Kevin Kushman knows how to grow a company.
He helped steer a Cincinnati power provider’s $9 billion sale to Duke Energy. He co-founded a $180 million venture fund. And he oversaw finances for a firm with investors as big as General Electric and Goldman Sachs.
Yet raising $7 million for the Indianapolis startup he runs today posed a years-long challenge.
“It’s the toughest area, it really is,” Kushman said of his 7-year-old firm, Blue Pillar, which sets up digital networks that its customers use to manage their utility consumption. “There was a significant shift in the last few years to more mature investments. The downturn occurred. What was a lot of [early-stage] investments has shifted to the later stages.”
Getting $50,000—often from friends and relatives—to develop a product and set up a company still is easy enough in Indiana, small-business leaders and venture capitalists say.
But once a firm needs a few million dollars to grow into a revenue-generating operation, the area can’t compete with Silicon Valley’s magnetism for venture capital.
Venture capital has been tricky at all levels, as the type of funding has slipped away from its 2000-era peak of $105 billion—four times the capital available today. In particular, troubles surround “early stage” companies—those that have grown beyond the support of most local angel investors and their seed money, but aren’t yet strong enough to shoulder much debt.
The lack of investments in these companies means many good business ideas—the kind that could become major employers that create high-paying jobs in the state—could financially starve to death.
“This is one of those things that we look at every day,” said Ryan Pfenninger, a venture partner at Elevate Ventures, which manages the state’s 21st Century Fund. “I can go out and find $50,000 or $100,000 with relative ease; $100,000 to $200,000 is a bit of an effort, depending on who I am. It’s a challenge to raise more than $1 million around here.”
Venture capital—the popular source for burgeoning enterprises—is a faint echo of what it was in 2000, during the dot-com boom.
Indiana reeled in $274 million that year—more than triple the $84 million it attracted in 2012, according to research from PricewaterhouseCoopers.
Early-stage companies accounted for only $28 million. One notch up the evolutionary ladder, “expanding” companies got $30 million.
In all, the state is responsible for a slim 0.3 percent of the entire $26.5 billion invested nationwide.
Silicon Valley alone consumed 40 percent of the pot. With major cities like New York and Los Angeles taking in a couple billion dollars apiece, little interest is left for Indianapolis.
California leads the way
“When I was out there, there were investors tripping over themselves to get to just mediocre deals,” Pfenninger said. “Here, it’s hard to just get one investor. It’s supply and demand.”
Indiana really only has one option for “early stage” investments: Allos Ventures.
The firm finished raising $40 million in February, which gave it enough money to chip into the three-way Blue Pillar investment that also includes Arsenal Venture Partners in Orlando, Fla., and Claremont Creek Ventures in Oakland, Calif.
The fund places Allos at the top in Indiana, but well below the multibillion-dollar giants on the coasts.
Don Aquilano, managing director of Allos, said high-profile growth stories, such as ExactTarget Inc. and Angie’s List Inc.’s, have brought investors’ attention to Indianapolis. But fundraising for smaller firms—Allos’ focus—remains a challenge as Indiana combats its “flyover state” image with coastal investors.
“It’s not where it needs to be,” he said, “but this takes time. The ecosystems don’t transition overnight.”
BidPal CEO Scott Webber, a longtime Indianapolis entrepreneur and angel investor, sees a different situation: The money is there, but businesses don’t know how to get it or they’re not willing to give up ownership stakes.
“We tend to be a family-business culture,” said Webber, who in 1995 made Software Artistry Inc. the state’s first publicly traded software company. “That’s a mentality where family businesses don’t give up equity unless it’s to their heirs.”
There is no reason companies should limit their fundraising to Indianapolis or the Midwest, he continued. Some of the biggest tech companies, such as ExactTarget, persuaded out-of-state investors to buy in well before the company went public last year.
In order for any of that to work, the startups need the know-how.
Howard Bates, president and CEO of Smarter Remarketer in Indianapolis, credited his team and his company’s software with driving interest for the $3.3 million he collected in December.
But he acknowledged that his experience and connections certainly played a role.
Bates founded Haverstick Inc., an e-commerce software development and information technology firm, in 1994. The company grew to $100 million in annual revenue before it sold in 2007 to Kratos Defense & Security Solutions.
On top of that, he chairs Elevate Ventures, which is Smarter Remarketer’s investor.
“I’ve been around and through more than a lot of these cycles,” he said. “But a lot of these younger guys haven’t had the experience.”
Indiana University lecturer Gerry Hays said he consistently sees students with software or apps they developed. They just don’t know how to monetize them at any stage, much less at the tricky, early stage.
“Entrepreneurs are positive by DNA,” said Hays, who runs Slane Capital in Noblesville. “They have optimism bias. They are just so in love with their idea, they become protective of it. They don’t want to tell anyone about it. They’re afraid someone is going to steal it or whatever.”
Getting the funding is a different story.
“Pretty quickly they become jaded about the capital-raising process because it gets pretty frustrating.”
Some of the younger entrepreneurs aren’t even interested in chasing venture capital.
For Nick Carter, a 29-year-old who launched software firm AddressTwo in 2008, avoiding investors is a point of pride—so much so that he wrote a book titled “Unfunded” that explains how he made do without them.
Carter wanted to maintain 100-percent ownership of his business, even if that meant moonlighting to cover the bills as he put his own money into the firm.
“For me, it was a matter of freedom,” said Carter, who has since launched three other businesses. “When you take on investors, you are obligated in a lot of ways … to really be sold and devoted to one company, to make the investors money.”
The company is still small, with four employees, but the strategy appears to work. Carter declined to provide revenue figures, but he said sales have doubled every year AddressTwo has been in business.
Still, Carter had moments when he asked himself whether he should seek investors. He’s glad he held steady with “bootstrapping”; Indiana just doesn’t have enough venture funding for young companies.
“There just hasn’t been a ton of wealth created here,” he said.•