As Diamond State Winds Down, New VC Needed

This is the last year for Diamond State Ventures to invest in new companies.

DSV, Arkansas’ only true venture capital firm, has invested $35 million in 21 fledgling companies since it was founded in Little Rock in 1999, said Joe Hayes, Diamond State’s president.

“We would like to perpetuate what we’ve built and create an additional fund,” he said.

That would require money from the investment community.

Diamond State was formed after $14 million was raised from 41 banks, three individual investors and one private company, Stephens Inc.

DSV is a Small Business Investment Co. that invests in businesses and hopes to make a profit on those investments. Venture capital investments are a risky business, but in general, venture capitalists want an annual return of at least 20 percent on their investments.

Hayes said DSV, which has $56 million in assets, has money in reserve to financially assist the 21 companies for several years.

By the end of 2005, Hayes said, DSV will probably have a total of 25 companies under wing and, by the time everything is said and done, will have invested $45 million in those companies.

The fund’s impact on Arkansas businesses is obvious, he said. In the two years before DSV was founded, SBIC venture fund investments in Arkansas companies totaled $3 million. Since 2000, that amount has jumped to more than $50 million with DSV responsible for one-third of that and its investment partners responsible for another one-third.

Tim McFarland, a consultant with Arkansas Capital Corp. Group who works from Fayetteville, said that, even with DSV, Arkansas needs additional venture capital funding. (DSV is under the ACCG umbrella.)

The Milken Institute said venture capital as a percentage of gross state product amounted to 0.209 percent nationwide last year. Using that formula, Arkansas should have venture capital assets of $142 million.

In the past few years, the number of emerging Arkansas companies has increased considerably, McFarland said.

About 30 companies in the state can be categorized as “emerging,” he said, with another 60 in the “earlier-stage stage” category.

McFarland said the state of Oklahoma invests $1 million per year on pre-seed and seed funding for new companies.

“It means you could invest and help 10 companies a year,” McFarland said. “That would be a good example of what Arkansas needs in place.”

After the pre-seed and seed stages, the growth stages are start-up, early stage expansion, M&A/mature and mature.

Only about 1 percent of all start-ups are potential high-profile companies, with potential to earn $30 million annually after five years in business, according to the Kauffman Foundation Study on Entrepreneurship.

“Some companies will fail,” McFarland said. “It’s not for the faint of heart … In my view, you need to invest in a basket of these. Diversification is key.”

More venture capital in the state would bring more jobs and help raise Arkansas’ per-capita income from the 75 to 80 percent range (of the national average).