Is ?Buzz? Burned Out of VC? (Ron Goforth, Guest Commentary

They told me that this issue of the Northwest Arkansas Business Journal would be devoted to venture capital (VC). My first thought was that if that meant this issue would be devoted to venture capital activity in Arkansas, then April 14 would likely see the thinnest issue ever.

Outside of the robust real estate arena and other deals that qualify for late-stage or commercial money, there has been scant investing activity in new ventures in the state, particularly in the increasingly discussed knowledge-based enterprises. Granted, this is a time of considerable nervousness in the investment community, but we should not use this as excuse to ignore or put off improving things.

Silver bullets are the stuff of fiction, and it is always easier to identify problems than to solve them. But we can look at some symptoms to see what we can do to at least begin to address them and encourage venture investing in small steps that that might lead to strides in venture development.

Addressable Negatives

Going over, yet again, the depressing statistics of “49th this” and “50th that” won’t help: we are already (or certainly should be) entirely aware of our status. So what negatives should we address?

• We have no clear and shining example of rewards of investing in early-stage enterprises — no example that would encourage other potential investors to get involved.

• There are some failures and disappearances, but, obviously, few insiders want to highlight them — so their news is vague and their message subtle. This limits access to information about pitfalls for potential investors and may contribute to a negative perception of early-stage investing in general.

• There seems to be a lack of investor sophistication when it comes to investing in knowledge-based enterprises — as in too casually accepting performance projections or excessive valuations.

• Conservatism of institutionalized venture capital in Arkansas limits its potential both as a revenue-generating activity and as a progressive example for other kinds of investors.

• The Arkansas Science and Technology Authority (ASTA) Seed Capital Investment Program is inadequately funded to be significant in supporting the development of technology-centric enterprise development in the state.

Some Positives

The very fact that capital has not been flowing into early-stage ventures means there is pent-up demand. The resulting potential deals provide considerable opportunity for investors to be highly selective and identify entities of relatively low risk and either significant value-creation potential or social value, or both.

We must expand the “comfort zone” of investors. One way to do so is to make investors familiar with how comprehensive due diligence can help quantify and control risk. The investment decision-making process can be rational and need not (should not) rely entirely on intuition or gut feelings or the ability to “read people.” Further, sound investment decision making should focus less on cutting the best initial deal and more on longer-term returns.

Conventional VC funds are in serious trouble nationwide — frequently deservedly so. The gamesmanship, lack of manager accountability, herd mentality, and negligence of inadequate due diligence that all characterized the pre-tech bubble bust still prevail. There are, however, superior fund management models emerging, such as The Alpha Fund in Fayetteville, which is a real and present opportunity.

Perhaps we should drop altogether the buzzword VC, along with its attendant baggage. Perhaps we should shift our paradigm and talk about “investment capital” or “enterprise development investment,” both of which are broader and more descriptive. Enterprise development investment is what Northwest Arkansas needs.

Anybody want to talk?

R.R. “Ron” Goforth, Ph.D., is President of Beta-Rubicon Inc., of Fayetteville, a firm that specializes in independent technology assessment and due diligence services. www.beta-rubicon.com