Venture Home: Venture Capitalists Speak Out on Opportunities Seized and Missed in the State
By Larry McAlester
Durocher's OKCBusiness News Wire
June 24, 2004

When you hear the term venture capital, places like Wall Street, Silicon Valley, the Research Triangle, and Dellionaire spring to mind. Oklahoma does not.

And, although Oklahoma doesn't have near the visibility nor the vibrancy of traditional venture capital hotbeds, there is a thriving investment environment sprinkled throughout the state and beyond.

Oklahoma City and Tulsa have the most activity in the state but places like Edmond, Norman, Ada, Stillwater, Bartlesville, Enid, and yes, Yale are all home to nominated companies at the 16th Annual Venture of the Year Awards banquet in Tulsa last month. That this is the 16th annual Oklahoma awards event is a surprise to most.
John Frick, General Partner at Chisholm Private Capital Partners, and the biggest VC player in the state, is not one of them.

Frick realizes that there may be better deals outside the state borders, but his company does about 80 percent of its funding in Oklahoma.

"Our view is we have a very strong regional bias," said Frick. "We think there are good opportunities locally and we want to support them."

And Chisholm puts its money where its mouth is. Recent Chisholm-funded companies doing well include: Inoveon at the Health Sciences Center, which has developed technology to help prevent blindness; Critical Technologies in Edmond who uses elegant software to manage large volumes of documents; and Advanced Academics in Bricktown, which provides online education helping at-risk kids graduate high school.

Chisholm and others have their share of success stories, but are there enough? According to Frick, the answer is no.

"Most people/cities who are trying to think about economic development and personal income have figured out correctly that a vibrant venture capital sector is the key to job growth," said Frick. "The biggest problem Oklahoma has is that venture capital historically has been funded primarily by the endowments of the universities and state employee pension funds.

Every place in the country with a vibrant VC community has universities and public employee pension plans as the first big investors. Right now those people in Oklahoma don't invest any money in venture capital, here or elsewhere, and until we get some local institutional investors supporting venture capital in general, and venture capital in Oklahoma specifically, it's not going to get big."

The biggest challenge facing Oklahoma venture capitalists is that when outside capital is secured, the first question asked is, "When can we move the company?"

In particular, big investors want companies close to where they're headquartered.

They are putting most of the money in, and their view is that it is easier to move people than to find extra travel time to get intense interaction with their companies.

"The only way we're going to combat that is to develop a broader venture capital community in the state," said Frick. "What we need is five to 10 venture firms like Chisholm Private Capital Partners, not just us, and we need the ability to have these firms put money in the deal."

One firm meeting some of that need is Commercial Law Group in Oklahoma City, a law firm who got into the venture game through a client who was doing some individual venture transactions, and their relationship with Chisholm.

"To call it a fund would be a misnomer," said Shannon Self, principal at Commercial Law Group. "But we have an entity that will invest alongside Chisholm if the opportunity presents itself, we do transactions independent of Chisholm which tend to be smaller transactions, we have done transactions in companies Chisholm has an interest in, we'll do a piece when Chisholm won't for some particular reason at that point in time, or we'll do a smaller piece of the deal."

Like Chisholm, Commercial Law Group does almost all of its funding in the state, but with a different approach and philosophy.

"We'll invest in businesses that are not appropriate for Chisholm's fund," said Self. "We'll make investments in non technology based companies and those whose exit strategy is not an IPO or sale to a bigger company. We'll do some mom and pop deals. Chisholm wouldn't call that VC, and I probably wouldn't either, but where VC starts and stops is not a clear line, so in terms of political analysis or market analysis it's usually new or growing companies that need capital that are not going public, there is no exit strategy so one has to be developed in the contract. In the market we'd be viewed more as a law firm than an investment firm," said Self.

Therein lies the problem in Oklahoma: It is difficult to develop a strong investment community when a player in the venture game hangs its hat on something else.

"Look at Austin and the incredible impact Dell has had that city," said Self. "When you have a company who has performed like Dell, a couple of things happen: You have lots of people who were on the ground floor that have lots of stock options and incredible wealth that don't want to work at Dell anymore, so they are out looking for deals to do; and besides money, they have been on successful management teams and seen it done right and that makes a huge difference."

Without that difference, Self, like Frick sees the same pattern in Oklahoma.

"What tends to happen in Oklahoma is because you don't have enough resources and management teams that have that experience, the law firms and accountants and professional infrastructure, that when you do have a success it tends to leave the state," Self said.

Even with these obstacles, the venture capital climate in Oklahoma City has warmed recently, Frick said.

"We've made a lot of progress the last few years," said Frick. "We've gotten several companies funded locally and we've been able to attract a tremendous amount of capital from other investors. It is not uncommon for us to get five to six dollars for every dollar we invest and we are getting that money from out-of-state investors."

The bulk of that interest is in biotechnology and life sciences companies.

There are several factors helping the state lead that charge, according to Doug Branch, President of Biotech Law Associates, a firm that positions life sciences companies for venture capital funding.

"The Venture Capital Tax Incentive, the Oklahoma Life Sciences Fund, Presbyterian Health Foundation and i2E have all been instrumental in getting companies from idea to VC readiness," said Branch. "The VC Tax incentive is a powerful incentive that keeps money in Oklahoma, the Life Sciences fund is great at filling the gap from lab to proof-of-concept, PHF has been crucial in the development of world class facilities with proximity to OMRF which promotes turning the science into real companies, and i2E provides critical initial funding."

What that all translates to is the creation of viable, fundable companies.

"There are very few qualified companies who are not getting funded and we are attracting outside capital from Blue Chip venture funds like the Perseus-Soros Fund, Healthcare Ventures and the New Enterprise Association."

So the venture capital climate in Oklahoma remains calm. According to the National Venture Capital Association Web site, investment dollars in the state have increased each of the past three years since peaking in 2000.

And although paling in comparison to Texas, Oklahoma has outperformed neighboring states Kansas and Arkansas.

"We have strong local ties," said Frick. "Our view is there are plenty of good ideas around that deserve support and that by not trying to compete head-to-head in the biggest markets with the most competition we could create an interesting niche for ourselves and have a good track record. It's been very challenging, but the economy is better and our companies are doing better as a result."

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