State Still Lagging for Capital Investments

That house Michael and Amy Bailey recently bought in the Chenal Downs neighborhood of west Little Rock is worth almost as much as the total venture capital investment in Arkansas during the third quarter of 2000.

Not to pick on the Baileys, whose $1.35 million real estate investment just happened to be one of the state’s largest residential deals this month. But the comparison illustrates the point recently driven home by two studies.

Compared with other states, Arkansas is virtually invisible to venture capitalists.

Only one venture capital company chose to invest in an Arkansas firm last year in the third quarter, pouring all of $1.5 million into the state, according to the National Venture Capital Association.

It gets worse.

Another report released this month by Growthink Inc., a California business consulting firm, asserts that of 941 privately held U.S. companies that received venture capital in the second quarter of this year, not one is located in Arkansas. Texas had 59 – 24 in Austin alone. Three each were located in Louisiana and Missouri. Even Mississippi had three, while two Oklahoma firms received venture capital infusions.

Of the more than 1,500 venture capital companies surveyed that had invested in private companies during the quarter, only three are based in Arkansas. Eighteen investors were located in Missouri, 110 in Texas, four in Mississippi and … well, you get the idea.

Where’s the Tech?

Venture capital investors are seeking new technologies, and there’s little technology innovation taking place in Arkansas. At least, that’s the perception.

“The [investors] are trying to invest in companies that give them a great return on their money,” said Corey Lavinsky, Growthink’s director of market research. “There is a shortage of new technology coming out of the region.”

Having no large financial center plus the lack of in-state venture capital depresses investment as well, Lavinsky added.

But, as always, the general perception of Arkansas and the reality differ, said Leslie G. Lane of the Arkansas Science and Technology Authority.

“There is some equity activity, though it’s not to the scale we would like,” Lane said. “Arkansas does pretty good in the amount of capital created.”

Lane cited food safety and cancer research programs at the University of Arkansas for Medical Sciences in Little Rock as examples of new technology and applications germinating within the state, along with electronics development by Fayetteville companies.

“We’re starting to see a lot of people engaged” in producing patents on intellectual property, Lane said.

But venture capital attraction is a big hill to climb, he admitted.

“In Arkansas we’re basically creating a new financial services industry with venture capital,” Lane said. “Some entrepreneurs will have to learn” the basics of procuring capital investment, he added, noting that the southern U.S. accounts for 28 percent of the nation’s population but attracts only 4 percent of venture investing.

A lost cause? Hardly, Lavinsky said.

“The shortage of Arkansas-based investors should not cause Arkansas entrepreneurs to abandon hope that they [will] find investors for their ventures,” Lavinsky said. “Most venture capitalists are willing to cross state lines to invest in companies with solid business plans, attainable revenue models and strong management teams.”

Two of the three venture capital firms in Arkansas, Arkansas Capital Corp. and Small Business Investment Capital Inc., are headquartered in Little Rock. The third, Palm Beach Capital Corp., is in Fort Smith.

Efforts for Change

On Aug. 10, the Science and Technology Authority co-sponsored a “Seed Capital Investment Workshop” in Fayetteville with the Northwest Arkansas Business Journal, The Bank of Fayetteville, the Friday Eldredge & Clark law firm and Little Rock companies Arkansas Capital Corp., and Stephens Inc..

The event, designed to “introduce potential investors to the unique opportunities and inherent risks of investing in start-up companies,” was hosted by Virtual Incubation Corp. and Beta-Rubicon Inc. of Fayetteville. Virtual Incubation described the event as a “working session for private investors interested in learning about entrepreneurial ventures and for entrepreneurs seeking information on the process of acquiring private investment.”

The Science and Technology Authority was created in the early days of former Gov. Bill Clinton’s second term to promote scientific research, technology development, business innovation and math, science and engineering education.

Each of the 14 members of the authority’s board of directors is appointed by the governor to a four-year term. Three directors must be scientists or engineers, two must represent academic institutions and five must come from private sector manufacturing. The director of the state Department of Higher Education or a designee occupies a permanent spot on the board. That’s currently filled by Eugene H. Aist, the department’s academic programs coordinator.

Lane is banking on a recently passed state law to spur investment. The Venture Capital Investment Act of 2001, sponsored by Sen. Kevin Smith, D-Stuttgart, and signed by Gov. Mike Huckabee, authorizes the Arkansas Development Finance Authority to solicit investment plans and designate an investor group to place venture capital in Arkansas companies deemed worthy by ADFA and the investor group. The state has committed $60 million for the project, which also includes income tax credits for ventures.

Statistics

Last year set a record for venture capital investment, “the most prolific year in the history of private equity funding,” Lavinsky said.

“In 2001, investors have become shrewder and far more discerning in their investments,” he said. “As a result, venture capital investments in the first half of 2001 have dropped considerably nationwide.”

However, the second quarter of 2001 still ranks as the seventh-highest quarter in U.S. venture capital funding history, the Growthink report stated, with more than $11 billion invested nationwide.

The San Francisco Bay area, home of Silicon Valley, garnered almost a third of all U.S. investments. With $3.2 billion in venture capital, representing 30.1 percent of the total, the Bay area maintained a lead it has held for several years.

The Central U.S. area, which includes Arkansas in the Growthink study, ranked second with $1.9 billion, mostly because of Texas. Of the 184 companies in the Growthink study that are classified as Central U.S., 59, or 32 percent, were located in Texas. The Lone Star State hogged more than 40 percent of the dollars invested.

“Consistent with funding patterns nationwide, most of the companies funded in the Central U.S. were in the Business Services and Applications sector,” the report stated. “Despite the decline in funding in all other sectors, the Healthcare sector in the Central U.S. improved significantly in the second quarter.”

Health care companies receiving capital included Medivance, a Colorado company developing therapeutic temperature management methods, and Clinical Pathology Laboratories of Austin, which performs clinical and anatomical testing for physicians, hospitals and managed-care providers.

The top investment-attracting companies in the region were Clearwire Holdings of Arlington, Texas, with $97 million; DataPlay Inc. of Boulder, Colo., with $55 million; and Applied Science Fiction of Austin, Texas, which also received $55 million.

Clearwire develops and operates fixed-wireless broadband Internet access networks and manufactures high-speed access equipment. DataPlay is developing new technology that allows consumers to record and play any digital media. Applied Science Fiction develops technologies for the imaging industry that link photography and digital media.

Top Venture Investments

Company — City — Sector — Investment(millions)

CityNet Telecommunications — Silver Spring, Md. — Connectivity — $175

Multiplex — South Plainfield, N.J. — Connectivity — 105

Perlegen Sciences — Santa Clara, Calif. — Healthcare — 101

Clearwire Holdings — Arlington, Texas — Connectivity — 97

Luminous Networks — Cupertino, Calif. — Connectivity — 80

BlueArc Corp. — Mountain View, Calif. — Connectivity — 72

Xcel Pharmaceuticals — San Diego, Calif. — Healthcare — 70

Rearden Steel Technologies — Palto Alto, Calif. — E-Content/commerce — 67

Atheros Communications — Sunnyvale, Calif. — Connectivity — 67

CopperCom — Santa Clara, Calif. — Connectivity — 65

Broadslate Networks — Charlotteville, Va. — Connectivity — 60

Source: Growthink’s Total U.S. Private Equity Funding Report, Second Quarter 2001