The economy was already faltering when a venture capitalist from New York took the reins at the Pittsburgh region’s most active startup investing agency.
The same month Ven Raju became president and CEO at Innovation Works, a North Side nonprofit, self-driving tech company Argo AI and vertical farming startup Fifth Season folded. The Pittsburgh-based companies laid off roughly a combined 800 workers in October.
Now a month and a half into his tenure as head of Innovation Works, Raju says businesses across the board will continue to feel the pinch of persistently high inflation and quantitative tightening at the Federal Reserve. But he thinks local companies could have an advantage thanks to Pittsburgh’s distance from the country’s most capital-rich markets.
“[In the] venture asset class as a whole … valuations were at an all-time high late last year. I think there was a lot of frothiness – a lot of capital going towards later-stage companies as well as early-stage companies,” Raju said in an interview with 90.5 WESA. “I think you are going to see some calibration, and that calibration will have effects that are ubiquitous … across the U.S.”
But he added, “in places like Pittsburgh, I would argue that some of the emerging markets tend to have more attractive valuation profiles where we may be less susceptible to the level of correction that may be happening on the coasts. But that remains to be seen.”
A glut of capital in coastal markets such as San Francisco and New York City increases the odds that companies are overvalued and, thus, have further to fall in a down market, Raju said. “It's essentially a supply-demand issue. [Companies with] greater access to capital [are] able to negotiate terms that may be more company-centric or company-friendly.”
But in a period of belt-tightening, he said, investors might find safer deals in Pittsburgh, where capital scarcity produces more modest valuations.
While a less favorable fundraising environment might offer benefits during an economic slowdown, local startups have long-complained that Pittsburgh does not generate enough venture capital. Raju noted that last year, the region’s tech firms drew just 2% of their funding from local investors.
“If you look at comparable burgeoning markets like the Nashvilles of the world or Philadelphias of the world or Raleigh-Durhams of the world, generally that's in the 20 to 30% realm,” he said. “So the numbers do indicate that we do have a supply issue in terms of resident capital.”
But he said Pittsburgh is on a positive trajectory. Over the last decade, funding for Pittsburgh tech companies has increased tenfold, reaching $3.6 billion last year. More than 70% of those investments took the form of initial public offerings at companies such as Aurora Innovation, Cognition Therapeutics, and Duolingo, according to a report Innovation Works and Ernst and Young published early this year.
“Success breeds success: As we see companies grow [and] scale here and have successful exits, then I think you will see more of that wealth being recycled into companies in the region,” Raju said.
He said that momentum attracted him to Pittsburgh. He became the chief investment officer at Innovation Works in July 2021. He also led the agency’s later-stage investment arm, Riverfront Ventures.
Raju has worked in venture capital and private equity for 25 years, previously holding positions in New York and London. In the two years before joining Innovation Works, he served as vice president and managing director of Northwell Ventures, the corporate venture division of New York’s largest health care provider, Northwell Health.
In Pittsburgh, Raju said, “the [startup] ecosystem has evolved quite a bit over the course of the last ten years. And I make the argument that we are perhaps at an inflection point.”
The steady rise in tech investment helps, he said. But he noted that the region also benefits from homegrown assets.
“We have world-renowned universities here. We have fantastic talent, particularly tech and scientific talent,” he said. “It is a relatively low-cost place to start and scale a business. So the confluence of that, in conjunction with external capital coming in, I think makes for a very ripe entrepreneurial and venture ecosystem.”
Funded partly by the Pennsylvania state government, Innovation Works functions as a “catalyst” for young companies so that they can eventually attract private investment, Raju said.
“We are able to participate in companies at the very early stages that perhaps a private sector investor would want to see further development or see further milestones to be able to invest in the company,” Raju said.
But critics say that inadequate public investment keeps organizations like Innovation Works from reaching their full potential to boost business formation and concomitant job creation. Raju agreed that increased state funding would help his agency to provide more comprehensive support to the businesses in its portfolio.
Even so, this fall, the nonprofit doubled the maximum amount it will invest in companies that participate in two of its three accelerator programs. Startups in the AlphaLab and AlphaLab Gear accelerators can now receive up to $100,000 in the form of a convertible note that gives Innovation Works 2% of common equity shares. The third accelerator, AlphaLab Health, had already awarded that level of investment in life sciences enterprises.
While costs have soared for entrepreneurs in the COVID-era economy, Raju said the pandemic has also helped Pittsburgh businesses by sparking a shift to remote work. Now, they can hire workers outside the region.
And Raju said, “it's forced East Coast and West Coast [venture capitalists] to look outside of their 20- or 50-mile radius. And I think that trend has been beneficial to places like Pittsburgh.”
