Diamond State Lone Venture Fund

Currently, there’s only one organized venture capital fund in Arkansas: Diamond State Ventures of Little Rock, which was formed in 1999.

Sam Walls is chairman of Diamond State, and Joe Hays is managing partner of the fund.

Walls is also executive vice president of Arkansas Capital Corp., a private, nonprofit, business-development corporation founded in 1957. ACC, the state’s largest SBA lender, “makes loans to businesses outside bank parameters,” Walls said.

Diamond State, “an affiliate” of ACC, was formed after $14 million was raised from 41 banks, three individual investors and one private company, Stephens Inc.

Last September, Diamond State received its Small Business Investment Company (SBIC) license from the U.S. Small Business Administration. That allows it to leverage up to three times its private investment through SBA-guaranteed bonds. That means Diamond State, with $14 million in private investments, has potential access to $56 million to use as venture capital funding.

A Northwest Arkansas venture capital fund could also apply for an SBIC license, said John Maguire, but some government regulations would affect its loans in that case. The pool of money could be quadrupled with federal backing.

Since it’s inception, Diamond State has made seven investments totaling $10.5 million, Walls said.

“In venture capital, you don’t do 50 deals a year,” Walls said. “You might do three or four deals a year.”

Of that $10.5 million, $950,000 went to Mercari Technologies, a Fayetteville software company. Diamond State also funded a trucking company, propane gas company, medical benefits company and media development of a children’s television show.

Walls said Diamond State isn’t corralled by the state’s borders. The firm — which has satellite offices in Springdale, Jonesboro and Fordyce — also makes investments outside Arkansas.

“Your objective is to have quality deals and lots of them,” Walls said. “With venture capital, you have to be absolutely driven for profit to have any hope of succeeding.”

Maguire wants to provide seed capital for start-up companies. Diamond State funds only early-stage and more developed companies, meaning those with a product ready to go to market.

“We’re not in business to fund them when they’re trying to figure out if their product is any good or not,” Walls said.

It’s usually individual investors who end up helping start-up companies, he said. They’re often referred to as “angel” investors.

Diamond State is a 15-year limited partnership that hopes to make a profit in five to six years.

“Venture capital is patient capital,” Walls said. “You get in it, and you’re in it for a long while. You don’t let a setback sink your ship …

“A significant percentage of your investments will have no return at all. Some will break even. On a relatively small basis, we’ll have some home runs.”

According to a survey by PricewaterhouseCoopers, Arkansas companies received $21 million in venture investments last year, up from $8.8 million in 1999. That ranked the state 41st nationally in venture capital funding.

But Walls said that number is meaningless because it incased only the companies that reported their investments to PricewaterhouseCoopers. The majority probably don’t bother to do that, he said.

Walls said he welcomes the idea of a second venture capital fund in Arkansas.

“We’re trying to serve as a catalyst,” he said. “We believe activity creates activity.”