A new study released today challenges the misperception that taking on Out-of-State capital drives more attractive valuations and better business outcomes for founders. The study, titled “Is all Investment Capital the Same Shade of Green?,” draws on data from the Atlanta Technology Development Center (“ATDC”) to understand the deal dynamics and outcomes of companies in the ATDC incubator program that accepted capital from In-State versus Out-of-State equity providers from 2014 to 2019. In the study, “In-State” represents companies that included investors that reside in the state of Georgia, and “Out-of-State” represents companies that raised capital entirely from investors based outside of Georgia.
Specifically, the analysis looked at eight factors: (1) initial check size; (2) initial valuation; (3) dilution (resulting from 1 and 2); (4) impact on operating pace; (5) impact on follow-on capital raises; (6) impact on business outcomes; (7) impact on long-term value creation; and (8) impact on expected equity value (incorporating 3,6, and 7).
If the current market perception is that taking on Out-of-State investors drives more attractive valuations and better business outcomes for founders, the study found little evidence to support it. The study revealed that founders who accepted local capital:
- Received initial check sizes that were approximately half the size
- Received initial valuations that were approximately half the valuation
- With (1) and (2) in concert, experienced less initial dilution
- Executed at a slower pace of cash burn
- Raised successive rounds of capital more often
- Achieved exits more frequently and went out of business less frequently
- Reached similar enterprise values over time
- Saw significantly greater expected equity value
In short, the data studied led to the following conclusions:
The benefits to founders of taking In-State capital are clear and should be considered by anyone embarking on a capital raise; and, founders who take Out-of-State capital give up more of their companies and assume meaningfully greater risk of business failure for no upside (on average).
The stated goal in conducting this research was simply to see if Out-of-State capital was truly “greener.” Based on the data analyzed, at least for those companies from ATDC, it is not. While some startups may be able to secure a larger round at a higher valuation from Out-of-State investors, the consequences of that choice may put them at greater risk of failure.
The findings support our theory that early operational support as a business scales allows the business to reach milestones that warrant additional investment. Out-of-State capital typically takes a more “scattershot” approach with its initial allocation and is not close to the progress the business has made outside of your standard metrics, dictating that it won’t follow on if a business struggles to scale early on. Alternatively, In-State capital investors seem to take a more measured approach, investing smaller rounds of capital, staying close to their investments, and following on as they make progress.
Access the full report for details of the study, including its methodology, dataset, and other findings.
Also published here.