Thursday, February 23, 2006

Too Little Venture Capital or Too Few Good Deals?

There's a debate going on in the region about whether there needs to be more venture capital, particularly early-stage venture capital and angel investment, in order to create more successful startup companies.

Supporters of the need for more capital point to the many entrepreneurial companies that are currently starving for the capital needed to develop a prototype and take their product or service to the full market they can potentially reach.

However, opponents say that the problem is a lack of good deals in the region, and that capital will come when an adequate deal flow exists.

This kind of “chicken-or-the-egg” debate is certainly over-simplistic and probably counter-productive. While in the long run a higher rate of company formation will likely attract more capital, the challenge to the region is insuring that there is adequate capital in the short run, i.e., now, in order to grow the companies that we have here today. Companies that cannot get adequate capital investment when they need it will either fail or they will move to other regions where adequate capital does exist. It is well-known that early stage investors are unlikely to invest in firms located a long distance away. A startup company with only one or two employees is far more mobile than an angel investor or venture capital firm, so in the short run, inadequate seed and venture capital in the Pittsburgh Region likely means that companies will move to where the capital is.

Moreover, venture capitalists don't just provide money, they also provide critical management and strategic expertise that can turn a good company into a great one. So the lack of capital may be limiting the number of good deals, rather than the other way around.

If the Pittsburgh Region is going to turn its tremendous R&D strengths into new companies and new jobs, it needs to insure that the pipeline from startup to success stays full of both capital and companies at every stage. Capital gaps at any stage will “pinch” the pipeline, causing shortages of capital to back up to earlier and earlier stages, creating a vicious cycle that will slow
company formation and growth, and ultimately discourage entrepreneurship in the region.


Anonymous Anonymous said...

The real issue here is syndication of VC. There is more public early stage money available here than anywhere else in the country.

2:08 PM  
Blogger bluedog said...

We've had a lot of locally operated venture funds here - especially ones with a Pittsburgh focus and they have performed poorly. Do we really another Pittsburgh Seed Fund?

We have too many entrepreneurs focused on the minute details of perfecting their technologies for which no market exists. Giving them money is less effective than just creating a massive public welfare program.

11:53 PM  
Anonymous Anonymous said...

Any good high tech entrepreneur can find funding...unfortunately many technologists are not really entrepreneurs just inventors who want to be...

9:49 PM  

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