Western New York Firms Struggle to Attract Venture Capital

When companies go looking for venture capital, Jack Wagner is the kind of guy they hope to hook up with.

By:
Tracey Drury
The Business News of Buffalo

http://www.nasvf.org/web/allpress.nsf/pages/8456

Wagner, the newest entrepreneur in residence at the Western New York Technology Development Center, is a former senior manager and CEO at such area firms as Comptek Research Veridian and Network Security Corp. Now he’s looking for the next great thing to which he can dedicate his experience – and dollars.

"I’m interested in remaining active. I’ve still got the fire in the belly," he said. "I want to get out there and take something that’s just starting and really grow it into hopefully a high-quality, decent-sized firm," he said.

Though his background is in the high-tech, aerospace and defense areas, he’s not limiting himself and has begun looking at some opportunities in biotech and life sciences. There are many opportunities for investment in the region which no one outside of the venture capital and angel networks knows too much about.

"I believe there’s a number of quality proposals and quality work being done," Wagner said.

So why do so many companies have such a tough time finding the venture capital they need? The numbers bear out that Western New York receives a very small percentage of VC funding, relative to other parts of the state and country.

According to Growthink Research’s Northeast Venture Capital Report, the region as a whole attracted $505 million in investment dollars during third quarter 2003. More than 55 percent of the total went to 20 companies in the New York City metro area, with the remainder of the state receiving $26.8 million. Cymfony, a Williamsville technology company with headquarters near Boston, was the only Western New York firm listed in the report, receiving $6.4 million.

Investments "stable" in region

Investments in the region have remained relatively stable in recent years, according to the recently released 2003 Money Tree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. Seven companies in Western New York’s 716 area code received $50.82 million in VC investment during 2003, up slightly from the $43.4 million invested in nine companies in 2002.

Nationally, investments totaled $18.2 billion in 2,715 companies, a decline of 15 percent from the previous year. Life sciences, including biotechnology and medical devices together, attracted $4.89 billion or 27 percent of all venture capital – the highest proportion directed to life sciences in the last 12 years.

Jeanne Metzger, vice president for public affairs, said the majority of investments continue to take place in high tech hotbeds like Northern California’s Silicon Valley and the New England-Boston area, followed by places like the New York City metro area, Austin, and Research Triangle Park.

"We find that these kind of high-tech companies that most venture capital companies invest in are concentrated in certain areas around the country," she said. "When you get down to areas like Buffalo, there’s some activity, but there’s not that much."

Metzger, whose association includes 450 VC firms around the country, said she has seen smaller regional funds develop to take advantage of those smaller areas where no one else is looking and they might find an unseen opportunity.

Identifying opportunities

Western New York has lots of opportunity, said John "Jack" McGowan, director of the TDC-managed WNY Venture Association, which sponsors forums to connect companies with VC firms and angel investors.

"It’s never been robust here, but there’s still some firms and entrepreneurs looking to get funding and a small number of deals that get done," he said.

McGowan supposes that one reason companies aren’t getting the funding they’re looking for is they lack the business experience to successfully launch and commercialize their technology. Connecting those people with senior executives like Wagner could be the answer.

"We need the people to do it who know how to run a business," he said. "It’s not taking a scientist and making them into an entrepreneur. A lot of times funders want to see people with a track record in business."

Those who have found funding locally say forming a strategy for investments is just as important as forming a business plan.

Synacor Inc. received $7.82 million in 2003 in two separate deals and last week announced another round of $1.25 million in funding from Advantage Capital Partners. The company, founded originally as chek.com, is a provider of technology supporting bundled online services.

Ron Frankel, president and CEO, said the company hasn’t encountered problems finding funding, getting support over the years from VC firms on both coasts.

"We’re continuing to get the support of the venture capital community," he said. "We haven’t encountered that as a problem area."

Timing it right

David Barthel, president of SmartPill, says persistence – and timing – are just as important.

According to the Money Tree survey, biotechnology received $1.1 billion of total investments in fourth quarter 2003 and was the leading industry category for the second consecutive quarter, outpacing software, which accounted for $978 in the quarter.

"SmartPill is a very exciting, innovative technology that has a high, unmet need," he said. "This year, we’ve learned, healthcare technology products are very attractive to the investment community. So much of it is timing and we’re poised now to move the company to the next level."

The company will soon take its computer-controlled diagnostic pill into clinical trials with the hope of bringing it to market within 18 months. SmartPill received early funding support from the Erie County Industrial Development Agency’s RDC as well as from local investors. For larger amounts of money, however, its critical to go outside the area, he said

"As a foundation for early funding, Buffalo has been really great for us, and primarily we like to give credit to the ECIDA because having them come on early on brought other investors on," he said.

Barthel thinks more funding will shift to the Buffalo area as the bioinformatics revolution gets underway.

"Other parts of the country are aware of what Buffalo is doing with bioinformatics and the birth and growth of the medical campus," he said. "I talk about it in our investor presentations and about how we’re going to leverage that. Word is starting to spread, specifically in New York and Boston."