Capital Poor, Aspiration Rich

By: Dean Anderson

OKC Business

Friends, families and fools.

In a state that's glaringly venture capital poor, it's how the majority of startup businesses in Oklahoma are funded.

Entrepreneurs say venture capital is nowhere in the Sooner State. Conversely, venture capitalists blame poor business models and the absence of quality start-up management teams as the reason money isn’t flowing more freely.

A self-described entrepreneur, Scott Klososky found venture capital for thee companies he built, Paragraph, Webcasts.com and Critical Technologies. He says the idea is important, but the execution to investors is paramount.

“It’s extremely hard,” Klososky said of winning over venture capitalist.” “It’s a very specific game. There are very specific rules. There is no one that teaches you how to play the game. You learn by playing and failing at it a couple times.”

Toni Weinmeister has seen many hopeless searches for venture capital money.

As the director of marketing and public relations for the Edmond Economic Development Authority, Weinmeister says the majority of entrepreneurs don’t truly understand the game or what venture capital is all about.

“They ask for grant money,” Weinmeister said of those who walk into her office.

Locally, cities have had successes and failures relying on venture capital to attract and retain business and industry.

Don Wood, director of the Norman Economic Development Coalition said venture capital isn't really an option to get businesses to settle in the state's third-largest city.

"I don't think you ever have enough venture capital, Wood said. "The situation we have today is there is probably more venture capital available than there has been but it still is a buyer's market. They can pick and choose and take only the biggest and best."

Weinmeister a said Edmond has had some success using venture capital, largely because it uses its own venture capital group.

"I'd like to think we do a good job of attracting business here," Weinmeister said, nothing, however, the capital available was still a far cry from the amount needed.

While entrepreneurs and development authorities agree the venture capital firms have every right to cherry pick only the best and brightest ideas, venture capitalists say, in their line of work, they have too be very careful if they want to stay around for very long.

John Frick, partners at Chisholm Private Capital Partners LLC, the state's largest venture capital firm, pays as much attentions to who is minding the store as to what the store is selling before committing his resources.

"This is a difficult area to be a venture capitalist in, "Frick said. "There aren't enough venture capitalists and there aren't many experienced start-up management teams as you would hope."

Wood agrees.

"The venture capital people look at the idea and the concept and that's maybe 25 percent of the attraction," he said. "Seventy-five percent of the attraction is the team. Have they done this before? What have they done in this industry? We have people with good ideas, but we haven't had that many start-up companies that have gone from an idea all the way through to an exit strategy."

When it comes to venture capital, Greg Main says the state historically has dome a lousy job of bringing it in. He should know, it was his job from 1991-1994 as the state commerce secretary.

Now the presidential and chief executive of the not-for-profit venture capital corporation i2E, Main describes the Nineties as the "dark ages" for venture capital in Oklahoma. He attempted to bring more capital in to the state but his efforts stalled.

"It's been through an interesting cycle, Main said. " Back then, there were no venture capital funds in the state. Oklahoma is still capital poor. Despite all those efforts we still don't have good solid venture capital players, but we’ve been relatively successful the last fives year at attracting venture capital money from out of state. The slack has been taken up by angel investors.”

Meloyde Blancett-Scott, deputy director at the Oklahoma Department of Commerce, said no numbers to gauge the amount of venture capital activity in the state are currently available.

However, the National Venture Capital Association represents more than 400 venture capital and private equity firms nationwide and has a keen grasp of the picture nationally.

In 2000, the association reported that venture capitalists invested more than $100 billion into more than 5,000 U.S.-based entrepreneurial companies.

Pricewaterhouse Coopers and Thomson Venture Economics also tracks venture deals and found that in the year preceding 911 the average venture capital deal amounted to $1.93 million.

In 2000, the NVCA reported more than 3,000 deals were backed by venture capital with more than $2 billion changing hands. In2004, more than 2,800 deals were reported with roughly the same amount of money finding its way into the hands of businesses people.

And, according to recently released data from the NVCA for the first quarter of 2005, disclosed valuations for venture-backed mergers and acquisitions again were at pre-911 levels.

As for Oklahoma, Main says, during the last five years about $220 million in venture capital has been invested in Oklahoma.

The rest is up to the angels, or private investors that choose to invest in new businesses on their own.

“Seed capital is the challenge,” Main said. “I Think inevitable the state is going to have to step up. I think the state need to lead. I think there are foundations that are interested and some private individuals that will participate.

“Is you put in $15 (million) to $20 million in seed money, that could fund 35 to 40 start-ups,” he said.

Klososky said Oklahoma could model other states to help attract capital.

The state’s retirement fund could be used to float money that would attract more venture capitalists.

“Basically you have create the right kind of climate to make it good, “ Klososky said. “On the other end of the spectrum, it’s the responsibility of the entrepreneur to have good products for venture capital guys to invest in. I don’t have any particular blame for the venture capital firms. I don’t think the states sets up the right climate and I don’t think there are enough entrepreneurs that have enough experience in obtaining that money.”

Working smarter may be the answer, according to Jeff Davis with Acorn Growth Companies, a pre-venture capital organization.

“The most important thing we need to do in Oklahoma, and many recognize this already and more and more recognize it everyday - we need to recognize where our strengths are,” Davis said. “We need to build upon the strengths we have in our economy. We don’t have to spend years and millions and millions of dollars building our aerospace economy – we’re already a world leader.

“The state needs to focus on what it is today and leverage that to its full potential.” Once that is done, Main agrees, believes capital will follow sound business models.

“What they have to understand is they have two challenges in front of them, “ Main said of start-ups. “The first is to create a business and a product. The second is to market their company to investors. They have to think about marketing their company to investors just like they have to market their products to customers.”