Various efforts are gaining momentum to improve the local atmosphere for venture-capital funding. Area universities have ramped up sources of support for startups while capital firms and government-sponsored programs continue to pinpoint promising deals.
Yet gaps in the funding spectrum exist. Securing growth funding, or the middle rung on the venture-capital ladder, remains a challenge for established businesses looking to expand or enter new markets.
“Upstate, in general, gets criticized a lot for not having a lot of venture-capital funding available,” says Jeffrey Lewis, treasurer of the Upstate Venture Association of New York Inc.
But area capital firms have raised money in the last three or four years and are combing through the investment options.
“I think the big issue for early-stage companies is making them more attractive to venture-capital firms,” adds Lewis, partner in the private equity team at Bonadio & Co. Inc. in Pittsford. “Just because somebody has a great idea doesn’t mean they’re going to attract (support).”
The quarterly MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association shows venture capitalists invested $119 million in Upstate New York last year. The October report, which relies on data from Thomson Reuters, puts investment activity for the first two quarters of this year at $32 million.
David Waterman, managing director of DeltaPoint Capital Management LLC, estimates that 8,000 companies in Upstate New York fit his firm’s investment criteria. The Rochester-based firm specializes in late-stage funding for established companies with revenues between $15 million and $200 million.
“And so I would guess 15 years ago, companies would change hands once every 20 years,” says Waterman, whose firm’s activities include divestitures and going-private transactions. “Now they’re changing hands once every 10 years, on average, and that means there are about 800 transactions, give or take, happening somewhere in Upstate New York that potentially we could address with our capital.”
Still, without a money center in the region and the capital that typically aggregates around bank headquarters, growth funding is not plentiful here.
“Just in terms of economies, it doesn’t make any sense to get into that business unless you can raise at least $50 million. Most people would say that number is probably closer to $100 million,” Waterman says. “Once you have (that), you’re not going to put it out in $500,000 chunks to small businesses.”
He adds, “So I’m not saying it’s like a doom-and-gloom situation,” considering businesses in that predicament could seek help from angel investors. “I just think it’s going to be hard to organize a capital market around that need.”
The availability of seed funding, on the other hand, has increased here.
Last month, Rochester Institute of Technology launched a $3.5 million venture fund open to the university’s students, alumni, staff, faculty and startups doing research with the university, among others. Besides aiming to bolster business development, the venture program has established a relationship between RIT and Rochester-based Excell Partners Inc., a New York State-supported seed fund.
“If you look at it in that fashion, you can see where these crossover criteria mean that there’s a great likelihood, between Ex-cell and RIT, eligible companies could see a dual funding source,” says James Watters, senior vice president for finance and administration at RIT.
He adds: “We will work together to make sure that the terms sheets—the conditions upon which these companies get money—are not incompatible in the sense that RIT’s terms and conditions are going to mirror and be very consistent with Excell’s to make life easier for these entrepreneurs so that they’re not negotiating two separate, mutually exclusive terms and conditions to get the money.”
RIT also plans to work with Rochester Angel Network members to fund companies that interest both organizations, Watters says.
To date, the network has made 22 investments totaling $10 million in 18 companies, says James Senall, RAN managing director and co-founder.
The RIT Venture Fund is currently evaluating five or six companies for funding, though it is not yet clear which will move to the award phase, Watters says.
While the local landscape for venture funding has secure footing in many respects, the national outlook appears murky.
According to the MoneyTree Report, venture capitalists invested $20 billion in deals during the first three quarters of this year, setting the stage for activity to fall short of 2011, both in dollars and number of deals. Third-quarter activity totaled $6.5 billion in 890 deals, down from $7.3 billion in 935 deals during the second quarter.
The software industry saw the lion’s share of funding, with $2.1 billion invested in 304 deals during the third quarter, making it the fourth quarter in the last five in which investment topped $2 billion.
Third-quarter investment in biotechnology and medical devices rose in dollars but slowed in deal volume, with $1.7 billion in 181 deals.
The report also shows that investment in the third quarter fell in all development stages. Third-quarter seed investments dropped 22 percent in dollars and 7 percent in deals, with the average deal totaling $2.7 million, down from $3.2 million in the second quarter. Software, media and entertainment and information technology received the most first-time funding, while sectors across the board saw expansion- and later-stage investments fall for the quarter.
Yet compared to other regions, Upstate New York has a strong foundation for cultivating deals, Lewis says. Factors working in the area’s favor include its strong investment community, highly regarded universities and vibrant history of entrepreneurship.
“I think one of the biggest challenges, though, is attracting out-of-town capital,” he says. “There’s a lot of venture-capital money in New York City, which isn’t that far away.”
Innovate NY, a new $26 million seed equity fund administered by Empire State Development Corp., is likely to be a boon for area businesses, Lewis says. Several capital firms that were awarded funds from the program actively invest Upstate.
“You would think that private equity funds in Upstate would sort of compete against one other, but there’s nothing further from the truth,” Lewis adds. “All of these funds have their sweet spot, and it’s a very collegial environment.”
Venture funds typically distinguish themselves by industry or financing stage they pursue.
Overall, the local outlook for venture capital looks bright, Lewis says. But companies seeking support need to have all their ducks in a row, including having a sound product, management team and business plan and a reasonable expectation about valuation.
“There’s a lot of money available for investment,” he says.
Sheila Livadas is a Rochester-area freelance writer.11/16/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.