Investments

Where Have All the Midwest VC's Gone

Bank Of America Investment By Jim Carlini • 03/28/03 Since the dot-com boom days are over and soaring tech funds are long gone, where are investment firms putting their money? Whats their criteria for investing? What is their strategy?

If you are a start-up firm looking for investment capital, you may be surprised at how things have changed. In some cases, former self-proclaimed savvy investors have become gun shy to the point that theyre not really looking at any investments unless its for some overpriced condo that they think is their next big investment. The huge losses they suffered in the last two years have turned many into non-investors of start-ups.


Just as a lot of amateurs in technology innovation were found out and became bankrupt and/or unemployed, there are also a lot of pseudo-expert investors that are now trying to find deals that are so perfect and have no risk that they are falling by the wayside (as they should).



Just like bad technology firms and poor management teams fell by the wayside, so will investment companies that really dont have the expertise to review the deals of today and provide a realistic term sheet to prospective investment seekers. They either have a bad business model that they are following or they really didnt have any expertise in the first place.

With investment seekers becoming more selective, those that offer a bad deal are not getting traction with start-up firms that cant accept outrageous terms. There was a time when a funding candidate could have a good PowerPoint presentation about an e-commerce concept and it was good enough to get $10 million in investment capital from the same people.

Those days are long gone.

A strong business plan, a strong management team and a strong cash flow are the minimum requirements for many investors before they even consider investing in a start-up. Ive heard several start-up executives in a nanotechnology funding seminar say they wouldnt be needing any funding if they had all those criteria met. Instead, they would be self-sustaining.

So much for the rigid terms that some investment sources think theyre going to secure with the next group of candidates. Few are buying into it and it has gotten to a point where some start-up firms are seeking alternative investors over ones that are local. I have heard from several different companies that they are not happy with some of the local investment firms and their approach to funding.

Aiming For Quality
Many investors have cooled to a point of not wanting to review technology. This is a time when they might be overlooking some good companies and some great returns.

In addition, the returns on other investments are abysmal. The real investment gamblers are hungry for the right deal. Most of them have been spoiled on high-tech double- and triple-digit returns and could care less about the 1 percent thats being given out by banks or other investment opportunities.

Some investors have that sickness of spending more money and never quitting (even on a bad venture). They dont put on the ABS brakes when they see a bad trend. They just keep investing thinking things will correct themselves much like casino gamblers thinking that putting in a couple more quarters will change their luck on the next spin. Millions of dollars later, they cannot realize that they are betting on the wrong horse.

I have also talked with a software firm that has run into some obstacles with Chicago-area investors. They also point to the arrogance of some firms that really dont understand how to develop a win-win situation.

Biotech: A Better Change of Getting Investments
There are some investment funds that are looking for specific applications in medical and biotechnology applications. If you have the right product, you can be brought into a realistic financial package with a term sheet that is reasonable. There are different corridors of biotech work going on in the Midwest. Some could argue that Wisconsin has a big jump on Illinois in terms of defining biotech as a new jobs creation industry. Illinois seems to lag behind.

Though politicians seem to think Illinois is a great place to encourage new endeavors, I think they are long on talk and short on action. Time will tell as outside funds line up to analyze new local products and endeavors while others play wait and see.

Carlinism: Bad management is not restricted to technology firms. Many investment firms have their fair share of pseudo-experts as well.




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Jim Carlini is an adjunct professor at Northwestern University. He can be reached at carlini@northwestern.edu or 773-370-1888. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters. They can be found at www.eprairie.com.

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