Is Venture Capital Available in Montana?
The following article appeared in the July 2010 issue of the Flathead Business Journal, but is no longer available online.
Last month we described VC firms as limited partnerships in which general partners raise funds from large passive limited partners, such as pension funds, foundation endowments and big corporate investors, and then invest those funds in new ventures. Typical investments by VCs today are rounds of $5 to $20 million in growth and later stage companies (not seed and startup stage companies). We further noted that VCs often invest in follow-on rounds of companies nurtured from start-up by angel investors. VCs tend to invest in high-growth, high-tech firms in business sectors in which the VC general partners have substantial experience.
Many general partner VCs are now having difficulty raising money for new funds because returns to VC limited partners (those pension plans and endowments) in the past decade have been lower than anticipated. Not surprisingly, the number of VC firms nationwide has been decreasing for the past five years or so. This does not bode well for increased interest by VCs in Montana companies
Furthermore, most VCs prefer investing close to home where “kicking the tires” of investment opportunities is convenient. Investing close to home makes mentoring and serving as directors of portfolio companies an efficient use of VC time. With a high percentage of VCs located in Silicon Valley and Boston, it is not surprising that over half of VC deals (over 60% of their capital invested) are located in California and Massachusetts.
So, have VCs been investing in Montana? The MoneyTreeTM survey reports that only eleven VC deals have been completed in Montana in the past decade. (MoneyTreeTM is a cooperative effort of the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters.) Granted, the National Venture Capital Association does not include investments made by some of the smaller, regional VC firms, but this does not really change the outlook for promising Montana firms seeking venture capital. Montana is only one of many “fly-over states,” so called because VCs traveling to and from California, Boston and New York fly-over and do not invest in most states.
So, what options are available to promising high-growth entrepreneurs in Montana? First, acknowledge in advance that venture capital is very difficult to raise in Montana. Then:
- When feasible, plan on achieving positive cash flow in startup ventures with personal cash and that raised from friends and family and from angel investors. Once positive cash flow is achieved, plan to grow organically (from internally generated cash).
- If you must raise more than $1 million, here are three possible approaches:
- Seek investment from one of the regional VCs who are interested in funding Montana companies. (We are assembling a directory of venture capital firms with interest in investing in Montana companies which will be published later this summer.)
- Swim upstream, that is, attempt to be the one company per year in Montana who successfully raises money in Montana from larger VCs located on the East or West Coasts.
- Bite the bullet and plan on moving your company to the locale of VCs interested in investing in your company.
Raising money from angel investors or venture capitalists is never easy. As we have suggested in the past, unless you absolutely must raise outside capital, don’t. The odds are against success, and the substantial time required could often be better applied towards executing on your business plan. The good news is that the angel movement in Montana is growing with three active groups (Frontier Angel Fund, Big Sky Angels and the Bridger Private Capital Network) and one or two new groups now being organized. Unfortunately, venture capital remains scarce in Montana and the situation is unlikely to change in the future.
For more on Montana Venture Capitalists, click here.