Forum Wows Venture Sect

Les Lane and Sam Walls had impeccable timing.

Their inaugural Arkansas Venture Capital Forum on May 15 in Little Rock sparked an uproar of enthusiasm for both the speculative investment sector and startup companies in search of funding.

Lane, director of the Arkansas Science & Technology Authority and creator of the forum, said the 375 entrepreneurs, investors and bureaucrats who participated in the gala nearly tripled early expectations.

The event came only days after the latest MoneyTree study, a national quarterly report card on venture capital investments, claimed that Arkansas was absent during 2002’s first quarter. A closer inspection shows that during MoneyTree’s last 11 quarters, the state’s venture capital volume was $36.2 million or about 47 percent less than any of its six contiguous neighbors (See map, page 19).

Because venture capital investors seek big market opportunities — which in turn typically generate jobs, tax revenue, market cash flow and have shorter exit strategies for investors — the news paints a dismal portrait of Arkansas’ hopes for a high-wage, high-tech future.

But Walls, chief operating officer of Arkansas Capital Corporation Group which underwrote the forum, doesn’t put much stock in MoneyTree. He said it excludes angel investment deals and other nonreported funding.

Walls said events like the forum, and a quartet of in-state deals recently funded to the tune of $7 million, can only mean Arkansas’ venture capital market is growing.

The forum even featured a series of presentations by six fund-seeking companies that were selected to pitch their dreams to the gala’s throng of potential investors.

Presenters included Fayetteville’s own TrestleTree Inc., which does health care cost management for Fortune 500 companies, and ImmunoBiosciences Inc. of Research Triangle Park, N.C., a veterinary vaccine firm that had its technology developed at the University of Arkansas by Craig Whitfill, a facuilty research associate.

“Activity begets activity,” Walls said.

“The forum fostered awareness of and interest in capital for emerging companies, which was its intention.”

Dana Silaski is a senior vice president of Stephens Inc. in Little Rock and represents private companies for its Private Placement Group.

She agreed that the success of the Arkansas Venture Capital Forum can help the state’s two biggest venture shortcomings.

Silaski said to promote more venture activity, Arkansas needs more investing and management infrastructure. She said the forum was the first step toward connecting the dots between entrepreneurs and angels or regional seed- and early-stage funds.

“Arkansas will also benefit as we develop more management infrastructure,” Silaski said. “Venture investors like serial entrepreneurs who have been part of a technology or early stage idea before.

They like to plug into that early-stage company a CEO or CFO that has helped take a startup public.

“The more people we have who have done it before, the more natural resources we’ll have in the state to do it again.”

MoneyTree Branches

The MoneyTree study rates the 50 states plus the District of Columbia and Puerto Rico. Its best performer during 2002’s first quarter was California with 263 deals totaling about $3 billion, for an average of more than $11.3 million per deal.

At No. 41 on the list, the cutoff point, was Vermont with one $150,000 deal.

The MoneyTree study is conducted through a partnership of financial services data leaders including the National Venture Capital Association in Washington, D.C., and both PricewaterhouseCoopers LLP and Thomson Venture Economics of New York. Kirk Walden, national director of venture capital research in PricewaterhouseCoopers’ Austin, Texas, division, physically complies the study.

“The research is statistically reliable,” Walden said. “But when you only have a few venture firms like Arkansas does, you can miss their volume by 50 percent on an annual basis by missing a deal or two. So there is some margin of error there.

“But there are venture deals that go unreported in Seattle, California and Texas, too.

Those areas have had a critical mass in certain sectors that have caused organic growth.”

San Diego is a biotech haven. Seattle is software. Dallas is telecommunications.

According to MoneyTree’s report, there were 4,679 deals totaling $40.6 billion nationwide for calendar 2001. Arkansas had two of those totaling $7.1 million.

About eight deals totaling $11.8 million during 2002’s first quarter were listed as “undisclosed and estimated” because MoneyTree lacked portions or all of their information. Theoretically, some of that could have included Arkansas deals. Diamond State Ventures, for instance, does not report its numbers to MoneyTree.

In three years of existence, Walls said, Diamond state has either spent or brought in $19 million worth of funding to Arkansas firms.

Most recently, DSV invested $7 million TrestleTree, DMD Industries Inc. of Springdale and both MedEvolve Inc. and Variplas Containers Inc. of Little Rock.

Arkansas has four true venture capital companies overall. (See map). If Arkansas Ventures is an “embryonic stage” fund as it’s often called, that would make The Alpha Fund a “twinkle-in-the-eye-stage” fund. Diamond State and Signal Hill look for “toddler” opportunities.

American Venture magazine reports that $100 billion sits idle in potential venture capital coffers nationwide, and that the money is simply waiting for a boost in the investment climate. Silaski said that seed- and angel-stage money represents 19 percent of total venture investments nationwide.

Angel Arkies

Walden said MoneyTree intentionally excludes angel investments, such as the three firms funded in recent years by Venture Capital Investors of Little Rock. The reason?

There’s no reliable tracking system for angel data.

He pointed out that just as there is more venture going on in other markets that’s not reported, there’s also more angel investors there as well.

Still, Arkansas doesn’t get credit for VCI, which has funded native companies Research Solutions, WesPak and Safe Foods LLC.

MoneyTree would have also missed the 10 Northwest Arkansas investors who in 2000 ponied up $2 million to fund Virtual Satellite Corp. in Fayetteville.

Mary Good, dean of the University of Arkansas at Little Rock’s Donaghery College of Information Science and Systems Engineering, is VCI’s managing member.

As the most organized group of Arkansas angels, VCI looks for two activities in the $250,000 to $1 million range annually to recommend to its members for financing.

Walls said Arkansas’ history as an agrarian state with relatively few super wealthy people with disposable capital, along with the disconnect that exists between startups and capital holders, probably contributed equally to a slower developing venture market. There’s also socioeconomic factors such as education and state funding that surely had an effect.

But Walls said deals that find investors aren’t always worth doing. And in the end, good deals get done.

“When people complain about not being able to find funding, the inference is that their project is worthy of money,” Walls said. “Sometimes they haven’t been funded for a reason. Ultimately, what we’re trying to do is create an environment where people with good ideas are exposed to the resources they can use.

“When you go out and seek capital or investment opportunities like we do, some days you feel like you’re the only one out there. The point is to get these folks together like we did [on May 15] to try to help get some deals done.”

Keeping Momentum

Ron Goforth, president of technology due-diligence firm Beta Rubicon Inc. in Fayetteville, has been critical of the state’s molasses-speed development of venture capital and high-tech opportunities. But even he was smiling after the venture forum, calling it a “blossoming recognition that it’s time to do something.”

The way to keep momentum gained from the event going forward, he said, is to solidify relationships with the region’s seed-stage venture firms, which were well represented in The Peabody Little Rock’s ballroom. He echoed Silaski’s call for networking infrastructure

“Right now we have no good structure for information gathering in place,” Goforth said. “The Legislature passed a favorable capital gains tax relief measure last year, and this event really brought the venture community together so there are some things happening.”

The next thing Goforth said he would like to see happen is for Fayetteville to host next year’s Arkansas Venture Capital Forum. The city already proved it could draw venture capital crowds with seminars in August 2001 and January of 2002 that drew more than 100 participants.

“If we are going to have a true Arkansas venture capital forum, and the two main economic engines for the state are Little Rock and Northwest Arkansas, then logic would dictate that we alternate the event between the two locations,” Goforth said.

2002’s First Quarter

Here’s how Arkansas’ six contiguous neighbors did in venture funding during the first quarter of 2002 and their rank nationwide. Arkansas’ deals and amounts were either zero or too low to be listed, according to MoneyTree:

Rank — State — No. of Deals — Amount Invested* — Average Deal*

3 — Texas — 42 — $319.9 — $7.6

27 — Louisiana — 4 — $15.1 — $3.8

30 — Missouri — 8 — $11.8 — $1.5

31 — Tennessee — 1 — $10 — $10

32 — Oklahoma — 1 — $8 — $8

39 — Mississippi — 1 — $0.25 — $0.25

* Dollar figures in millions.

SOURCE: The MoneyTree study conducted by Price Waterhouse Coopers LLP, Thomson Ventue Economics and the National Venture Capital Association.

Arkie Deals

Annual Venture Capital Investments for Arkansas.

Year — Deals — Amount*

2001 — 2 — $7.1

2000 — 4 — $10.3

1999 — 3 — $16.5

1998 — 3 — $6.9

1997 — 2 — $4

1996 — 0 — 0

1995 — 2 — $5

Totals — 18 — $49.8

* in millions

Source: PricewaterhouseCoopers LLP, Thomson Ventue Economics and the National Venture Capital Association