Flyover States! Minnesota, Iowa, Oklahoma, much of the Midwest and even
the non-urban portions of states such as Washington and Texas are frequently
called 'flyover states' by economic developers, especially those of us committed
to helping worthy entrepreneurs find the financing to launch and grow their
companies. The term was coined about a decade ago after "Money Tree
Report" statistics confirmed the increasing concentration of institutional
venture capital in Silicon Valley, Route 128, Research Triangle, Austin
and a few other places. Venture capital firms (called "VCs") raised
ever-larger funds that demanded for greater efficiency in funds deployment.
Little time was available to investigate opportunities to invest in rural
areas, so the VCs just "flew over" them.
Leaders from places experiencing neglect from this trend soon came to
appreciate they had to adjust to a new reality. This story shares some of
the creative networking building efforts and strategic adjustments made
by forward-looking leaders who recognize the need to retain the entrepreneurial
talent of their communities.
Today's investment statistics clearly show that the flyover tag still fits.
The PriceWaterhouseCoopers' 2003 Fourth Quarter MoneyTree Report confirms that Silicon Valley, New England, New York and Texas account for
more than 60 percent of the nation's total venture capital investments.
The Midwest, Northwest, Southwest, Southeast, North Central and South Central
areas of the country accounted for less than 20 percent of the total.
"Invisible" early stage capital - angel investors
But venture capital is just part of what it takes to launch startup companies.
Research by Dr. Jeffrey Sohl of the University of New Hampshire Center for
Venture Research shows that early stage capital - pre-seed, seed and angel
funding - is the driving force in starting and growing the new companies
that create tomorrow's jobs and attract new capital. There are two significant
sources of equity capital for high-growth business ventures: angels (high
net-worth investors) and institutional venture capital funds. Angels are
the older and by far, the larger source of seed capital. Importantly, angels prefer to invest in seed and startup stages of emerging entrepreneurial
ventures, usually investing in the $100,000 to $1 million range.
According to Dr. Sohl, about 400,000 early stage investors (individual
angels or groups) annually invest in at least 10 times the number of deals
as are made by venture capitalists. Before 2000, annual angel investment
dollars always exceeded total venture capitalist investments. In
peak years, angels invested more than $50 billion in over 50,000 ventures
call. Since the retrenchment of 2001, however, both angel and venture capital
investments have dropped to about the $20 billion annually. Angels, although
a relatively less visible part of total capital investments, are plainly
the driving force in financing pre-seed and seed stage deals.
Leaders in flyover states - and in communities in rural and non-metropolitan
areas - are discovering the growing importance of angels as a key source
of local capital for homegrown enterprises that can be used to energize
their local economies. Individually, angels provide critical startup capital.
And, perhaps just as importantly, angels provide even greater value as they
form into groups and clubs, bringing in-depth knowledge of tech-based industries
and significant regional and national contacts. Their help in creating new
companies with high-growth potential often attracts the next stage of funding,
regional venture capital investment.
Angel investors are excellent resources because many are entrepreneurs
who have cashed out from successful tech-based companies. An equally valuable
resource may be the local leadership, or "civic entrepreneurs,"
who work with local seed investors to expand sources of entrepreneurship
and new enterprises. They find ways to reach across institutional and geographic
boundaries to work with public, non-profit and private sectors, create a
shared vision of change for their community, and bring together key resources
to build a local knowledge-based economy.
The most important function of angel group investment is its ability
is to fill the emerging new enterprise funding gap, typically about
$500,000 to $2 million, too small for the venture capitalist, to large for
the single angel. Known as the "valley of death," this is the
equity funding usually needed to launch a company after funds from friends,
family and "fools" have been exhausted but before the company
has grown enough to be of interest to a venture capitalist. Some communities,
like Worthington, Minnesota, have formed or are working to form local seed
funds to fill the gap.
The Worthington way
Worthington, Minnesota, is a town of about 10,500 people in the state's
southwest corner. There the Worthington Regional Economic Development Corporation
(WREDC) has formed several successful partnerships that reach into Minneapolis
and surrounding states. WREDC, local business leaders and Minneapolis's
Minnesota Investment Network, Inc. (MinCorp) have set up Prairie Capital
LLC, an early-stage investment fund of about $640,000. Prairie Capital has
made about $1.2 million in investments - $530,000 from the fund and another
$700,000 from individual investors in Prairie Capital LLC.
Now the fund is in process of recapitalizing, and WREDC and Prairie Capital
LLC are seeking to attract investors from South Dakota, Iowa and Minnesota.
As a way to invite investors to participate in the new fund, WREDC held
a one-day training session on the seed investing process, produced by the
National Association of Seed and Venture Funds (NASVF). Those who attended
represented 14 Minnesota cities, four South Dakota cities and one city each
in Iowa, Nebraska and Wisconsin. Participants included 10 representatives
from venture capital/investment companies, a dozen private investors (angels),
almost as many entrepreneurs, and several representatives of university
and federal laboratory tech transfer programs interested in building the
local economy.
Their effort aims at creating a $3 million local fund that will partner
with MinCorp to make investments in the Worthington area. The fund will
be structured as a limited liability company and function like a small venture
fund. MinCorp will provide 10 percent of the fund, up to $100,000.
Worthington is typical of a new trend in which local leaders reach beyond
traditional geographic boundaries and work creatively with early stage investors
to help build local, fast-growth enterprises, generate new jobs and attract
new investment capital. Similar efforts are underway in Spokane, Washington;
Whitefish, Montana; Las Cruces, New Mexico; Shreveport, Louisiana; Fairfield,
Iowa; Tulsa, Oklahoma; Greenville, South Carolina; Morgantown, West Virginia;
Portland, Maine, and many other communities across the nation.
State-level efforts
Some states, such as Oklahoma and Washington, are increasing the availability
of early-stage capital for new companies by helping create statewide networks
of private angel funds.
The Oklahoma Technology Commercialization Center (OTCC), equipped with
incentive legislation for the formation of angel funds, helped create a
dozen, community-based $1 million to $2 million funds as LLCs. Members of
the funds get "first looks" at technologies groomed for investors
by OTCC.
The Washington Technology Center (WTC), supported by a grant from the
Economic Development Administration, is creating a statewide network of
angel groups - first, to help WTC evaluate market potential of new technologies,
and second, to provide early stage capital resources. WTC staff identify
and work with a leading businessperson (a "champion") in each
community who possesses the wealth, respect and prestige to draw other possible
investors into the network. WTC then works with a local economic development
organization to develop a network of possible investors, and establish training
activities to develop the network's investment capabilities. Then they develop
a deal flow of possible investments and work with groups formed throughout
the state.
Keep your eyes on the enterprise
Community leaders are focusing more on the enterprise as the engine that
drives a vibrant local economy. Important as they are, local institutions
that churn out advanced technology, benevolent citizens who can write large
checks, or well-endowed venture capital funds cannot by themselves create
jobs and attract outside capital. Building the vision and changing the community
culture is crucial in creating enterprises. Success comes from investors
and entrepreneurs who talk with each other about what makes the enterprise
succeed.
Fairfield, Iowa has made very good use of this principle. A community
of 10,500 located about 70 miles from the setting for the film Field
of Dreams, Fairfield is the 2003 Grassroots Award Winner from the National
Council of Small Cities. At its Web site (www.fairfieldiowa.com/fea.htm),
the Fairfield Entrepreneurs Association boasts an entrepreneurs' relocation
program, generous tax credits for investments in Iowa businesses and abundant
venture capital available from a dozen local and regional VC firms. It reports
that since 1990, more than $200 million has been invested in local companies.
The Web site is packed with potential resources for entrepreneurs and information
on cooperative efforts throughout Iowa and surrounding states.
Shreveport, Louisiana is also on this path and has started several efforts
to augment its oil industry and build a knowledge-based economy. The Biomedical
Research Foundation (BRF) recently invited investors and investment professionals
from across the state and as far away as Dallas, Oklahoma, New York and
California to participate in a seminar on seed investing produced by the
NASVF. Participants included about 30 venture capital representatives and
private investors, plus a dozen investment professionals and entrepreneurs.
Outcomes of the event include a $3 million investment from a California
venture capital firm in a local company and BRF's initiation and coordination
of a regional network of angel investors who will evaluate local technologies
for potential investment.
And the secret is…no secret
Away from the spotlight, many of the nation's communities are extending
their reach and participating successfully in regional and national early-stage
investing. They tap private sector resources such as attorneys experienced
with seed deals and expert in term sheets; high profile private investors
(super angels); venture capital companies that work with local private investors
and participate in first-round and later rounds of financing; angel investment
clubs skilled in assessing potential investments; consultants skilled in
due diligence; seed fund managers; technology associations that help promote
development of clusters, and local "cashed out" entrepreneurs
seeking new opportunities (especially those entrepreneurs cashed out of
successful technology-based companies).
They also take advantage of resources from technology commercialization
experts; university intellectual property and technology portfolio managers;
university seed and venture funds; recipients of Small Business Innovation
Research (SBIR) and other federal technology business development grants;
SBA Small Business Development Center professionals with experience in developing
tech-based companies; state-sponsored seed and venture funds and technology
commercialization programs; state and local finance authorities that work
with regional and national seed and venture capital companies, and many
more.
To enhance the process, these communities often hold seed investing
seminars as network-building interactive workshops, and forums to engage
regional civic leadership in defining the issues that affect their communities.
In addition, they facilitate initiatives to:
- form angel clubs, formal seed investment groups
and tech-based enterprise associations;
- build capacity for early-stage investment by
holding investment forums, securing due diligence support services, and
holding "Ready for the Commercial Market" technology shows; and
- support tax credits for seed investments.
Successful communities are clarifying and strengthening their visions
- and capabilities - to build local knowledge-based economies. They catalyze
the process in which investors fill the funding gap and support new tech-based
enterprises. And in the long run, they are increasing the potential for
self-sustaining investment cycles in which successful enterprises create
cashed-out entrepreneurs, who then help spawn a new generation of enterprises. |
