Venture Capital Fund Fills Void in Financing for Louisiana Startups

Companies that took advantage of the Capital Tax Credit Program agree that the Louisiana CAPCO Program should be re-instated:

When business leaders gathered Monday to announce the creation of a venture capital fund to help entrepreneurs at the very earliest stages of business development, they took a small step toward filling a funding gap that has persisted in New Orleans and Louisiana for decades.

‘We’ve gone from being like Estonia to people saying maybe this is the next major hot spot,’ said Matthew Wisdom, who founded the technology company TurboSquid in 2000.

The primary goal of the New Orleans Startup Fund is to provide $25,000 to $250,000 in early-stage capital to individuals looking to start high-growth businesses in the New Orleans region. But it’s the fund’s tertiary goal of growing the venture capital pool in the New Orleans area that may provide the greatest impact to the business community.

“Louisiana has not received a huge amount of venture funding in the past,” said Mark Heesen, president of the National Venture Capital Association, whose association, along with PricewaterhouseCoopers and Thomson Venture Economics, publishes a quarterly venture capital investment report.

According to that report, there were 14 deals in Louisiana involving venture capital generated in the state at a value of $10 million in 2009. There were 2,916 deals across the country at a value of $18.25 billion in the same year.

Venture capital companies are known to seek out firms with the possibility of high growth in a relatively short period. Usually they invest in cutting edge information technology, communications or life sciences companies. Most of the investment in Louisiana, however, has been limited to energy-focused firms, Heesen said, an industry that had not been very attractive to venture capitalists.

“You’re a community that has really been so involved in one major industry traditionally, not an area for venture capital investment,” Heesen said. “There was nothing really to grab the interest of venture capital.”

That’s what Matthew Wisdom encountered in 2000 as he started the technology company TurboSquid, a New Orleans firm that sells 3-D stock images. Although TurboSquid had an investor, Intel Capital, willing to bet on the high-growth potential startup, Wisdom said the company did not want the hassle of being the lead on the project.

“They wanted to have a lesser role but still have the company funded,” Wisdom said. “They wanted somebody to be more involved and somebody who would do some of the heavier lifting.”

The company suggested TurboSquid secure a local investor to put up funds but also to perform due diligence, sit on the startup’s board, and try to ensure that the company stayed on track. Wisdom turned to Advantage Capital, a venture capital firm that has offices in Louisiana but invests around the world.

“Without Advantage, the deal would have died,” Wisdom said. “Advantage was the group that has been with us from the beginning.”

But Advantage is the big fish in a small pond of venture capital investors in Louisiana. Unlike TurboSquid, local companies often have to rely either on investment from friends and family, traditional bank funding or go out of state for venture funds.

“It’s a state that is traditionally underserved by venture capital, in contrast to a state like Texas,” said Crichton Brown, senior venture partner at Advantage.

The dearth is only becoming pronounced in Louisiana, and particularly in the New Orleans area, as a wave of startup-minded individuals have taken root here in recent years.

“In terms of New Orleans, obviously it’s becoming a more attractive place because people want to live here,” Brown said. “You have to support that with a network of accountants, lawyers, bankers, investment bankers, consultants, angel investors and of course universities all working in unison.”

Same status as Estonia

Growing the pool of venture investment in New Orleans has proved difficult in part because the population of able and willing investors is small. Areas that have large pools also have thriving entrepreneurial centers centered around universities, something New Orleans has lacked historically.

Wisdom said there also are not enough “limited partners” in Louisiana. Limited partners are people willing to take the risk of providing money to a venture capital firm to invest on their behalf in the hope of high returns on that investment.

“The problem is that there are not many limited partners that are willing to make a fund that invests in Louisiana companies,” Wisdom said. “That’s why venture capitalists are highly concentrated in Silicon Valley. Those venture capitalists are the ones with the best track record so the limited partners are investing in them.”

For those investors, New Orleans might as well be the tiny European nation of Estonia, Wisdom said. Many investors are just too reluctant to take on a risk so far away.

“It’s always great to have a local presence. There are eyes and ears on the ground,” Heesen said. “You want to very often be physically close to your companies. A lot can go wrong with these young, struggling companies.”

State tax program gone

The issue in Louisiana has been how to create those pools of investment capital, Wisdom said.

For a time, the state filled that void. Louisiana capital corporations, or CAPCOs, were established under a law designed to create pools of venture capital in Louisiana. Under the Capital Tax Credit Program, the state gave tax credits to companies that put their money in the CAPCOs, which would then invest them in business ventures.

“These state-run programs such as CAPCO make it easier for venture capitalists to invest in the state,” Heesen said.

But in 2007, Gov. Kathleen Blanco vetoed a bill extending the program because it was too expensive.

Early-stage investment activity has declined since the program’s end, Brown said.

“I think a renewal would be a positive thing, as long as the money is professionally managed,” said Brown, whose company took advantage of the credit program.

Conversations about how to increase the pool of early-stage investment have been sparked by Hurricane Katrina, which ushered in a younger population to New Orleans and the opportunity for the city to reinvent itself.

“It came to my attention that without some sort of access to seed capital, pre-angel type capital, that none of these companies were going to have a chance to get going,” said Ben Allen, president of Dolphin Debit Access and one of the founding board members of the New Orleans Startup Fund. Allen moved to New Orleans in early 2005 to start his company, which provides outsourcing services to community banks and credit unions.

“Right now, there’s really no money available,” Allen said. “There’s really some stuff going on, but we’ll have a hard time sustaining all of this if we don’t find some capital to put into it.”

Wisdom said he hopes the New Orleans Startup Fund, where he serves as chairman of the board, will alleviate some of that immediate need while also producing business ideas that can attract other investment. The idea is for that fund to beget other investment, including from outside the state.

“For a lot of the previous 10 years before Katrina we were in the Detroit level of decline for new businesses, now we’re better than the national average,” Wisdom said. “We’ve gone from being like Estonia to people saying maybe this is the next major hot spot, which is a change I wasn’t sure I’d see in my lifetime. What we need to do over the next two to three years is get a stable of companies that are ready for that level of investment.”

Heesen said he sees opportunities for the city and state to increase the pool of venture capital in the oil and gas industry where new models of efficiency are being created.

“I think that’s what you all have to put forward. It’s a new day,” Heesen said. “This is not something that happens overnight. This is a long period before you see funding and the results because a lot of our companies fail at the end of the day,” Heesen said. “I think there’s hope for (Louisiana) but I also want to be realistic.”

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