State Counters Venture Capital Trend
By Marcin Skomial
The Oklahoman
7-10-2003

When it comes to venture capital, Oklahoma is a rare creature.

Last year, when the amount of venture capital invested across the country plummeted to record lows, Oklahoma experienced its best year ever. It's a trend that has been taking shape during the past five years in the way venture capital is invested, industry observers say.

Out-of-state venture capital firms are reaching out to Oklahoma enterprises — a significant shift in an industry that has historically preferred to keep its investments close to home.

"I think it is absolutely true that the industry is becoming less geographic and more industry-specific," said John Taylor, vice president of the National Venture Capital Association. "If a West Coast venture capitalist is interested in a particular technology out of some distant university, they will make that investment."

And many local venture capitalists and investors say that — because their outlook for the economy is improving — they are becoming less wary about putting up money for investments.

"A lot of venture capitalists are beginning to see the light at the end of the tunnel," said William Paiva, general partner at Chisholm Private Capital Partners, an Oklahoma City venture capital firm. "They are at a point when they are more willing to invest, and are more actively looking for opportunities."

That is good news for the upcoming Annual Southwest Capital Conference, which will be Sept. 17-18 in Tulsa. The conference will bring venture capitalists, companies and others from at least 10 states.

Venture capitalists have been grounded in a grim reality since the dot-com bubble burst in 2001. One of the biggest deterrents for investors has been the lack of market for initial public offerings. In the past, the stock sales represented an important way for investors to generate cash from their investments.

And many new companies are finding it more difficult than ever to market their products, as consumers are holding on to their wallets.

"There are a lot of great companies with great products that do not have anybody to sell their product to," Taylor said. "That holds back venture capitalists from investing in them."

Oklahoma — and the entire Southwest region — receives just a minute part of financing from venture capital firms that invest billions of dollars every year.

Most of the financing for Oklahoma goes into biotechnology, an industry that is quietly making its presence known in Oklahoma City amid traditional mainstays such as manufacturing, construction and energy.

Last year, venture capitalists invested about $60 million in Oklahoma companies, $8.8 million of which came from Chisholm, an Oklahoma City-based venture capital firm.

Venture capital spending across the country has been on a downward spiral since 2001. Last year, venture capitalists invested $22 billion, in sharp contrast to about $105 billion spent at the peak of the market in 2000.

Industry observers do not believe 2003 will bring the bounty that 2002 did.

For one thing, Paiva said much depends on whether academic centers such as the OU Medical Center and others are able to come up with eye-catching innovations.

Experts agree, however, that the rules of venture capital investment have changed and Oklahoma's potential for attracting cash is brighter than it used to be.

Until about five years ago, venture capitalists had been reluctant to invest in companies more than two hours away from their headquarters, Taylor said. The reasoning was that the distance makes it hard for them to oversee businesses.

Venture capitalists rarely engage in daily operations at companies, leaving it to the management, but they are involved in strategic decisions. Venture capital firm executives often sit on the companies' board of directors.

The final decision about investing in a distant company often depends on whether there is a local venture company that also is putting up money for that company, Taylor said.

"They need to have someone out there to oversee the operations, which they cannot do to the same extent because of the distance," Taylor said.

There are only four venture capital firms in Oklahoma; the largest one of them, Chisholm, has an $80 million investment budget. Some of the investment in Oklahoma also comes from private individuals, so-called angel investors.

The Southwest Capital Conference, which is organized by the Oklahoma Investment Forum, has seen a steady increase of attendees from states such as New York, California, Texas and Colorado, said Tom Walker, executive director of the forum.

It's not unusual to see investors such as Thomas Dickerson, chairman of Tullis- Dickerson & Co., Inc., a venture capital firm based in Greenwich, Conn. His company focuses on health care enterprises.

Dickerson said the conference gave him a chance to network with two Oklahoma health care companies. He did not invest in any of them, but he pays attention to what is developing in Oklahoma through an in-state adviser who keeps him aware of investment opportunities.

For some, the conference offers a way to network with out- of-state and local investors and allows them to gauge others' outlook for the economy.

Paiva said he has seen more optimism at the conference over the last two years.

"Last year the mood at the conference was cautiously optimistic in contrast to the year before when it was somewhat more depressed," Paiva said. "I think this year will be much more optimistic."

What happens to the economy in the long term is a crucial question for venture capitalists.

The best time to put up money for a company, Paiva said, is when the economy is just about to rise from a downturn. That is because during a downturn the value of companies usually goes down, making them more affordable for investors. When the economy is in high gear, the value of companies usually rises. At that point, venture capitalists want to sell out because it ensures the biggest return on their investment.

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