The hole in the middle of venture capital

I regularly hear people complain that our region lacks venture capital. Last week I asked members of our entrepreneurial community about this perceived funding gap and what they thought we should do about it.

The first thing I learned was that the venture capital funding gap was most profoundly felt when a start-up needed capital to accelerate its climb towards success, what I’ll call “acceleration capital.” The entrepreneurs pointed to many start-ups successfully finding their initial risk capital from friends and families, or smaller venture funds, and raising the first $250,000 to $1 million necessary to get started. They also reminded me of the many innovative companies in our region that have raised hundreds of millions of dollars of venture capital to fund business expansion. They all agreed acceleration venture capital was the hardest to find.

Some thought our start-ups were not perceived as compelling in comparison to those in other regions, so that acceleration capital went elsewhere. Our region didn’t promote itself well, didn’t have a culture of risk taking, or suffered from a heavy focus on service-business models, were each identified by entrepreneurs as potential causes of this competitive disadvantage.

Others didn’t see it as an issue relating to our supply of compelling companies. Ed Barrientos, a long-time angel investor and chief executive of Brazen Technologies, told me he felt “the number of viable start-ups has been relatively constant for the last 15 years.” He thought that the perceived funding void was just a function of “signal to noise” because more companies were starting here than previously, so that there were more businesses competing for the same pool of capital.

Entrepreneurs who had been investors provided the perspective that the acceleration funding gap was a national problem. Gene Riechers, a successful venture investor and former technology executive, pointed to a national consolidation of the venture industry into a smaller number of large funds. This consolidation has forced the venture industry to concentrate on deals that can put a large amount of capital to work quickly – making acceleration deals burdensome and unattractive.

Riechers cautioned against waiting for new VC funds to be raised that would focus on acceleration capital because the industry trends that led to consolidation were likely to continue for a number of years. His advice was to look for acceleration capital elsewhere.

But where?

A few entrepreneurs thought that the region’s wealthy would be a good place to start. Ben Foster, a business mentor and serial entrepreneur, felt that a regional effort in educating local wealth managers and millionaires on the investment opportunities that start-ups present could create new sources of acceleration capital.

Others thought that greater integration with larger regional businesses was the best path – customer revenue could provide growth funding. An example was James Quigley, founder of GoCanvas, an app technology company, who would like to see the business community “engage in the ecosystem and invest.”

Naturally, people raised the role of government in solving the problem, although not as a direct investor. Mirza Baig, a partner in Aldrich Capital and an investor in start-ups, thought state governments should look to trigger acceleration venture capital through economic and tax incentives. Others pointed to the federal government as a source of research-and-development funding that could be leveraged to accelerate high tech companies.

A few also asked whether we should be worrying about venture capital funding to fill this void at all. Mary Tucker, chief executive of UPIC Health, a health care start-up, pointed to the growing number of investors looking to make socially impactful investments, adding that “perhaps the answer is not to focus on the doughnut hole – I’m squarely in it right now – but rather expand and build on social VCs in the region.”

Clearly, we have an issue that is unlikely to go away. I think it’s time to take an entrepreneur’s approach to solving the problem. We’ve identified some potential solutions. Let’s pick one and get started.

 

 

 

 

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