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Monday, February 15, 2010

Time to look outside of Wallstreet. Local startup capital wanted...and needed.

According to MoneyTree (report link) we only had three Alabama companies participate in venture capital rounds during the 4th quarter of 2009.
  • Atherotech, Inc. Southeast AL
  • Halo Monitoring, Inc. Southeast AL
  • Silver Leaf Capital LLC Southeast AL
Of course, the MoneyTree report is widely known to be under reported in Alabama, but that is still an absurdly low number.  If Alabama is going to pull it self up by it's bootstraps and "refuse to participate in the recession" then we are going to need a much higher VC and similar participation than 12 companies a year.

Let's do the math for a minute.  According to the 2007 Kauffman Foundation study on returns (study link), "angel investors participating in organized angel groups achieved an average 27 percent internal rate of return on their investments" however the study also confirmed the conventional wisdom that the majority of those returns were produced by a small percentage of the portfolio.  In the study, "the top 10 percent of exits account for 75 percent of the total cash returns in the sample."  That means that at the MoneyTree reported rate, Alabama is barely investing in enough companies to consistently produce one significant success a year...for the whole state.  No wonder supporting and using venture backed startups to impact the local economy isn't really viewed as a viable economic growth strategy.

But it is...

There are numerous examples of other regions that actively use high growth startups to energize the local economy and are all the better for it...Silicon Valley, NY, Austin, NC Research Triangle and even Nashville.

The strangest thing to me is that I get the feeling that many of our potential local investors think that startup investing is something that is done by "those other people, over there" or that establishing success startups can't be done here or is something akin to gambling.  Of course, many of those same people have no problem at all putting money into a fund managed a thousand miles away, by a person they will never meet, to invest in companies they personally may know little or nothing about.  And those returns have been dismal for a decade.

Now, I'm not advocating taking all your money out of the NYSE and putting it into some random local startup all by yourself, but for those that have the ability to diversify into some non-traditional investments...why not participate in a local invesment club (see: ACA or Birmingham Angel Network) and use some of that capital to do some good in your local economy, you just may end up finding some higher returns?

Birmingham Angel Network, LLC's Fan Box