our hometown of Orlando. As a show of commitment to that vision, I put my house up for sale in CT and moved down here before the 2015-2016 school year, so my wife and I could enroll our children in school here. I also started actively engaging with folks from this community, many of whom I found really did share the same vision, which is how I ended up on the Board at StarterStudio.
If what you’ve read here in anyway resonates with you, then I’m asking for your help. As an ecosystem, we don’t actually need a lot, certainly not by Silicon Valley standards, to transform our existing, but largely unassembled, LEGO blocks into a masterbuilt piece of art, but we do need more momentum than we have now to get this virtuous machine rolling. If you have the business experience, commit some time to coach an up and coming entrepreneur. If you have great investment insight, volunteer to judge a pitch competition and help our entrepreneurs refine their story. If you have the philanthropic interest and means, consider sponsoring programs like StarterStudio (even if it’s just in a small way). And most importantly, if you have the investment capital, please consider making some early-stage investments that are meaningful enough to keep our local entrepreneurs and their world-changing ideas right here in our community. The investment return of early-stage venture capital, as an asset class, is very attractive in its own right, but the impact that successful business development can have on our community is priceless.