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The Capital Gang – What’s the state of capital in the state capital?

May 17, 1999

Lorri Montgomery with Angela D. Hill
Inside Business Monday – COVER STORY
May 17, 1999

You hear the stories every day. But every story, it seems, has a different ending.
One start-up or spin-off company announces its still-sketchy plans for the future, and a dozen investors come rattling the door, wanting to get in early in hopes of walking away with substantial profits a year later. Venture capitalists, in this story, compete like wolves; it seems there are too few investment opportunities for the money available.

Then you hear the other story. A company has devised a new product, something that seems to have a much-better-than-even chance of becoming a marketplace success.

But there’s a problem: Without an infusion of capital, the company cannot go into production. And the entrepreneurs sit with their wonderful idea, unable to make it come to life. They lament the lack of available capital and wish that they’d been fortunate enough to have been born into Silicon Valley or Northern Virginia instead of Richmond.

Which version is correct? Does Richmond have too many dollars chasing too few investment opportunities? Or are entrepreneurs going begging?

The answer, of course, is elusive. It depends, observers say, on the nature of the business involved.

A recent survey conducted by PricewaterhouseCoopers ranked Virginia sixth in the nation in the amount of venture capital raised. It said venture-capital firms spent $430 million in Virginia in 1998 – an 82 percent increase from 1997, when $235 million came into the state. But the majority of that money went to Northern Virginia, which is quickly becoming known as the Internet center of the nation.

So is there enough venture capital in Richmond?

“For the right deals, I think there is,” said Charles Moncure, principal at Dominion Partners LC in Glen Allen. “There are lots of good deals out there and lots of bad ones. I think the ones that don’t make a lot of sense, naturally, have a difficult time finding capital. But for the ones that are attractive, well thought-out and well presented, I think there is an adequate supply of capital.”

According to Moncure, the industries that offer the best bet to investors – and that stand the best chance of drawing investors – are information technology, health care and service.

Conspicuously absent from Moncure’s list is the sector that many people almost automatically link to venture capital: high technology. That may be because of the risk involved; high-tech companies often require substantial research-and-development advance money that is gambled on outcomes that are tenuous.

Matt McGee, managing director of B.L.C. Capital in Richmond, says he will support a company if he can reasonably predict that the company will be generating revenue in two to three months. He has a hard time, he says, financing a firm that isn’t likely to see a return for a matter of years.

High-tech is what everyone thinks of when they think venture capital, McGee says, but gas stations, restaurants, retail stores, hotels and manufacturing plants need start-up money as well.

“When it’s back to the core ‘I need a half-million dollars,’ or ‘I need $5 million,’ it really comes down to: What are you going to do with the money?” McGee said. “What type of industry are you in? What’s your development time going to be? How long is it going to be until you can start generating revenue?”

B.L.C. Capital looks to support low-tech businesses, McGee said, because “I believe there are numerous funds and venture groups that are developing on a daily basis to support the high-technology end of the business. I feel that the section of businesses that have been overlooked or have fallen out of vogue is probably what makes up 80 percent of small businesses these days.”

Even so, McGee acknowledges that the Richmond area may be cash-poor when it comes to venture capital for high-tech operations.

“I don’t believe many professional venture-capital firms are in the Richmond area,” said McGee, who also is active in the Richmond Venture Forum. “They tend to evolve in pockets, like technology companies. I think venture-capital companies also stick together because they spring off of each other.”

While much of the high-tech money that the state does get at the moment is targeted at Northern Virginia, there is one new effort under way that may soon provide assistance to start-up businesses in Richmond, Hampton Roads and Charlottesville.

Dennis Ackerman, director of the Bank of America Entrepreneurial Center at Old Dominion University in Norfolk, is working with a Charlottesville company, M.CAM, to develop a revolutionary new method to allow start-ups to receive loans from banks.

“It’s very exciting, and it seems too obvious,” said David Martin, founding president and chief executive officer of M.CAM. What M.CAM will do is provide the collateral to banks for start-up companies, which historically cannot get financing from banks because financial institutions have not considered intellectual property – like patents, ideas and copyrights – to be collateral.

But M.CAM, which is a spin-off of Martin’s 8-year-old Mosaic Technology Industries, has the expertise to do just that. Mosaic is a technology-transfer company, which buys intellectual property from small companies and sells it to others. Through this work, Mosaic developed an expertise that no other company has – the ability to assess the value of intellectual property.

“They will go in and tell the bank, ‘We will pay you this much, or guarantee this much if the company doesn’t succeed,’” Ackerman said. If that happens, M.CAM will buy the company back based on a depreciation schedule agreed to in the original contract. M.CAM then will turn around and sell it, as Mosaic has done for years – selling technology developed by one company to another company.

M.CAM is in the process of putting together its first deal, which cannot be discussed until it’s complete, Martin said.

Ackerman and Martin also are working together to develop a network called Greenlink that will introduce angel investors to entrepreneurs. Greenlink will send a newsletter to about 500 angel investors in Richmond, Hampton Roads and Charlottesville. The newsletter will highlight start-up companies and what they are doing so angels will know which investment opportunities are available.

Greenlink also offers start-up firms the advantage of being a local network – and it can help to have local investors who not only are familiar with the local business community but also can be available to offer expertise to entrepreneurs who may have little formal business background.

“I certainly think, if it’s an early-stage venture capital, investors like to be close enough to attend a board meeting or a management meeting or meet a customer,” Moncure of Dominion Partners said. “The farther away you are, the more difficult it becomes. And if you’re talking about fairly small capital pieces – $1 million to $2 million – it’s hard to fly down from New York twice a week when you’re just looking after a million-dollar investment.”

Ackerman added that having access to local management support and direction can be a key factor in a new company’s eventual success or failure.

“One of the biggest problems facing the area is the lack of strong management teams at start-up companies,” Ackerman said. Because the area hasn’t developed many leading companies, he explained, it hasn’t produced enough managers with the experience of taking a company from concept to reality.

“When investors look at a company, they look at the people first, then the idea. Not the idea then the people,” said Karen Jackson, the Hampton Roads regional director for the Center for Innovative Technology. “We have the techies, but we need seasoned management teams.”

Developing those teams means there must be a collective embracing of the entrepreneurial spirit – and available education for entrepreneurs.

Silicon Valley, for example, got its start as the result of the efforts of Fredrick Terman, an engineering professor at Stanford University who in the 1930s encouraged his students to pursue entrepreneurial activities. With Terman’s help, two students founded Hewlett-Packard.

Ever since, Stanford and its surrounding community have exhibited such strong entrepreneurial spirit that in 1996, Silicon Valley revenues totaled about $100 billion – with Stanford start-ups contributing more than $65 billion of that.

Needless to say, Stanford has played an important role in the infrastructure and development of Silicon Valley, producing free-thinking graduates, cooperative research, a focal point for collaboration and continuing education for the community – and the entrepreneur.

“We need to teach entrepreneurs how to value their own company,” Jackson said, explaining that most do not realistically know what their company is worth. “They need to know how much they are willing to give up. Are they willing to risk the equity in their homes or their children’s college fund to support the business?”

It’s a common problem. “Many of them [entrepreneurs] way overvalue their company,” said William Donaldson, president of Strategic Venture Planning on the Peninsula and an instructor of entrepreneurial and management courses at The College of William and Mary and the Entrepreneurial Institute in Dayton, Ohio.

In addition, entrepreneurs need a better understanding of their relationships with venture capitalists, he said. “A lot of entrepreneurs come up to me and say, ‘All they want to put in is money.’ And I say, ‘And your point is?’ They don’t understand that they have to give up a lot of control when they take an investor’s money. Without a [local] model for them to go by, there’s a lot of misunderstandings.”

In the end, the availability of venture capital seems to be largely a matter of perception. If you’ve been able to find an investor, there’s plenty; if you haven’t, then there’s a shortage.

And finding that investor often means finding a way to look in the right place.

Said McGee: “Going to a successful business guy who’s developed 20 gas stations over his career and made a lot of money, and asking that guy to invest in an Internet company is like asking him to speak Chinese. But asking him to support a gas-station operation, you’ll usually see the support…. You just need to ask the right guy the right question.”

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