The State Journal
Published: August 24, 2006

Moving Deliberately, VC Firms Post Successes

Some say lack of entrepreneurial experience is reason for lack of investments.

By: Pam Kasey

The West Virginia Venture Capital Act of 2001 succeeded in its goal of attracting venture capital companies to the state. Investments have followed, as hoped -- although some say there could be more.

Fourteen VC funds sought a part of the $24.5 million the state put up through the act.

Six were chosen by the West Virginia Economic Development Authority and, in 2003, each received an investment of $4 million for re-investment in West Virginia companies.

Those investments went to Adena Ventures of Athens, Ohio; Anthem Capital II, Baltimore, Md.; Mountaineer Capital, Charleston; PA Early Stage Partners, Wayne, Pa.; Toucan Capital Corp., Bethesda, Md.; and Walker Investment Fund II, Glenwood, Md.

The INNOVA Commercialization Group of the West Virginia High Technology Consortium Foundation also received a $500,000 investment

Three years later, about $14 million has been invested in new West Virginia companies, leaving $10.5 million yet to invest.

Matter of Experience

Some of the venture funds have run with West Virginia's allocation. Mountaineer Capital and Adena Ventures, for example, have invested their entire $4 million allocations and more.

And they've made investments they're excited about: Charleston-based Vested Health, for example, established in 2001 and now providing consumer directed health plans in 25 states, and Threewide Corporation in Morgantown, which captures and distributes real estate data.

But some other funds are hanging back.

PA Early Stage, for example, has at least $2 million yet to invest. Toucan Capital has made one investment for less than $500,000.

"I think the venture funds in the state are still having a hard time finding venture-backable companies," said Eric Lewis, chairman of the networking and educational group West Virginia Venture Connection and former executive director of Walker Ventures, one of the six funds.

Although Walker has invested $3.5 million of its allocation, Lewis feels an entrepreneurial culture hasn't developed fully in West Virginia.

"Venture-backable ideas are just different," he said -- "bigger ideas than so far have come out of the state in great number."

Anthem Capital hasn't made a single West Virginia investment.

Anthem seeks early-stage investment, but it's waiting for an opportunity with "a management team that's done it before," according to General Partner Ed Spiva.

"West Virginia just doesn't have the serial entrepreneurs (yet) that meet our profile," Spiva said.

Experience, or lack of it, is the issue.

Here's INNOVA Director Greg Clutter: "I could keep 10 people busy working with these early-stage companies constantly in the trenches: Here's how you market your product, here's how you price it, let's put together a board."

And here's Spiva: "There is plenty of capital available for the right kind of business opportunities. It's not a shortage of capital that is inhibiting companies from growing. It's a lack of expertise."

There's no real disagreement there -- it's a difference in the level of entrepreneurial experience the two VC funds expect in a management team.

"Some of these firms are looking for experienced entrepreneurs, but this market is still in its infancy," said C. Andrew Zulauf, partner at Adena.

"There was this quandary when we first started out: Do the VCs come and create the companies, or do the companies come and then the VCs invest? Chicken and egg," INNOVA's Clutter recalled.

"I'm not sure we've answered that question," he summarized. "Some say there's plenty to invest in. Others say the deal-flow hasn't come."

A Matter of Time

Chicken or egg, it seems everyone believes something has hatched.

"It typically will take anywhere from five to 10 years for this to happen," said Spiva, who said he's seen the process through in Delaware and Virginia. "I think good progress is being made, and anyone who expects it to happen faster, they're just not looking at it realistically."

Spiva thinks the state needs to focus on its strengths, energy being the most obvious example, and direct its support for entrepreneurship around those. Bringing experienced management from outside the state to grow companies based in those strengths would give VCs greater confidence, he said.

And he believes the West Virginia entrepreneurial community is too focused on developing companies that seek government contracts.

"The state has done the right thing," he said. "There's software talent in the state, just as an example, because there have been government contracts. But now you need to move beyond that and go to the commercial sector."

Meanwhile, good things of other sorts have come from the Venture Capital Act experience.

"We wouldn't have had those VCs here as resources, to do presentations, to counsel and mentor West Virginia companies about what this capital process is if we hadn't gone through that," said Clutter.

It's a lesson for a possible future round of state allocation to venture funds, said University of Charleston Entrepreneurship Center Executive Director Nora Myers, who has worked closely with venture capital in the state.

"If we had it to do over again, I think we might screen VCs a bit more for ones that were prepared for partnerships (with less experienced entrepreneurs)," Myers said.

She feels we've completed the first chapter in the story of entrepreneurship in West Virginia.

"Our next chapter will entail taking that learning and having a better focus on strategy," she said. And, echoing Spiva, she said, "What kinds of industry sectors can thrive here? Maybe we should be focusing on things like energy, chemicals, biotech, things that already have a lot of presence here in the state."

Spiva is looking forward to Anthem's first West Virginia investment.

"I believe that the state has a tremendous opportunity," he said. "I thought that five years ago, and I still think that's true."

Meanwhile, monies not yet invested remain with the state, earning interest.

There were no time limits attached to the state's allocations, according to Economic Development Authority Director David Warner, who said he feels the approach is proving to be a success.

"The old Capital Company Act gave rigid timelines and forced investments to be made at certain times, possibly earlier than they should have been," he said. "We wanted for the marketplace to dictate when the best timing was for these companies to make investments."