“Where’s the love? Some venture capitalists say they need more local support for their mission”

Nashville Business Journal, by Judy Sarles, December 6, 2002

Some local venture capital firms say they are not receiving enough attention from the area's institutional investors, something they say may hurt firms already suffering in the economic slump.

"I don't think the venture capital community in Nashville can survive without support from local institutional investors," says Mike Blackburn, a partner at Petra Capital Partners, a venture capital firm established in 1998.

Cities that have vibrant venture capital industries have strong support from local institutions, such as state and local pension plans, corporations, financial institutions and university endowments.

"No such broad-based support exists here in Nashville," says Blackburn.

The outcome is there are several small firms in Nashville that can invest $1 million to $5 million, but the city lacks larger firms that can handle, for example, an investment of $20 million.

Throw into the mix industry predictions that a third of all venture capital firms (there are about 800 firms recognized by the National Venture Capital Association) will not survive the current downturn and the outlook for Nashville's VC industry is not pretty.

"Why should we let this happen when we have the means to address the root cause through increased cooperation between the institutional investors, venture capital firms and entrepreneurs in our community?" asks Blackburn.

David Ward of Salix Ventures, which was founded in 1997, says the venture capital industry all over the country is in a holding pattern. Firms are being careful about how they put their money to work and about raising new money for new funds.

"It is a difficult cycle," says Laura Campbell of Laura Campbell & Associates, a provider of business growth advisory services for new and existing businesses, as well as private equity investors. "Young people and old people aren't starting new funds."

Although there's not a whole lot of opportunities right now for them, Salix hears all the time from young people who want to come into the business.

"That's always a good thing," says Ward. "I think sometimes they don't appreciate how much hard work it is."

Older funds with a track record probably have an easier time raising money than newer funds, says Larry Coleman, managing general partner at Coleman Swenson Booth Inc., which, at 19 years, is one of Nashville's oldest firms.

But Gary Peat, a partner at Council Ventures, a two-year-old firm where two of four partners are under 40, says some of the established Nashville firms have had their share of challenges. Some are not actively gearing up for the next fund.

"That is not good," says Peat.

However, he says deploying capital in a declining market that is close to the bottom is a sensible move.

"We think now is one of the very best times in maybe a decade or more to invest in venture capital," he says.

The venture capital business will continue to grow in Nashville, Coleman says, especially at older firms. Although the average age of the principals at his firm is about 55, he doesn't see age as an issue, since people are living longer and older venture capitalists have the experience to attract investors.

If it hadn't been for people like Jack Massey, who funded and founded what is today HCA Inc., Nashville wouldn't be the national capital of the health care industry. During the past two decades the growth of the health care industry, seeded by HCA, has contributed to a strong base of experienced managers and resident sources of capital fueling Nashville's business community, which gives Nashville several advantages over other cities. But Blackburn says the infrastructure used to support that growth is drying up.

"There's a lineage of great firms and great venture capitalists here in town and it would be a shame to lose sight of the value that that brings," says Peat.

A key piece of the economic puzzle is the establishment of pools of locally managed capital to fund the growth of local enterprises, Blackburn says. The capital used to support local businesses is increasingly located in New York, Boston or San Francisco. Coleman Swenson has raised four funds, but except for investments from a few high-net-worth individuals, it has not received any local institutional support.

"Most people would like to see an active program by pension funds, foundations and endowments," says Coleman.

Blackburn recommends that the leaders of local institutions approach legislative entities, boards of directors and boards of trust to free up allocations of their investment resources to local venture capital firms.

"Spread it around to all qualified fund managers so that it is more likely to end up in the hands of qualified managers," says Blackburn. "Make it a requirement that we invest some portion of our funds in local businesses. We can build upon our past success rather than see it slip away."

Peat, who says Council Ventures is not being harmed by a lack of local institutional capital, thinks foundations and endowments need to become more aware of economic development.

Some might say Blackburn's perspective is sour grapes. He admits that it is a David vs. Goliath battle. But he says he's an advocate for the venture capital firms and entrepreneurs in the community.

"A rising tide will lift all boats and that every constituency will benefit from this idea," says Blackburn.

Compared to 10 or 20 years ago, start-up businesses these days need more capital – and they need it more quickly – in order to gain scale and establish their brand before competitors enter the market.

"This is especially true for the health care industry, which has few barriers to entry," says Blackburn. "To accomplish this requires more capital. The capital simply must come from our local institutional investors. Our business community has been built substantially on the backs of high net worth individuals. We simply cannot keep going back to this same well."