Midwest Snaps Back As Investment Mecca
After years of little interest, venture capitalists converge on Midwest states to stake out investment possibilities
IN the Midwest, the venture capital money tap is starting to flow again.
Across the nation, venture capitalists poured $2.5 billion into the economy in 1992, up from $1.4 billion in 1991. But the Midwest was still suffering from a venture drought. Just ask Ken Syke.
Last year Mr. Syke, the director of the Wisconsin Venture Fair, canceled the event because there was not enough support. Last month, however, the fair took place with 11 companies pitching to 80 financiers and venture-group representatives.
After the fair Syke followed four of those companies to the granddaddy of Midwestern venture bazaars, the 10th-annual Great Midwestern Venture Capital Conference. About 200 venture firms met to ``kick the tires'' of 28 promising companies.
The investors came from all over the country, in part because only 11 percent of all American venture capital actually resides in the 10-state region stretching between Minnesota, Missouri, Iowa, and Kentucky.
The companies represented the traditional venture sources - independent pools, banks, large companies, state agencies, and even a large university endowment (the University of Notre Dame). Conspicuously absent were state pension funds, which only broke into the venture field this year.
``The high quality of life and the low cost of production is what draws investors to the Midwest,'' says conference coordinator Bruce Kidd, who concedes that Boston and San Francisco still dwarf Indianapolis as investment meccas. Up until four years ago, the Indiana Small Business Development Corporation, sponsor of the event, limited the conference to Indiana companies. Then Ernst & Young, a ``Big Six'' accounting firm, which sponsors a series of regional fairs, joined and thereby broadened the geographic base.
``We are also more open to low-tech ventures than they are on the coasts,'' Mr. Kidd says. ``Their venture fairs tend to focus on high-tech.''
That is good news for Ken Ross, chief executive officer and founder of Express Shipping Centers in Fairfield, Iowa. Mr. Ross originally cut his entrepreneurial teeth on software ventures. But, he says, ``The software business has become very cut-throat. In the last year it has become increasingly difficult to raise money.''
The future is uncertain for medical and health care companies as well. According to Venture Economics in Boston, these companies were the second-largest funding category in 1992 after software.
``But with the new administration, investors are a little uncertain about the future of biotech,'' says Patrick Harris, president of Micromed in Louisville, Ky. ``There may be more emphasis on companies that stress prevention than ever before.'' Still, biotech, which boasted one-third of the presenters, dominated the conference. ``We are willing to look at a lot of projects in different fields,'' says Orval Cook of Alpha Capital Partners in Dayton, Ohio. ``People on the coasts tend to specialize.''
High return on investment is the force guiding Mr. Cook and the other general investors who attended the conference. Collectively, they represented a pool of $200 million to $300 million.``We like to see returns of 30 percent to 50 percent per year or more,'' Cook says.
Scott Malpass, chief investment officer for the University of Notre Dame in South Bend, Ind., says his office has earned 19 percent overall returns on venture capital since the school, like Stanford, Yale, and others, diversified into that area.
Venture capital, however, is always risky. Cook says 15 percent or more of his investments lose some money. Those odds tend to scare off traditional portfolio managers. Willingness to take risks also varies within the venture community. As Cincinnati economist Barry Stregevsky says, ``A greater willingness to risk is a sign of increased consumer confidence.''
``We expect 10 to 15 percent of these companies to actually get funded as a result of this conference,'' Kidd says. ``These companies should end up getting between $1 and $10 million each.''
The payback however, will be far from immediate. ``No one whips out a check at one of these conferences,'' Cook says. ``The fastest deals usually take eight weeks. The longest usually take about a year or a little more.''
The trend in venture investing is toward larger investments in fewer companies, says Mr. Malpass of Notre Dame. Riskier seed money to create companies from scratch is becoming hard to find. But financing in the later stages of projects is becoming easier, he says.