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 Slowly, high-risk companies attract more venture capital March 7, 1999 By Dan Fitzpatrick, Post-Gazette Staff Writer
More venture capital is available to Pittsburgh’s entrepreneurs now than four years ago, and more startup companies are rolling in cash, as a result. But Pittsburgh’s record of high-risk finance dims when compared to that of other PG Benchmarks regions. Pittsburgh trails 10 of those in the total amount of venture capital invested in early-stage companies. Venture capitalists offer firms money and management expertise in exchange for ownership shares and board seats. Typically, they cash out once the company becomes profitable. In 1998, venture capitalists pumped $15.6 million into eight young Pittsburgh-area companies, according to Venture Economics, the firm that compiled the data for PG Benchmarks. Why is venture capital so important? Startup companies need high-risk money to turn their good ideas into products, and they need it fast. Much of the venture capital across the country goes to young technology companies, making it a good measure of regional innovation. It is difficult, though, to track every dollar spent. Some small venture capital firms and people who invest their money individually, as "angel" investors, do not make the measures compiled by Venture Economics, a subsidiary of Newark, N.J.-based Securities Data Co. Venture Economics surveys an estimated 1,000 U.S. firms, many of them members of the National Venture Capital Association. That covers between 80 and 85 percent of the venture capital invested annually, said Venture Economics managing director Jesse Reyes. In Pittsburgh, some venture capitalists were left off the list. Downtown-based Birchmere Investments, for example, was not part of a survey in 1998. Yet, it invested $3 million in eight early-stage companies. Even so, several trends emerge from the venture capital survey. First, venture capitalists in Pittsburgh are doing a much better job of finding companies than they did four years ago. Eight firms received early-stage financing in 1998, trailing only Minneapolis, Seattle, Atlanta, Denver and San Diego. In 1995, only one early-stage Pittsburgh company got money, according to Venture Economics. Comparatively, though, these companies are not getting as much money as their counterparts in other cities. Cleveland’s venture capital firms, for example, invested $19.2 million more in four companies than Pittsburgh did with eight firms. The problem in Pittsburgh is a gap between what startup firms need and what venture capitalists are willing to provide. Venture capitalists interviewed for this story said many of the companies in Pittsburgh are still too small to attract big money. Entrepreneurs said venture capitalists are not as willing to invest in small firms as they are in larger ones. But such is the nature of the venture capital business. To make money, venture firms need to attach themselves to sure winners, and they can’t spread themselves too thin. Venture capitalists spend a lot of time with their firms, offering management expertise as well as money. Logistically, they can’t take stakes in dozens of high-risk companies. They need to choose carefully, looking for companies that have a better chance of making it big. "Venture capitalists have one thing in mind, and that is to make money," said Craig Kirsch, associate director of Arthur Andersen’s high technology and emerging market practice. To do that, some in Pittsburgh have to look outside the region for the larger deals. At the same time, out-of-town venture capitalists will make the trip to Pittsburgh only for the big investments. A small deal is not worth their time. "If you do an early-stage investment, you want the company close by," said Jim Colker, managing general partner of the CEO Venture Fund, which invests mostly in the Pittsburgh area. Even veteran executives are having problems finding money in Pittsburgh. Take Douglas Goodall. A former employee of several high-tech companies in the Pittsburgh area, Goodall is an old pro at finding money for startups. His last attempt was at Vision Systems, a small software development and information technology consulting firm in Oakland. As CEO and chairman, it was Goodall’s job to pitch venture capitalists on the company’s ideas. But local venture firms would not part with the amounts Goodall needed, wanting to go after larger deals instead. Out-of-town venture capitalists had the same reservations. They told him: "You’ve got a great idea, but we are only interested in investing larger amounts in smaller amounts of companies," Goodall said. So, Goodall had to find the money elsewhere. He spent a year pitching private "angel" investors, who invest smaller amounts of money in startup companies. That group is not large, either. Consider the number of "angels" in the Western Pennsylvania Adventure Capital Fund, a two-year-old organization that has funneled $5 million from private investors to 11 local companies. Eighty people provided $2 million to get the fund started, and 220 potential investors are on an additional mailing list. But only 25 of the 300 are active investors in local technology startups. Goodall found the money, eventually, but the search was "a huge time drain and enormously frustrating," said Goodall, now interim CEO of Innovation Works, a nonprofit that assists technology firms. Despite Goodall’s experience, things are getting better for local entrepreneurs. Since 1995, at least four venture capital firms have formed in southwestern Pennsylvania, most of them focusing on local companies exclusively and some of them willing to invest heavily in early-stage ventures. Also, PNC Bank began linking high technology firms to venture capitalists and loans through VentureBank@PNC. Silicon Valley Bank, a commercial lender that targets small, high-growth technology firms on the West Coast, set up an office in Rockville, Md. to serve Pittsburgh and Philadelphia. More help is on the way. UPMC Health System, along with six smaller backers, has teamed with the federal government to form a $60 million venture capital fund to invest in biomedical startup companies. It will not limit its investments to the region, but local companies are expected to receive top priority. At the same time, the University of Pittsburgh and Carnegie Mellon University continue to discuss an early-stage venture fund of $50-$60 million. And Innovation Works, fresh from a $2.7 million award from the state, will begin providing technology startups this year with money, research, marketing, development and business support. More out-of-town venture capitalists are starting to take notice of Pittsburgh, too. New Jersey-based Edison Ventures, for example, recently pumped $2 million into software developer Janus Technologies of North Fayette. Edison also has a seven-year investment in DXI Inc., a Robinson provider of software products for the ocean freight shipping industry. "The ball is just starting to roll," Kirsch said.
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