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Pennsylvania joins states seeding tech-friendly VC firms

With nearly half of VC funds ending up in California, other states are trying to help spawn and keep local tech companies.

Pennsylvania is feeding $29.5 million to venture capital funds to help spawn tech companies in the state, the governor announced Friday.

Pennsylvania's PA Venture Capital Investment Fund will provide funding to VC firms that will invest in local start-ups. Pennsylvania is the latest state to use this so-called fund-of-funds approach to bolster regional economic development. Maryland, for example, has its Technology Development Corp. (TEDCO), while the state of Oklahoma has the Oklahoma Capital Investment Board.

"Making investments that will help grow Pennsylvania's technology industry will secure our competitive place in the global marketplace, while creating new opportunities and supporting the revitalization of our towns and cities," Pennsylvania Governor Edward Rendell said in a statement.

The PA Venture Capital Investment Fund, a $60 million fund, has distributed nearly half of its investment among seven VC funds focusing on tech investments.

PA Venture invested $5 million into the Draper Triangle Venture II LLC fund, for example. That fund focuses on start-ups in such areas as information technology, automation technology, nanotechnology and educational technology.

Another $3 million was invested in the EnerTech Capital Partners III LP for companies in the energy and power industries. And a $2.5 million investment went to the Blue Hill Investment Partners LP for start-ups in advanced energy such as renewable energy.

Pennsylvania, as well as a number of states, find it can be easier to distribute the funds to VC firms, who are adept at culling through business plans and allocating capital, said George Lipper, editor of the National Association of Seed and Venture Funds' NetNews publication.

"Many states began doing this because they found their companies couldn't compete. Nearly half of VC money ends up in California," Lipper said. "It's a defensive move and a measure to protect their investment."

Pennsylvania is a prime example. The state operates economic development programs such as its Ben Franklin Partners and Life Science Greenhouses to serve as an incubator for companies. However, as those companies "graduate" from the programs, it's often been difficult for them to find additional funding.

This additional source of funding was especially needed during the market's downturn, when VC funding dried up for a number of young companies. That commitment from the states is still needed, even as the investment climate improves, said Lipper.

"The states are not likely to reduce their level of involvement," Lipper said. "They want to preserve the work that comes out of their research parks and universities."

Colleges and research parks often spawn technologies that serve as the core for creating new companies, and hence economic growth in a region, he noted.