After its first year in business, a company given $500,000 by the state to find venture capital for Nebraska businesses has yet to procure a single dollar of investment.
Invest Nebraska Corp. has counseled businesses looking for investment, has critiqued business plans and has worked with business organizations in midsized Nebraska cities. It has introduced numerous businesses to potential investors, some of whom, Invest Nebraska says, are negotiating deals.
But so far none of its efforts has yielded any investment.
And national venture capital experts said they aren’t surprised. A combination of market conditions – a mostly rural state far from financial hubs and an economic slump – make Invest Nebraska’s mission of promoting investment in a state with mostly low-tech businesses a difficult one to say the least.
Venture capital investment provides young companies without much of a track record with immediate funding to help them grow quickly. Unlike other forms of business financing, venture capital is best suited for high-risk ventures with potential for high rates of return.
Typically, venture capitalists invest in companies that have been around for about a year, and are likely soon to issue an initial public stock offering or to be acquired by a larger company. Investors called angels, whom Invest Nebraska is also courting, are more likely to fund startups, but only those with potential for rapid growth.
The high-tech and bio-tech industries have been the biggest beneficiaries of venture capital. Neither industry has a significant presence in Nebraska.
“No matter how sharp these guys are, they’re running up hill,” said Stanley Mandel, director of Wake Forest University’s Angell Center for Entrepreneurship.
Bryan Fairfield, Invest Nebraska’s executive director, admits that attracting venture capital to a state that has had little in the past is a challenge.
But he describes the past year as laying the foundation for future investment.
“We’ve had many, many meetings between investors and businesses. There haven’t been any deals signed as a result of those meetings, but that’s not at all surprising. Having worked in the venture capital industry, I know that these things take time,” he said.
Before coming to Invest Nebraska, Fairfield was managing director of DreamField Partners, an Omaha private equity firm.
Some companies that Invest Nebraska is working with may be just weeks away from getting investment, Fairfield said.
But venture capital experts noted that in 2001, at the same time the Legislature was passing the Venture Capital Forum Act, the national venture capital industry was quickly deflating, along with the technology industry.
Between 2001 and 2002, U.S. venture capital investment fell from about $100 billion to about $10 billion. It has since rebounded to about $20 billion, Mandel said.
Unlike the programs in other states designed to boost venture capital investment, Invest Nebraska has no money of its own to invest – the $500,000 appropriation funds the group’s operations for three years. It has also raised over $400,000 in private funds.
The office, therefore, must rely on either Nebraska’s small venture capital industry or fickle national investors – who are widely courted – to find financing for businesses.
Gov. Mike Johanns pushed for the act that funded Invest Nebraska, touting it as a way to boost investment in rural areas.
“Every economic development study that analyses Nebraska continues to emphasize the need for venture capital,” said Johanns spokesman Chris Peterson. “We’re going to continue to make an effort in this area.”
Peterson added that the poor national economy over the past two years makes Invest Nebraska’s mission more difficult.
But experts said that even in good times, venture capital may not be able to help companies in rural areas.
“There isn’t much interest among venture capitalists in, A, rural areas and, B, companies that aren’t extremely fast growing,” said Rob Atkinson, vice president of the Progressive Policy Institute in Washington, D.C.
Last year the institute ranked states in their availability of venture capital. As in similar studies conducted by other groups, Nebraska ranked in the bottom third.
“They’re going to find it very difficult to attract venture capital,” said Ross DeVol, director of regional economics at the Milken Institute, a Santa Monica, Calif., economic think tank. “Most venture capitalists like to invest in companies near where they live” – typically on the East and West Coasts.
Milken released a report recently that described venture capital investment in Nebraska as growing but still inadequate. The report claims that venture capital investment in Nebraska last year was about one tenth the national average – 0.02 percent of the state’s gross domestic product, compared to an average of 0.21 percent.
Only 1.4 percent of Nebraska businesses received venture capital last year, according to the report. The national average was 5.9 percent.
In 1999, less than one third of venture capital dollars coming from Nebraska financiers went to Nebraska companies – $45 million of $151 million – according to U.S. Rep. Tom Osborne’s Rural Economic Development Handbook and Guide. Proponents of the Venture Capital Forum Act cited that figure in justifying the funding of Invest Nebraska.
Nebraska has many angel investors -wealthy individuals or even an entrepreneur’s friends and family – but only one full-time venture capital company: Odin Capital Group in Omaha.
Since Odin formed in 2000, with the intention of investing locally, it has invested in only two Nebraska companies.
“We just are not seeing the kind of investments here that fit,” said Thompson Rogers, a partner in Odin and a member of Invest Nebraska’s board of directors.
Still, Rogers said he thinks Invest Nebraska will play a valuable role in the state now that it has established itself and has built a network of investors and businesses.
“They’ve had some growing pains,” he said. “But don’t judge them now. The time to judge them will be in another year.”
