JumpStart: IdeaExchange Blog

Last week, Dan Primack continued his discussion from the week before on peHUB about the numbers being published on national trends in Venture Capital fundraising — and what it all means. His general conclusion was that the numbers are hardly worth celebrating. His three reasons why:

1. Bigger fundraising totals do not necessarily translate to better returns.
2. Even if size does matter, improving over H1 2009 is no great feat.
3. The two major databases - Dow Jones and Thomson Reuters aren’t consistent.

I couldn’t agree with him more.

I decided to engage in the conversation - and to continue the discussion here. Here is the comment I posted back to Dan:

Dan,
Thanks for bringing to light the challenges involved in data collection. Our organization takes the lead in collecting and publishing the amount of venture investment just in Northeast Ohio and it is a laborious task.

When two reputable data collectors come up with contradictory information I think the only option is to call it inconclusive, as you have wisely done. Given the uncertainty in the data, the only thing to do is talk to entrepreneurs to get real, if only anecdotal, data. Here in NEO I know that our entrepreneurs are definitely feeling more “Thompson” than “Dow Jones” – growth capital is very difficult to come by.

As you point out, big funds are not necessarily the most successful funds. I’d like to see venture turn back to its roots of smaller funds, managed by a handful of close-knit partners who have relevant backgrounds in the industries in which they are investing. Smaller funds mean smaller management fees and I think that’s a good thing. Venture investing becomes more personal, the principals have everything riding on their ability to generate great IRRs (rather than collecting current income via huge management fees.) So, I’m actually okay if the total dollars invested in venture nationally goes down, just to long as the number of firms managing the money increases.

What do you think?

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

Every once in a while you happen upon a blog post that sums up everything you’ve been thinking in an especially neat and tidy fashion. Here is one of those posts written by David Shen, formerly with Yahoo and Apple and now a venture investor. In it he shares seven questions that he typically asks when he meets an entrepreneur, presumably in order to assess whether or not he’ll move to the next stage. We ask similar questions of our applicants in the hopes of giving them some insight into what for-profit venture investors seek so it’s nice to see these questions posted for all to see. As I’ve said in the past, it’s great to see VCs openly blogging about their industry - the information serves to educate and enlighten all aspiring entrepreneurs.

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

Last month the Brookings Institute published a report, authored by Frank Samuel, called “Turning up the Heat: How Venture Capital Can Help Fuel the Economic Transformation of the Great Lakes Region.”  

The 54 page report makes the case for increasing the amount of pure venture capital in the Great Lakes region* as well as the amount of funding for those organizations that essentially “prime the pump” for VCs. For those of you who have read my blog posts you know that this topic is right up my alley, so I say “Right On!” to Frank and encourage the leaders in these states to read the report and take action.

For those of you who prefer the CliffsNotes version, here goes: The region in question has more than enough assets to support a vibrant venture eco-system — great university R&D**, quality graduates from top tier educational institutions***, a strong industrial base, and expertise in growth sectors such as biomedical and cleantech. Of all the venture capital raised in the U.S. approximately 40% is contributed by the Great Lakes region’s large public pension funds while the region only receives about 13% of that back in the form of investments. (Hmmm, does this seem fair?) Mr. Samuel’s proposal involves forming a fund-of-funds (with capital invested by Midwest pension funds) that will be invested in venture funds actively investing in the Midwest region. I love the idea and it makes tons of sense. More Midwest VC money = more Midwest deals funded = more Midwest economic growth = more Midwest employment = more Midwest prosperity.

The devil is always in the details, however. My guess is that the situation at present is a result of the average Midwestern pension fund manager claiming not to be able to find any “top tier” Midwestern-based venture funds to invest in. Most Midwest-based venture fund principals bristle at this complaint, but there’s some truth to it; there simply are not enough large VC funds in the Midwest with “top quartile” track records to absorb all of the money pension funds want to invest in this asset class.**** So, what’s the solution? I am sure there are several, but I can think of two at the moment. One, invest the money with a coastal firm only if it will open and staff a Midwest office (hint: Draper Fisher Jurvetson provides a great example of how to do this) and two, take some risks and invest in first time funds (something conservative pension fund investors have been historically loathe to do) as long as the principals at the fund can show they have experience successfully investing in and/or starting and exiting companies.

I hope this report creates momentum and cooperation among the leaders of these 12 states and, in turn, these leaders put pressure on the pension funds to invest in their own backyards (or put their money where their mouths are — pick your idiom). The benefits of a vibrant venture ecosystem are obvious (think Silicon Valley, Austin TX, etc.) and could be realized with a little bit of cooperation and whole lotta creativity.

* the Great Lakes region as defined in the report includes 12 states: Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, New York, Ohio, Pennsylvania, West Virginia, and Wisconsin

** 33% of all U.S. research and development dollars and 35% of all NIH research grants go to the Great Lakes region

*** who, historically, have fled to the coasts to look for work

**** most pension funds only want their investment to represent a small portion of the overall venture fund’s assets

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

Last week, Jeff Bussgang had a very interesting post on his own blog and peHUB: Why Do VCs Blog (and Tweet)? As you know, JumpStart is blogging and tweeting too - for many of the same reasons Jeff mentions. It’s great to hear the perspectives of other VCs as the industry continues to change. I shared a few of my thoughts on the topic as well:

Jeff, thanks for the post. Blogging definitely makes information more readily available to the masses and has helped to demystify the topic of venture capital. As a seed-stage venture investor with a focus on companies in the Midwest, I enjoy reading posts from my brethren around the country - it helps me keep abreast of current trends. (Just last month I highlighted 12 great VC-related blogs worth reading). I think you make some great points about why people blog. I know at our firm we started a blog not only to provide an outlet for personal viewpoints on various venture-related topics but also as a PR opportunity for the firm and the individual bloggers. That said, keeping a blog timely and relevant is hard work. Keeping the material fresh is a challenge and I’m impressed (and thankful) that so many VCs take the time to post. I wish I were as diligent. Active blogging by a VC may get them increased deal flow and definitely gets them enhanced name recognition which, for the amount of time and effort a blog requires, is more than deserved.

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).