Ohio Venture - OVA Review Newsletter
News from the Ohio Venture Association meeting on February 10, 2012

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Keynote Address:

Venture Capital Summit VII:
From Entrepreneur to Exit

As traditional venture capital firms have largely retreated from early stage investments, angel investors—and regional networks of angels—have begun filling the vacuum. But with the broad scarcity of new capital in recent years, every player in the start-up value chain has had to become more innovative and cost-efficient.

Those were among the main themes emerging from OVA's seventh-annual Venture Capital Summit, held at Corporate College East on February 10th.

"The models for running a venture capital fund and deploying capital are becoming more innovative," said Jonathan Murray, of Early Stage Partners. Indeed, added North Coast Angel Fund's Todd Federman, with the scarcity of new capital in recent years, "we're really focused in a lot of ways on playing small ball, and finding repeatable, scalable sales and marketing opportunities...we're really getting creative to find ways to get capital from our customers at the earliest stages, and not having to rely on investors."

In her keynote address, Catherine Mott, chair of the Angel Capital Association (whose members include approximately 6,500 accredited investors around the United States), likened the situation to Charles Dickens' Tale of Two Cities. "At any point in time, depending on which side of the table you're on, it can be the best of times, it can be the worst of times."

At present, she went on to note, "angel investors are the darlings in Washington, D.C." The National Governors Association, the U.S. Treasury and the Small Business Administration have sought input from angel investors on how the government can better encourage capital formation in new ventures. She was even recently named to an SEC advisory committee that will provide input on rulemaking for access to capital.

"So why would they care about getting angel investors around that table? Three reasons: jobs, jobs and jobs. From 1980 to 2005, all net new jobs come from companies five years old or less. This is why we get all the attention...so it's only natural that we who fund these companies are getting all this attention."

In 2010, angels invested $20.1 billion in the U.S. economy, nearly matching the level of investment from the venture capital industry. "And it's been about this level for the last eight years or so," she said. But as the angel investor sector matures, she explained, angel investors are increasingly interested in combining their muscle into effective networks.

Why?

"Well, 50% of our deals go bad. Entrepreneurs in the room, look around. Half of you are going to fail. We're going to call that tuition, because we figure you're going to learn from that, and go on and build another company. But at the same time, we don't want to lose at that rate. So as angel investors, we're taking a lot more sophisticated approach to building a healthy portfolio of companies. We're aggregating our money, we're aggregating our knowledge, we're aggregating our industry connections, so that we can do collective due diligence and mitigate our risk. We also know that (doing it this way) we're going to see a lot more deals. The odds of seeing the best of the best are a lot better than me alone with three or four of my friends."

Much of the discussion during the summit focused on the so-called "valley of death," the period during which start-up ventures must make due with whatever cash they already have on hand before their next round of funding.

But Tim Moran called that phrase a misnomer. "I think the valley of death is a little bit of a misnomer. I think the valley of death is any point at which you can't raise capital for your next round...When you think about it, there's logically going to be a valley of death because of the funneling that occurs. If you look at the number of potential companies and ideas out there, and there are hundreds of thousands of them, but there are only so many investors for that next stage (past friends and families). So in a certain sense, some of them have to drop out. But the valley of death can occur at any stage. You could call it the valley of death for a pharma company when they've already already raised $100 million."

Mott said: "I've seen companies that burn through a million dollars a month." Sometimes, "the valley of death comes because you weren't efficient at deploying capital. You didn't surround yourself with the right kind of advisors, who could provide you with the right information on managing your expenses, meeting milestones and that kind of thing. So in that case, the valley of death is self-imposed."

With access to capital difficult, said Mott, "be creative about it. Get to market sooner, validate it sooner, exit sooner." If you don't exit sooner, she warned, "you may miss the boat."

Here are a few additional highlights from the summit:

  • OVA president Jim Weisman noted that the Cleveland region alone now surpasses the states of Indiana and Illinois for life science investing, "and we are closing in on the states of Minnesota and North Carolina, which are two historical hot spots for life science investing. So overall I'd say the state of our region is strong and getting stronger."
  • Catherine Mott said she's "insanely jealous" of the amount of angel syndication that goes on in Ohio. The only other region in the country that has as much is New England. "Here, there's a real camaraderie among the angel networks."
  • Neil Wyant, of Everett Partners, on the benefits of incubators: "At the early stage, it's all about execution. Ideas don't execute themselves, people execute the ideas. So the more smart people you have clustered together, the better."
  • Rich Langdale, of NCT Ventures, on the same subject: "Today's workforce, they're basically doing you a favor by showing up for work. So the workplace has to be fun. When you ask entrepreneurs what's their favorite part, it's really the interaction with other entrepreneurs. That's where they get their juice flowing. That's why they're staying till 1 in the morning, because of that interactivity and fun."
  • Kendall Wouters of Reach Ventures said "we like to vet the idea before the first line of code is written."

Webcasts from the Meeting:

Click on the image below to view part one of the presentation as video.

Video Webcast from Recent Meeting
Keynote Address: Catherine Mott, CEO and founder of Blue Tree Capital Group and chair of the Angel Capital Association
Topic: "From Entrepreneur to Exit"

Also see OVA Venture Capital Summit VII:

Webcasts produced by Tom Kondilas.

OVA's New Video Archive is Online:

OVA is pleased to have recently added an archive of program videos to its website. You'll find the full video record of most OVA formal programs since 2008 at www.ohioventure.org/video-archive.html.

Upcoming Meeting Dates:

  • April 13, 2012
    Joseph Jankowski
    CWRU
    Stephen Behm
    University Hospital
  • May 11, 2012
    Panel Discussion
    Featuring a Company Showcase
  • June 12, 2012
    Venture of the Year Award
    Submit Nomination

See complete details and registration for these events.
 

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