Innovation Works and EY Detail Pittsburgh Tech Investment Report

Transcription: 

Okay, so good afternoon, everyone, it might be a rainy day in Pittsburgh. But that doesn't stop us from having great guests and talking about really important things. And today is another good example of that. In a moment, I will introduce our friends, Rick, Rich lunak and Leon Hoffman in a moment, but let's just talk about just some housekeeping. We'll get that out of the way. So Huntington bank has been a partner with us right from the onset, if you don't know them, they are very active in the small business community, but they're also very active across our community, civically minded, very engaged, and always working to make sure that they can do whatever they can to take this region and put it in the limelight. So reach out to them, if you don't know them. They've been great partners. And Jonathan kersting is somewhere on here. And we were reminiscing yesterday, when we used to do a show, right? live in the communities in the banking communities, and talk to people who are actually on the street and in the tech community. So we hope that we'll get back to that in the fall. And Huntington has been an amazing partner 40 by 80 is our wholly owned subsidiary of the Pittsburgh tech Council, the 501. c three is our charitable arm. It's the longitude and latitude Pittsburgh, and we work on things that focus on workforce development, particularly, you're going to hear about apprenticeships and different ways of people getting into the workforce and making sure that we're not leaving people behind, as well as supporting entrepreneurs. So we this was an opportunity for you to listen, this is all about our guests today, this is not an opportunity for you to sell your wares. This is not an opportunity to shout out about your company. We have plenty of options for that. We have muted your microphones and Jonathan kersting, who I mentioned earlier, he is here he's going to keep an eye on the question. So I don't want to waste a minute longer. And I want to bring our two guests, Leon Hoffman, from Ernst and Young and he is the managing director of the region here. Is that correct? Well,

I am the managing partner of the Pittsburgh Office.

And he has just been a great guy to the tech community. And he is Ernst and Young has actually worked with innovation works. And we have rich lunette who is president and CEO of innovation works known to many people as IWC. So, first of all, what I like to do is just ask both of you tell us just quickly about your journey. Who are you? How are you? How are you doing during, during COVID? And I can start with rich, you were on the show, at one point during COVID. I know that for sure. And we've checked in a few times, how are you doing? I mean, what's, what's the pulse?

Yeah. So, you know, it's been a tough year, I think for everybody. And we're all getting a little bit of cabin fever. But hopefully there's a there's a bit of the end in sight. At IW. We are we are just so busy. You know, in addition to this report, we're releasing our annual community report and we have a bunch of higher profile events and cluding an AI and robotics venture fair a the the health care safety challenge with the Jewish health care Foundation, a reverse pitch competition with investors and regional startups. So we've been really busy. And I I you know, despite the impacts of COVID-19 on our economy, I remain really bullish about the momentum in our startup community here.

Did you mention the hardware cup?

Yeah, and the hardware cup we we have a bunch of different challenges. So it moved from I would say less of a region by region focused competition to more of a sector focused competition. And over the next month, I think we have four or five of the the vertical focused competitions. In fact, we had, we had one yesterday afternoon, and around consumer products, I think. And then we have one in the life sciences and a few other sectors coming up. So keep your eyes open for those as well.

They I'm keeping track of you. work. Thank you. Thank you for that. So Leon, welcome. Thank you for joining us today. Tell us a little bit about yourself and how you're you're actually doing during this this interesting time.

Thanks, Audrey and thanks for the opportunity to join today. I would echo Rich's sentiments. It's obviously been a tough year. I would say that. From an optimism standpoint. It's been a while since I've been this optimistic. about the coming out on the other end. You know, I think, for my firm, we're a professional services firm, you know us as a audit and tax firm, we do consulting work as well, we've been able to deliver on our, on our client commitments, which has just been a testament to our people. But you see, I'm still at home, right? And I'm sure many of you are. So we're, we're definitely a culture that likes to be together in person. So we are looking forward to those days. And we've had to change a lot this year, one of our marquee programs, the entrepreneur of the year program, which typically is very much in person, and just a great showcase of Pittsburgh and the surrounding area, in terms of what's happening in the entrepreneurial space had to go virtual this year. So a lot of changes, we feel like we've persevered. And I'm looking forward to coming out here on the other end. That's great.

So listen, you know, let's, let's get to some of what you just released, you released a report, and I know that we put it in the chat, you released a report, I believe, rich, this is the ninth year that you've released this report. And there's there's a lot of information in there. So I don't know how either, if you want to sort of, you know, address where you want to start, what are some of the key findings? You know, we have a bunch of questions, but how about like setting the stage? You've been enriched? You've been involved in this report for nine years yourself as well?

Yeah, it's, um, you know, it's it's data that we had tried to track for many years at innovation works just inform our strategies of how to help the region's entrepreneurial community. And so, you know, we we want to know, where people are raising follow on funding where the gaps are, and how we could potentially do outreach to help drive an increase in angel investing or corporate or VC investing and geographically where all those dollars are coming from and so it Why does has always had such a strong commitment with their Entrepreneur of the Year awards, and obviously, tremendous rigor and analytics in the work that they do that, that they just became a natural partner. And I have to give such a huge shout out to them this year, as you know, the report had had generally been a PDF document that we could print or someone could read, read, but their team just did a terrific job making it an interactive, this automated, you can drill into the data. So there, you know, I can't say enough for what they've added to this process and been terrific partners over the years.

It's amazing what we can do at home, right?

Yeah. And I

yeah. And I have joked it only took a global pandemic for us to bring this into the model.

So what what do you think like, what do you think at the high level? What have you learned? And then we're going to drill into some of the data because there's, there's a story there. So you know, if you want to just talk about this 910 year, framework, what, what has this decade brought, what have you learned?

Yeah, I'm happy to start and rich, can can jump in here. And, yeah, it has been nine years. And we're obviously very proud to partner with the team at rich, or at the innovation works rich and his whole team. And there's a lot of people that that create this report. So I want to give them a thank you here, too. But you know, I think, you know, I look at it, I step back. And Richard, I've talked about this, whenever we were preparing the 2020 report last year, there was just a tremendous amount of uncertainty, right. And I think if you would have asked us at the time, how we thought this report would have looked like 12 months from now, we would have signed up for this all day, every day. Right? Because the reality was, was there was just so much uncertainty about business conditions, you know, the extent of the pandemic, what impact that would have on capital, right. I mean, that's obviously a big part of what you're seeing here. And I think what we learned is that those first few months were rough. There was no, no, no question about it. I think capital got tighter, for sure. But obviously, there's been a great deal of stimulus across the across the globe that has helped free up capital. And I think what we saw from a training perspective, is the 2020 was a was a great here. nearly a billion dollars of investment, which is the second highest since we've been looking at this in a in a global pandemic. So, you know, I think that would be my one broad observation that I think we should be proud of these results in a year. That was really a challenging year for, you know, for everybody by all accounts.

There were a bunch of companies right which the closed right at the onset of the shutdown.

Yeah, they were and then as you know, things sort of fell off the cliff a little bit in the second quarter venture funds were more likely to do follow on investments and worry about their existing portfolio companies versus looking at new deals. And angel investors, for example, saw a lot of their portfolios, and on in the public markets and things like that drop in, we're less likely to do investment. So it was a really bad time, where term sheets were withdrawn and the 11th hour for startup companies and everybody was looking at, you know, all the impacts that you have in terms of revenues, and your supply chains and other things being impacted. We're still feeling you know, the effects of that. And I, you know, we shouldn't be Pollyanna. But like, Leon said, it's, it's remarkable. And it just shows the tenacity of our region's entrepreneurs and the vibrancy to the fact that even with that, we were able to post the second best year of last decade that we've, since we've been looking at that. And the only other big sort of trend and takeaway I wanted to maybe punch home is the 10 year trend is undone, undeniably positive and showing growth for our region. And, you know, obviously, there there are peaks and valleys in any given year, and the numbers may go up and down. But if you look at the 10 year trend, both in terms of number of deals and the dollars, we're showing a great trajectory, and I am bullish about the momentum we have here.

So let can we dive into some of the trends now that now that you've sort of told the macro? Let's talk, let's try and drill in a little bit, because there is data in there, that's that somewhat compelling? So can we can we talk about that? Can you want to isolate it by the categories that you've broken it out? The reporting? I mean, because, you know, obviously, you went back, and you did robotics and hardware, you've done Life Sciences consistently software, which is a wide, you know, which is a wide bucket. And, you know, life sciences. So, talk, talk a little bit about some of those trends, because I like the way you've broken it out that you have real dollars, and then you have unique number of companies.

Yeah. We on? You want to start and I guess?

Yeah, I do. I think, obviously, the automation and robotics sector has gotten a ton of publicity late and very well deserved, frankly, I mean, there's been a lot of big big transactions, bigger transactions, then, you know, we've seen in that I can remember, quite frankly, in terms of dollars invested. If you think about Aurora, excuse me, Argo, just over the last few years, I mean, these these, these have just been tremendous, tremendous deals. So when you look at the data, clearly, from the dollars funded perspective, that sector gets the majority of the funding, I think there's also an under, under turn there under current there, that the you know, the life sciences and software sector still remain incredibly strong. And in fact, in 2020, the dollars raised by those companies was higher than 2019. Obviously, smaller, smaller, but nonetheless very important, right, and just just the overall ecosystem, but when you look at when you look at the the AI and robotics sector, those companies are big, big companies, and those companies are doing some fantastic things. And, you know, I I think the future is very bright for those companies. And the future is very bright for those companies here in Pittsburgh, which is, which is fantastic.

Yeah, yeah, go on. And I was just gonna say from a deal. So if you look at those sectors, by a percentage of the deals, not dollars, software, and the life sciences, and robotics and AI have all grown in that period of time. And, you know, we have a pretty good balance. In fact, if you if you look at, say the top 10 deals, they're pretty evenly divided among Life Sciences, software, and robotics. And obviously, some of those rounds are bigger than others. But the other really encouraging thing is, you know, it wasn't that long ago where you could probably count on one hand, the number of companies that were raising rounds larger than say 15 or $20 million dollars and that list of growth equity, investments in regional companies has has really expanded and tended to drive our total dollars for the region, North work.

So, you know, you've been, you've kept your eye on this rich and obviously same with you, Leon, the number of or the percentage of companies and VCs that invest in Pittsburgh that are outside of Pittsburgh, how are we doing, I like the way you have a map on there, and they put an international map on one slide, and you can drill in and see who you knew some investors are. So doing that way. So you did like a concentric circles around Pittsburgh, and then the Midwest and then went out and then went to the west coast,

what percent, over the last five years, we've had over 300 investors from around the world investing into local startup companies. And in 20 2042 of those were first time investors in Pittsburgh, ah, and that is really key, because what that means is, you now have 42 larger funds, with a partner that's regularly, you know, in a non COVID, time would probably be coming to town for board meetings on a quarterly, if not monthly basis to work with those companies. And his shut up propensity or interest in Pittsburgh area deals. And so it's a lot easier to introduce those investors into additional deals. And, you know, as an example, you know, Bain Capital years ago, created a lot of news when they invested in precision therapeutics, and it wasn't too long before they, they invested in led around in Dynamics, and then for moms, and, you know, suddenly they they have a big portfolio in the Pittsburgh region. And I think, you know, my hope is that we have an opportunity with a lot of these first time investors in 2020, to hopefully show them what our region has to offer, and, you know, build off of it and secure more and more of those dollars.

Yeah, that's, that's a good number. That's a good number. I don't know how that is compared over time, but definitely percentage wise, that's a good number. It's just it, hopefully, it becomes contagious. But, um, you know, one thing that I want to, I want to say, and you guys can refute me on this or not, is that it seems with the big investments in some of these companies that Leon talked about, like the robotics companies, and listen, we've been doing robotics for almost four decades. So, you know, we're finally at the place where people are seeing this commercialization and the translational, you know, research get into the into the world. Do you think that this could be an inflection point in terms of maybe big bigger companies having different signs on our on our city skyline? You know, because it's, you know, it's probably time for us to have a little bit of presence with some of these new, you know, these newer companies, I'm excited by it. That's what I extract from it. I extract that there's big money. And and then my second part of the question, will be corporate investments, because I see they've, I've seen a change, and your data reinforces the change in corporate and strategic investment. So I feel like this is happening. And it's really based on just the work that we do at the tech Council, because we can extract patterns. What do you both think about that?

I am excited as well, right? I mean, I think you look at it, and it's clearly me, you think about to your point, Adrienne, it's been for decades, you know, we've we have the great benefit of being in the backyard of some absolutely wonderful university, CMU and Pitt just to name a couple that really have spurred that innovation. And, you know, again, when I look at when I look at this, that would be a fantastic outcome, right, is if we're ultimately viewed as kind of a robotics hub, so to speak, right, which I think we already are, it's just getting one of these companies to whether it's go public, or whether it's continue to get deeper roots, right, and to your point, get their name up on top of a building. And I think that they will come I, if I knew when I would, I wouldn't be doing this, but I do think that they will come.

I think the trends point to it. That's all I'm saying. I'm not saying that, you know, trends follow a certain trajectory, but it's a 10 year slice. They talking about that's that's really good. So what about this corporate, you can see corporate and particularly before COVID. Right, I just look at the data, the slide off of COVID You know, I'm just yeah,

so they increase in corporate dollars, I would say, has been a big driver of our local numbers and in some ways is fairly consistent with a national trend. towards that, that is, in fact, the fastest growing segment of venture capital, nationally, and part of the drivers are, you know, I think are fairly obvious is, you know, where, you know, decades ago, right companies would just naturally invest, you know, 15% of their revenues in internal r&d and look for that, for innovation. More and more of those, those investments have lowered and they look more towards open innovation and, and m&a and other types of activities to, to drive innovation and top line growth. And, and a lot of that now is happening in the form of startup investments and corporate venture funds. And they can either be set up on balance sheet or off balance sheet. But, you know, here locally, you've seen companies like Ford and VW and Audi and Delphi, invest heavily, for example, in the autonomous vehicle space, but then also into, you know, a lot of regional startups, and that goes across the board, whether it's, you know, Smith and Nephew in the life sciences, setting up roots here, or, you know, Amazon having with their Alexa fund, having invested in a number of local companies and acquiring some of our local startups. So it's, I think it's a, it's a great trend, and, and just along those lines, you know, the fact that we have so many corporate anchors here now, as a part of either those investments, or acquisitions, I think, is a big driver in our regional tech ecosystem as well.

So what about let's, what about IPOs? I mean, because we didn't strictly have not have not, you know, you can Salt Lake City, a smaller place, and they really had a lot of activity. So you think that matters?

I was gonna say, yeah, the numbers are, the numbers are the numbers. We haven't had IPO activity in some time. You know, I I do think, again, if you look at the trends, IPOs don't happen overnight. I think, you know, one of the trends we didn't talk about was the exit proceeds. And if you look at if you look at that data, we've had close to $15 billion of exit proceeds. Now granted that none of those were IPOs. And $15 billion was over the last nine years, but $15 billion of exit proceeds, about 4 billion of that was in 2020. So IPOs are big transactions. And, you know, the trend there that you're seeing, particularly with the 4 billion of exit proceeds in 2020, I think is a really positive sign that, you know, we are tracking towards that. Right, in terms of in terms of IPO. And I do think it's, you know, I do think it's important. I think it's important, just, obviously public companies have back office functions and talent that other companies don't need. So I think establishing that here in this region, I think is is the is the next step for sure.

Yeah, I think I think that fills the gap for some of the developmental needs of startups, right? Because we don't we don't sit with that nicely in our region, even though it's growing. It's definitely growing and you're starting to see that kind of traction. So what what are some of the most notable deals that you think that maybe, you know, I can put you on the spot on? And you know, who might IPO first, you know, is there anything you want to sort of play with, you know, I like to bet when I know I win, but

I agree. I'm looking for another company like Duolingo to appear on a Saturday Night Live skit. I think that Yeah,

they already did that. Hey, someone else. Okay. But

if you look at some of our bigger rounds in 2020, you had robotics companies like Aurora and see grid raised significant rounds, you had stalwarts in the software space like Duolingo. And Nish raised really big rounds. Both of them are very fast growing and then life science companies like pepto logics and cannot bio sciences. So, you know, and you could make a case almost for any one of those that, you know, the these are companies with enormous market opportunities that are growing quickly, and have that kind of IPO potential. It'll happen. That's a very high bar. But keep in mind, I hope it happens. Because I think when you look at some of the other big startup and entrepreneurial communities nationally, some of the big drivers have been when you have those astronomical successes that just create their own universe. And whether it's, you know, Amazon and Microsoft in Seattle, or Dale in Austin, or a bunch of other examples like that. They, they they really drive things. So. I, I hope it happens tonight. I think we have some legitimate contenders for for that.

I mean, I think the biggest thing for that is prosperity and wealth for the people that are here in Pittsburgh. And then it just starts to grow exponentially. And that's the piece that we've been waiting for. Right for that kind of, you know, excitement, and we have had people who have had some good exits, right, that you know, and they stay in the region. And they are trying to start up new funds even right, so what about some of the new proliferation of some local local funds? That doesn't mean that they're just gonna have to invest local, but, you know, there seems to be this post COVID, although not post COVID, COVID kind of surge in investments. We have them on our show, we've talked to them. There's a lot of excitement around that. What's your reaction to all that? Yeah, I

think, all all, all positive. Right. I think, you know, one of the things if you look at in our report, we track closely that what we call the dry powder in terms of the amount of funding available here in the market. And that's been something that has trended down right over the last last few years. But posts are report post 1231 2020. It's been some great activity there. Right. And you can you right after you had to get an E and black tech nation ventures on, which is really good, some fantastic things.

Yeah, exactly.

And I mean, these funds are backed by folks that have a lot of experience and have had success before. Right. And I think that's a very, very important thing. Because, you know, that's those sorts of funds will will, will do well, right. And in having that capital available here in the region is is great for our startup companies, for sure.

So what can we talk about specs? And just tell everyone beyond you want to talk about that? Yeah, sure. Offering definition of a spec.

Yeah, so SPAC is a is incredibly hot investment vehicle right now and special purpose acquisition company. And essentially, it's a way I think about it's almost a reverse merger. So you have a group of sponsors that go out raise capital, through a publicly traded traded stock. So they they raised the capital before they even know what their operations are going to be. Right. So they say they raised $300 million, and they have a time period. So essentially go out and acquire a company with that $300 million to then be the actual operating operating company go forward. Just a little tidbits facts this year already, in terms of the amount raised for spax has exceeded all of last year, two and a half months, enter. So we're already Over and out. absolutely incredible. And where I think this is important to the region is as you see these facts, making a lot of just because given their structure, it's it's easier to make smaller companies public, it's less onerous. It's, it's just requires less financial information, so on so forth. So I think this is an area that I'm watching closely. I know there's a lot of things percolating even here in the Pittsburgh, Pittsburgh market. And although it may not be a traditional IPO, if a company is acquired by us back, they become a public company, which back to our conversation before.

Thanks for the area. So

I think it might be a new tool. I think I you know, I think that's what what people are saying and the amount of inbound inquiries I've had on sfax alone makes me think it's just astronomical opportunity. So what do you think that I fail to ask you that you want us to get your point across on Is there anything that you think you want to wrap up and say first of all, definitely become an entrepreneur? You know, we can we can go we can go through that rich, but what what do you think that maybe I overlooked and you want to make sure that people understand what's happening? Is there anything

um, So I, you know, to me, it's probably those longer term trends, that that are really positive for the region. The other thing is, you know, one thing we didn't note that I think was meaningful is, I'll give a shout out to the Commonwealth of Pennsylvania when when the, when the pandemic hit, there were a lot of programs introduced to help small businesses, but for a number of reasons, they didn't work as well, for startups, because of the way, you know, startups can't serve as debt and aren't cashflow positive and things like that. So the state stepped in and provided support to the state's venture community, and as well as partners like the Ben Franklin technology partners, and that really helped, you know, close to 60 Regional companies through that downturn and help them extend their runway and cash payroll. So kudos to them. And and, you know, I just want to give a shout out to the state for helping to support our region's companies.

Beyond Do you have any final words,

I would just put a plug in if, if you're in our report, don't don't skip the section what people are saying, I think it's really cool to see what other venture capital firms are saying, as well as local startups. I'm a pittsburgher, all my life. And when I see things like hard work is in our DNA. And the quality of life here is fantastic. It just puts a smile on my face. So I would just end on that note that it's well worth a couple minutes of reading those quotes. So

that's great. So go to the report and put the link out. It's easy to find, I think it's on is it in the IWC site, as well as the E ny site. We put it out there. So if you have any problems with it, just let us know. But the report is out there. It's interactive. They put some animation in as well. You can drill down and play around with it. And I want to thank you both for taking the time and having a discussion about all these topics. Really appreciate the work. And I know Jonathan's on that we didn't have any questions. But, Jonathan, what's on for tomorrow?

We're switching gears up tomorrow. It's all about eating locally via bar Marco and footprint farms. Oh, that's

nice. That's nice restaurants. Yes. And, and farm to table. Excellent. So stay safe, everyone. Enjoy the day. Thank you so much for tuning in. And thank you, Leon. Mitch. Thanks, Audrey.

My pleasure. Take care. Take care.

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