Alabama, South lag in venture capital funding
By Jimmy DeButts Staff – Birmingham Business Journal
Venture capitalists have largely ignored Alabama in the past year with no deals being reported in two of the past four quarters.
Alabama tied for 32nd nationally with just seven deals worth $43.1 million in the four quarters ended March 31, 2010, according to a recent report by PricewaterhouseCoopers. The state posted zero deals in the first quarter of 2010 and the third quarter of 2009.
Southern reliance on locally generated funding and a deficiency of venture capital firms contribute to Alabama’s lack of deals, industry experts said. Southerners generally seek financing through family and friends first, Founders Investment Banking LLC Managing Director Zane Tarence said.
“We are more relational in this area,” Tarence said. “If you can fund it yourself, through families or an angel group, it can be a better resource. We use venture capital as a last resort. They are going to boot strap it for as long as they can.”
Founders brokers multimillion-dollar deals, particularly in the information technology sector. Tarence said activity is hotter now than at anytime in the past two years with 10 currently in the works, he said.
Venture capitalists are always looking for sound investments regardless of locale, PricewaterhouseCooper’s Tracy Lefteroff said. Lefteroff, the firm’s global managing partner of its venture capital practice, said funding for the life sciences sector is often a barrier for those firms’ growth.
However, capital is available if the conditions are right, he said. Traditional research and development hub states such as California (1,199 deals worth $9.4 billion in the past year), Massachusetts (324 deals, $2.4 billion) and New York (175 deals, $840 million) have established venture capital infrastructure and an experienced serial entrepreneur base, Lefteroff said.
“The traditional areas are doing well because the infrastructure they established are there works even in down times,” Lefteroff said. “Those three factors are the reasons they continue to do well no matter what is happening in the economy.”
Regionally, Alabama trailed North Carolina (33 deals, $337.5 million), Florida (34 deals, $262.3 million) and Georgia (49 deals, $331 million) in venture capital deals in the past four quarters.
Alabama has the development capability and managerial talent to spin research into commercial products, Founders’ Tarence said.
“We have a ton of talent in Birmingham, but people outside the state don’t perceive us as having the talent,” Tarence said. “Investors invest in proven management teams. They bet on the jockey not on the horse.”
Venture capital activity will mirror the stock market the rest of 2010, according to PricewaterhouseCoopers’ Lefteroff. He expects life sciences investors to be bullish but overall the venture capital industry is trending smaller, heading to pre-Internet bubble levels.
Venture capitalists in Alabama are likely to link their investments to the state’s established economic growth priorities, according to Franz Lohrke, Brock Family chair in entrepreneurship at Samford University. Lohrke said state leaders are targeting the aerospace, clean energy, information technology and nanotechnology sectors for expansion and venture capital likely will follow those paths.
“They overlap with state priorities,” Lohrke said. “Those are on the state’s science and technology roadmap as they look for areas we can build an advantage in.”
Lohrke said programs such as Alabama Launchpad are designed to spur investment in the state’s startup community. Alabama Launchpad annually awards $175,000 among three winning teams composed of researchers from state universities.
The 4-year-old contest awards early stage companies to help them reach thelevel where venture capitalists enter the picture, according to Alabama Launchpad Director Glenn Kinstler. Lohrke said Launchpad can fill a funding void in the absence of a vibrant venture capital community.
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