Something ventured

Entrepreneur, May, 1999 by Stephen B. Sherretta

Venture capital funding hit an all-time high in '98. Here's what it means to you.

The high-powered world of venture capital has done it again. Total venture capital invested last year soared 24 percent to another record high of $14.3 billion. That's a 78 percent jump in just two years, according to PricewaterhouseCoopers (PwC) LLP's Money Tree Survey, which tracks some 630 U.S. venture capital funds on a quarterly basis. Other key measurements in 1998 fell in line accordingly: The average investment jumped 16 percent to $5 million, and more projects were funded than ever before - 2,856.

James D. Atwell of PwC's Global Technology Industry Group in Boston, the survey's sponsor, says, "1998 should have been declared the 'Year of the Entrepreneur.'" He's got a point. An estimated 40 percent of all venture funds distributed last year went to companies that were no more than 2 years old.

But, of course, there's a hitch. While venture capitalists are ravenous to underwrite start-ups and expansions of small businesses, they continue to have highly discriminating tastes. Recipients of their largess had better be technology-based and must have an aggressive growth strategy with plans for an initial public offering, merger or acquisition within the next five years, says Kirk Walden, national director of the survey. Think exit strategy.

So venture capital has gone the way of NASCAR: Just as stock car racing moved from homespun mechanics and clay tracks to computer-designed cars, venture capital has shifted from a home-grown, small-business funding source to a key financier of high-tech projects. If a company is high-tech or a close semblance, venture capitalists may beat a path to its door. If not, expect to beat the bushes: About 76 percent of last year's funding went to high-tech projects.

Still, there are those who buck the trends - non-techies who find a way to secure venture capital. Lucinda Heekin of Cincinnati is one. She's the founder of The Last Best Place Catalog Company, which offers high-end apparel, gifts and jewelry. She built her operation from ground zero to $10 million in sales in five years using venture capital to support expansion after the first year. Last year, sales grew 24 percent, and Heekin's company was given $581,000 in venture capital for expansion by River Cities Capital Funds, also of Cincinnati. This year, Heekin, 47, expects an even larger investment and additional investors.

A former attorney, Heekin relied on professional contacts to help her approach River Cities. How did she persuade them to invest? First, she prepared an exhaustive business plan. Next came Heekin's vision. "We felt the apparel market had become too homogenized," she says. "People are hungry to not look like every other person."

River Cities listened, though Heekin agrees it's tough for non-high-tech firms to get venture capitalists' attention. "It's a measure of the principles of the firm that they didn't reject [us because we're] a low-tech company," she says. "River Cities decided we had real growth promise."

Stephen B. Sherretta, a freelance business writer in Philadelphia, is a former writer and editor with the Economist Group and the Financial Times in London.