Report: VC Investment Languishing in
Midwest Region, Nationally

CHICAGO - Here are the latest of irregular alarums and excursions relevant to the world of Midwest technology entrepreneurs with a special focus on the lack of funding for seed and other early stage companies:

Source: ePrairie Daily Newsletter, November 22, 2005
Author: Darrell Dvorak
Copyright date: 11-22-2005

Early Stage Blues I
The third-quarter MoneyTree report from PricewaterhouseCoopers confirmed that venture capital investment in seed and early stage companies is languishing in the Midwest and nationally.

Early Stage Blues II
The Boston Globe expands on the disappointing MoneyTree report:

• Even as the overall volume of venture investing is rebounding from its post-bubble doldrums, early stage companies are finding it tougher to get venture financing.
• The shift toward later-stage funding - a trend that has been accelerating over the past year - is also causing unease in an industry that prides itself on being in the vanguard of economic change.
• "It's a real problem for the industry if we're not doing early stage deals," said Mark G. Heesen, president of the National Venture Capital Association in Arlington, Va. "That's what venture capital is about and our best returns historically have been from the early stage deals."
• One reason venture capitalists are thinking twice about funding early stage firms is they typically require more due diligence than companies that have revenue and profits. As funds grow larger with more pension funds, endowments and other institutional investors clamoring to participate, venture firms are inclined to do fewer but larger deals.

Early Stage Blues III
The Center for Venture Research at the University of New Hampshire issues a troubling report on angel investor interest in early stage ventures:

• "If we lose that seed market, we're in deep trouble," Sohl said. "The [entrepreneur] in the garage stays in the garage."
• Several factors are fueling the trends. For one, a well-documented shift among venture capitalists toward later-stage deals has forced angel investors to bridge the gap by coughing up more follow-on funding for their newly minted companies.
• Meanwhile, Sohl thinks the proliferation of organized angel groups - as opposed to angels acting individually or with a couple friends - may favor later-stage deals. By Sohl's count, upward of 140 formal angel groups are now active compared with about a dozen a decade ago.
• "Some of these [groups] may be pooling their money and morphing into funds," he said, meaning they have greater amounts to put to work and thus look for bigger deals.
• "When four or five or more people get together, conservatism often rules. That could favor later-stage deal," an observer said. "The wheels of democracy don't move as fast as the individual passions of an investor who has money."

Confirming Your Suspicions
From venture capitalist and blogger Bill Burnham:

• "For those of you keeping score at home, that's now a grand total of more than US$516 million invested in just three software companies - all of which are focused on the same niche of providing middleware software that enables mobile devices to use e-mail.
• "While US$500 million wouldn't be a big deal if these companies were pursuing a long-term market worth billions of dollars, there's a decent chance this market won't even exist in five years [because of Microsoft].
• "Such profligate spending in the face of impending doom perhaps confirms the theme of a Wall Street Journal article, which basically says that VCs are throwing tons of money at late-stage companies because they have lots of money and it's burning a hole in their pocket."

In Memoriam: Peter Drucker
The world's greatest management consultant died last week and entrepreneurs and other business folks everywhere will suffer the loss. Fortunately, we still have his body of work, which any serious entrepreneur will ensure he masters. In celebration of Drucker's wisdom, here's a repeat of something this column first cited in March 2004:

• There is only one valid definition of business purpose: to create a customer. Because its purpose is to create a customer, the business enterprise has two and only these two basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.

Darrell Dvorak is a partner with Tatum Partners. Formerly, he worked in senior roles at Skokie, Ill.-based Searle (now owned by Pfizer) and Ameritech (now SBC). Dvorak can be reached at ddvorak@tatumcfo.com.

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