[Corrected 8/30/14, 1:51 p.m. See below.] It’s a “dangerous time” for the VC world because the majority of the industry’s money is concentrated in a relatively small number of firms, primarily in Silicon Valley. And that makes it tougher for startups in the Midwest to grow.
That warning came from Chris Olsen, co-founder of Columbus, OH-based Drive Capital, during a panel discussion among Midwest venture capitalists at the fifth annual Forward Festival in Madison, WI. The eight-day festival is the city’s answer to more high-profile conferences celebrating creativity and startups in other parts of the country, like South by Southwest in Austin, TX. More than 2,000 people attended this year’s Forward Fest, which featured a Ruby software developers conference; a new “Edible Startup Summit”; networking soirees, trivia contests, and live music; the inaugural Wisconsin Innovation Awards; a pitch contest for women entrepreneurs; and a mix of speakers that included Nolan Bushnell, the co-founder of video game maker Atari, and the panel where Olsen and other VCs discussed the industry’s opportunities and challenges. [This paragraph and subsequent references to Bushnell were corrected to indicate that he was a co-founder of Atari, not sole founder. We regret the error.]
The concentration of VC wealth means it’s getting harder for mid-sized funds to raise money, said Jeff Maters, vice president with Chicago-based Pritzker Group Venture Capital. And that’s a problem for Midwest startups because the smaller VC funds are the ones who invest in companies outside of Silicon Valley, Maters added.
It’s relatively easy for Midwest startups to raise seed funds, and fast-rising companies can even convince a coastal VC to fly into America’s heartland for a deal in the $10 million to $25 million range, said Bill Pescatello, a principal with Lightbank in Chicago. But raising a Series A round of a couple million dollars is much harder for Midwest startups, he said.
And Olsen cautioned entrepreneurs to be wary of how much equity they give up to angel investors. He has seen situations where after several angel funding rounds, the founder only owned 5 percent of the company. Olsen said he has bought out angel investors to give equity back to the founders. His ideal capitalization table? Company founders, employees, and investors each own a third of the business.
“You want to make sure the founders have enough skin in the game…to stay the course,” said John Philosophos, a Chicago-based partner with Great Oaks Venture Capital, which has its headquarters in New York.
Here are a couple more highlights from the events I attended:
—Jignesh Patel’s keynote speech illustrated the importance of the pivot for software startups, something he believes is almost a given, no matter how intelligent the founders are. The University of Wisconsin-Madison computer sciences professor co-founded Locomatix, whose software provided enterprise customers with real-time analytics of mobile data. Locomatix was acquired by Twitter last year, but it was an arduous six-year journey to get there.
In 2009, Locomatix had burned through $1 million in cash and was close to shutting down, said Patel, who was chief technology officer at the time. The company slashed half of its staff, and
