Venture Capital Follies in Pittsburgh

The P-G's "Tech Saturday" this morning has two venture capital-related items, one hopeful, one not.

The hopeful item is news that Adams Capital is raising another fund.

The not-so-hopeful item is David Radin's report of a Tech Council presentation on how entrepreneurs get funding.
Patrick Stewart of Idea Foundry and Mike Morneault of Innovation Works, both publicly funded economic development agencies, are interested in creating jobs for the region. They judge investments, in part, by how many new jobs will be created. Kenn Moritz of Stonewood Capital Management and Sean Sebastian of Birchmere Ventures are venture capitalists who are more interested in the financial gains that they'll be able to bring to their partners or investors.

As if "create jobs for the region" and "financial returns for investors" are equally important or relevant to an entrepreneur. But they're not. The region desperately needs jobs, but start-up, entrepreneur-based companies rarely generate them. If a funding agency is looking to entrepreneurs to create jobs, the agency is wasting its money and entrepreneurs' time.

So, all is not lost for the entrepreneur with a good idea -- especially if that idea involves a technical factor that gives a competitive advantage. There is money to help you turn your idea into reality, move it into production and grow your company. But you have to look in the right place. According to Mr. Morneault, not everything is fundable.

Mr. Sebastian put it into perspective, by quoting the old adage about whether you should look at the horse (the company/product) or the jockey (the management team) before making investment decisions. He says before looking at either, he looks at the race -- to make sure that the market they want to enter holds enough opportunity.


This quote shows up at the very end of the column, and in the news business, this is called "burying the lede." The most important thing to come out of the presentation is the idea that the most brilliant technical innovation isn't the key; a rock-solid, experienced management isn't the key. Those things matter, but they don't matter unless the market wants the innovation. Got customers? Then you'll get funded.

Finally, there's an important thing that apparently didn't come out of the presentation, which is this:

For a lot of entrepreneurs, looking to venture capital (or even to Innovation Works or Idea Foundry) is simply looking in the wrong place. Since Spring Training has arrived, think of a baseball metaphor. Until you get to the public markets, venture funding and other institutional funding is the major leagues. Innovation Works is Double AA, or maybe (for some) Triple A. Many entrepreneurs with nothing but an idea are playing Single A -- or worse. If you need money to build a prototype, you're going to be riding a lot of late-night buses, carrying your own suitcase, and washing your own uniform. No VC is going to drive you around. Instead of looking to VC money, look realistically to how the minor leagues get funded. Build a record, find customers, and play your way to the top. Max out your credit cards. Leverage your house. Find a lawyer who can help put together "Friends and Family" money. Maybe, with some customers, you can get the ear of the Angel network.

Comments

5 Responses to "Venture Capital Follies in Pittsburgh"

David Radin said... 3/05/2006 9:23 PM

Mike,

Thanks for noticing and commenting on my Connected column this week in the Post-Gazette.

You mentioned that start-up entrepreneur-based companies rarely generate jobs. As an attendee of the session and after past discussions with similar organizations, I got the sense that even creating opportunities with a half-dozen to a dozen new jobs in the short term is considered an economic gain for the community. If so, I would agree that a $50,000 investment in a company that generates a handful of jobs is beneficial -- especially if you can duplicate that 5 to 10 times a year for a city the size of Pittsburgh. Following your lead using baseball examples -- you might even hit an occasional extra base hit (dare I say a homerun) among these singles. These homeruns would obviously need time to develop -- and probably new capital in the form you suggest. But sometimes the entrepreneur simply needs some time to develop their ideas. Not every would-be entrepreneur has the luxury of having a job at a university to allow them to develop their concepts without much personal risk.

The underlying thought that didn't come out in either my original article or your original post is that what Sean considers a large enough market is probably much larger than what Patrick or Mike consider a large enough market. Their goals don't let them define them the same way. Angel investors would probably be somewhere in between.

I'm also glad that you selected a specific point in my article to consider the most important to come out of the presentation. My sense coming out of the presentation (based on the questions from attendees) is that the audience members needed help in different areas -- so the point that is most important to you might not be the most important to some of the others. They may have already known that, but were interested in answering other questions.

Of course, since most readers of my Post-Gazette column are not looking for funding (and will probably never look for funding), just knowing that the meeting happened is the most important part -- because it may not affect them, but will affect the community around them.

As a writer of a *feature* column (after all, this was not "hard news" content -- it wasn't published Tuesday, the day after the event; I wrote it for Saturday -- 5 days after the event), I often have the choice of multiple ways to start the column. It doesn't have to be the hard-news lead and burrow down approach that would be used with hard news. Sorry to disappoint you by not leading with the point you felt was most compelling. If my audience was homogeneous, it would be much easier to do.

The good news is that you found it interesting enough to read through to the end. I hope I continue to attract your attention this thoroughly. And I thank you for posting your comment about it. Discussion is good.

David

Frank Demmler said... 3/08/2006 5:06 PM

Mike,

I have read your blog for a while now, and I'd like to invite you to come meet with me at Innovation Works.

We are quite different than how you have portrayed us. I would like to give you a first hand look. You may maintain your opinion, but at least I'll know that I tried.

A few brief comments:

• Innovation Works welcomes all entrepreneurs. If we can't help, then we'll try to point the entrepreneur in a useful direction.

• Our charter is to assist in the creation and growth of technology-based companies that have "significant" job creation potential.

• "Significant" is not a hard and fast number. My screen, and I can't represent this as IW policy, per se, is to get a sense if the company could create 20 jobs in 3 years and/or 50 jobs in five years.

• In my opinion, if a company can get commercial traction to the point that the job creation ramp is along those lines, then:

- cumulatively that can add up to a lot of jobs over time
- once that level of growth is achieved, the trajectory may lead to hundreds (or thousands) of jobs

• I believe that there have been quite a few studies (with academic integrity, and not self-serving) that have demonstrated that small businesses create the bulk of new jobs.

• I believe the region has benefitted from the success of Automated Healthcare, Fore Systems, FreeMarkets, and Spinnaker Networks, among others. Helping entrepreneurs to create the successors to these firms is one of the goals of Innovation Works and Idea Foundry.

• Finally, Innovation Works is not a funding agency as you have characterized it. Innovation Works is a set of entrepreneurial assets that can be brought to bear to assist early stage companies.

# The professionals at Innovation Works are skilled, experienced, and passionate about their responsibilities.

# Our institutional and individual networks can gain access to specific individuals that would be next-to-impossible for the entrepreneur to access on his own.

# The collaborative network among the various organizations involved in different sectors of this larger space provide the entrepreneur with access to all organizations. There has been frequent criticism that there is no one-stop shop for this kind of assistance. The reality is that there are multiple points of access, all of which will lead to the same general space and entry to all the organizations. Is it seamless? No. Does it work? Yes.

# The backbone of our interaction with companies is to work with them to flesh out a "robust" business plan. By that I mean one that has been developed with input, advice and guidance from us, but more importantly, fellow entreprenurs who have "been there, done that." This is in contrast to the business plan that is well-composed and makes a strong case for a business direction that is support by unassailable logic and reams of secondary research to support it, but does not reflect the real world.

• And , yes, Innovation Works has funding programs, but that funding, if it's appropriate, is a consequence of having worked with us.

# When I say "appropriate," I am referring to its appropriatenes to the company. As you note in your column, there are multiple sources of capital. Each has its own pros and cons. Each has different probablities of being raised. Each have baggage that can move a company along an irreversible course without the entrepreneur realizing the consequences of a particular choice.

# We may not meet a particular person's expectations. We are not perfect. We make mistakes. It might also be that the expectations were unrealistic to begin with and that we were unsuccessful in recalibrating them.

Entrepreneurs are welcome to go to our website and let us know about their interest in working with us, or investigating that. Someone, probably me, will respond. I'll admit that my response time is longer than what is desirable, but I'm working on that.

Once engaged we'll move forward on the creation of the "robust" business plan. Some entrepreneurs are disappointed that we can't put in the time and write it for them, but we can't, and we shouldn't. We need to guide them through the process so that they "get it," whatever "it" is.

We will work hard as the entrepreneur's advocate. We will do what we can to assist the entrepreneur in succeed, but ultimately, that is up to the entrepreneur.

So, Mike, when would you like to come visit?

Frank Demmler
Director, Entrepreneurial Services
Innovation Works
(412) 894-9509

fdemmler@innovationworks.org
www.innovationworks.org

P.S. You and your readers may be interested in the articles that I have posted to my CMU website.

www.andrew.cmu.edu/user/fd0n

Mike Madison said... 3/08/2006 6:18 PM

Frank,

I'm delighted that you took time to write and delighted to accept the offer. I'll write to you privately.

Please don't misunderstand my point of view: Since I started writing last Fall more concretely about innovation and entrepreneurship in Pittsburgh, I've heard generally good things about IW. I am skeptical about the role of state funding in the tech economy; if, to some extent, IW relies on state funding, then I think that's likely to be a misuse of tax dollars. I'm skeptical of the impression -- which I don't lay at IW's door -- that IW (or any consortium or incubator or greenhouse, etc. etc.) is or should be "the" starting point for tech-oriented entrpreneurs in the region. In other words, I think criticism that Pittsburgh needs a "one-stop-shop" is misguided.

I'm looking forward to learning more.

Thanks,

Mike

Anonymous said... 3/09/2006 11:11 PM

Mike,

I agree no serious entrepreneur should depend on public money for their lifeblood, but the money given to IW and others tech organizations should be kept in perspective. Penn spent approx. $50M on tech plus some life sciences research money last year(a decrease from the previous year). The economic development stimulus package was $2 Billion last year and there is about $700 Million in other economic development funding going into old industries and retail each year from the state. We are stuck in the 50s.

Andrew J. Chomos said... 3/11/2006 3:02 PM

We have found Innovation Works to provide so much more to our Company than seed funding.

The market research IW performed on our products has proved to be extremely valuable as we approach commercialization.

Additionally IW has functioned as management consultants with a keen eye towards IP development and business strategies.

IW is a resource I can count on.

Andrew J. Chomos
CEO
Caracal Inc.

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