FORT WAYNE – Coming up with money to lease office space, buy equipment and inventory can be a major hurdle to turning that great idea into an actual business.
Venture capital can be a way to clear that hurdle. But getting strangers to bet money on you can be a high bar – especially in the Midwest during a recession, experts say.
It’s always been difficult to finance startups, said Karen Goldner, president of the Main Street Venture Fund and a Fort Wayne city councilwoman. And I think it’s more difficult now than it was 18 months ago.
Venture capital is money put up by wealthy people or companies to help businesses start up, expand or restructure. Also called risk capital, it is fronted with the expectation it will yield greater profits than more conservative investments such as stocks and bonds.
As the economy tanked and the financial markets plunged last fall, most investors found they had much less in their portfolios than they had a year earlier.
In the three months ended June 30, U.S. venture capital funds raised $1.7 billion, the least since the first quarter of 2003, according to Thomson Reuters and the National Venture Capital Association.
And venture capitalists do far fewer deals in the Midwest than in Silicon Valley or New England. Or in New York City, Los Angeles or Texas, according to first-quarter MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.
Of the $3 billion invested nationwide during the quarter, just $14 million was invested in Indiana and $25 million in Ohio, the report said. But venture capitalists invested $175 million in Texas during the same period.
The relative scarcity of venture capital doesn’t mean people aren’t starting businesses in the region.
I think there’s a fairly robust entrepreneurial segment in the Midwest, said Karen Hopper Wruck, a professor of finance at Ohio State University’s Fisher College of Business.
But she said most startups don’t rely on venture capital.
That doesn’t mean there isn’t any venture capital floating around northeast Indiana and northwest Ohio, said Bill Todorovic, assistant professor of small business and entrepreneurship at Indiana University-Purdue University Fort Wayne.
It’s actually more available than most people think, Todorovic said.
However, the money’s only available to those with the best business plans, he said.
Very often, I’m approached by people with an idea for a better mousetrap, Todorovic said. That just isn’t going to fly.
Instead, they have to show how much their idea’s going to cost and how much of the market they plan to capture. In addition, they have to propose a management team that can execute the plan or adjust when things don’t work out as hoped, Todorovic said.
Goldner agrees. They have to show how they’re going to make money and how they’re going to make the investors money, she said. Otherwise, they’re just talking.
Todorovic reviews many business plans and passes some along to venture capitalists.
Out of 100 business plans I see, there might be two or three I do that with, Todorovic said. The bar is very high.
Despite the high bar, Goldner said her Main Street Venture Fund is doing more deals this year than last, albeit for less money per deal.
The fund started in October 2006. By the end of 2007, it did 54 deals. In 2008, it did 34. This year, the fund had already done 54 deals by mid-July, Goldner said.
Average early deals ranged from $400,000 to $500,000, although they’re now running between $200,000 and $300,000, Goldner said.
One successful early deal was Main Street’s 2007 investment of $500,000 in Valpo Orthopedic Technology Inc., a Warsaw startup that developed a less-invasive method of knee replacement.
Their infusion was critical to us moving forward, Valpo Chief Operating Officer Tom Sherer said.
Surgeons implanted the first Valpo-designed device in December 2008. By the end of July, 44 Valpo-designed implants had been done.
The company is still in the development stage and Sherer declined to say whether it’s turning a profit.
If you think your business plan might have what it takes to attract venture capital, talk to your lawyer and your accountant, Todorovic said. They should be able to help steer you to investors.