The Venture Capitalists
Deb Smit
Wednesday, July 11, 2007
Pittsburgh has it all, national banking, health care, and high tech companies. More than 170 research laboratories reside here, and we claim more doctoral scientists and engineers per capita than Boston, Los Angeles, or San Francisco. Give us time and a lot can happen.
That’s the word from Pittsburgh’s venture capitalists, the people who put their money where there’s more to be made. And if funding is believing, the news is good. Investors agree that regional venture capital growth is on the rise and the opportunity for early-stage companies has never been better. Pittsburgh is on the cusp of a flourishing entrepreneurial market and, in time, as success breeds success, companies will spin off and multiply.
Last year new companies attracted $230 million in investment dollars, giving the region the largest growth in VC investment of any area in the country. Those who hold the purse strings believe this trend will continue. New start-ups, especially the proliferation of university-developed technologies, are not only attracting local investors, but calls are coming in from as far away as Silicon Valley.
Then and Now
“Fifteen years ago there were no venture capital firms in Pittsburgh,” reflects Glen Meakem, the force behind the hugely successful FreeMarkets, now Ariba. “There were a few early efforts, all of which are gone. It’s very significant now that we have four formally organized and working venture firms in the area—Draper Triangle, Birchmere, Adams Capital, and now Meakem Becker Venture Capital.”The Sewickley-based Meakem Becker fund is the region’s latest large fund, a $70 million pool that seeks investments in the $2 to $6 million range, with an eye for information technology and the life-science industry.
Pittsburgh VC companies put a significant amount of money to work last year, launching companies with tremendous potential. Among those are Meakem Becker backed Akustica, the leading high-tech digital microphone company in the world, Tiversa, a leading internet security firm, and Seec, a business services software company.
“The difference between now and back then during the dot.com bust is that a lot of venture capital groups left,” explains Don Jones, managing director of Draper Triangle, an early stage investor with a $120 million managed fund. “They were looking to get lucky. There was no solid foundation to those organizations. Today we have an increasing number of angels developing companies that are successful. Wealth has been generated by entrepreneurs who are inclined to invest in other enterprises. That’s where we’re getting the critical mass.”
Where once there were none, today more than 30 venture capital firms operate in Pittsburgh, according to the Pittsburgh Regional Alliance. Out-of-towners Louisville, KY-based Chrysalis Ventures III and New York-based Constellation Management Ventures Management have moved in and TA Associates, a Boston-based private equity firm with $10 million under management, has an office here. An atmosphere of cooperation among them is key, many say, as larger investors come to rely on the value of seed stage and angel investors.
Draper Triangle works closely with Innovation Works, the largest investor of seed-stage companies in the region. Having companies like Innovation Works, Idea Foundry, and Blue Tree Allied Angels in Pittsburgh is a critical step in turning great ideas into solid small companies, says Jones.
Success Breeds Success
“We joke that an overnight success takes a decade,” Jones continues, looking at the success of Plextronics, Renal Solutions, Carnegie Learning and BitArmor, all in the Draper portfolio. “What we need is to reach a critical mass for the domino effect to be self-perpetuating. There needs to be families of successful companies that spin off each other.”
That is beginning to happen. Spin-outs from Pittsburgh’s world-class universities are flying like sparks. It helps that the city is one of the greatest R&D hubs in the country and the region ranks seventh in National Institutes of Health funding.
“This is the best time since the bubble in terms of deals and total,” claims Tim White, coordinator for the Greater Oakland Keystone Innovation Zone, (GO KIZ), a cooperative of regional, tech-based economic development organizations, trade groups, governmental agencies, and universities that helps new companies emerge from the Oakland system. “If you look at the research centers across the country, not many have the depth and breadth we have. We’re seeing more come out of the universities and better deal flow now than there has been in years.”
The Oakland research engine, which includes CMU, UPMC, and University of Pittsburgh has doubled its level of university research funding on a per capita basis over the last five years, $250 per capita for Pittsburgh compared with $137 per capita for the nation. The total was close to $1 billion in 2006, thanks in large part to institutional investments.
“One of the interesting things that we've seen in the last five years is a focus from our universities toward spin outs,” notes Mike Matesic, CEO of Idea Foundry, an Oakland-based non-profit that currently nurtures 35 start-ups. IF has helped put companies like Apangea Learning, medSage Technologies and Starr Life Sciences on the map. “Most cities don’t have the university and corporate research base that we have. It’s a source of new ideas and companies.”
“The level of entrepreneurism is on the rise,” Matesic exudes. “The number of applicants to Idea Foundry is growing. Our goal is that everyone we work with will stay here in Pittsburgh and grow. We want them to be here for the long haul.”
If Timing is Everything
“It’s definitely an exciting time,” chimes in Rich Lunak, president and CEO of Innovation Works. “We’re seeing more companies approach Innovation Works with new ideas. It’s interesting if you look at the growth in other cities, none have made as sharp a turn in growth as Pittsburgh.”
Innovation Works recently released the details of its own growth last year, reporting that it assisted 230 companies in 2006, up from 118 in 2005. In addition, IW and Pittsburgh Life Science Greenhouse, which supports biosciences with investments of $6M in 37companies regionally, are helping to launch a new angel investment fund, Pittsburgh Early Growth Partners, currently in the throes of raising money for early-stage investment.
“Of the 21 venture deals in our region last year, more than half got seed investment from Innovation Works, a good indicator of the success of these companies.” But venture capital is just one of the pieces that has matured in the past decade, Lunak adds. Pittsburgh is finally beginning to build a pool of professionals who are helping to guide young firms.
Money may no longer be the big issue in Pittsburgh, but other challenges lie ahead: creating a favorable business tax environment, attracting and keeping good talent here, and providing business support services. Pennsylvania’s Corporate Net Income Tax, for example, is the second highest in the country.
“People in Pittsburgh have to understand that the key to the future is not government and government jobs, it’s entrepreneurship and the private sector,” says Meakem, who has made a the state's uncompetitive business taxes a personal crusade. “That’s where the tax base is. The only way you do that is by cutting the cost of government and making the cost of doing business here cheaper.”
“I don’t believe a single event will take Pittsburgh to the next level,” reflects Catherine Mott, co-founder of the Blue Tree Angels. “It takes a village. We have to look at the whole picture—the KIZ zone, Idea Foundry, Innovation Works, Birchmere activity, the out of town funds. I get frustrated when people say those who are successful don’t stay here. We need to create opportunities and fund the talent. If we build it, they will stay here.”
Deb Smit is innovation and job growth news editor for Pop City.
Captions:
'Innovation Works!' (if Clark Kent was a investor firm, that is)
'Seed money'
Don Jones at Gateway Center
Logos of local success stories
Mike Matesic in Oakland
Glen Meakem
All photographs copyright © Jonathan Greene
except Don Meakem, courtesy of Meakem Becker Venture Capital