The article below was originally published by the Northwest Arkansas Business Journal on Monday, January 19, 2015 and features Jim Smith, one of our founding partners. The article and its contents are the property of Gray Matters, LLC and is republished here with its permission. The original article can be accessed by clicking the link below.
by Jennifer Joyner
Those involved in the Northwest Arkansas entrepreneurial ecosystem agree access to venture capital has vastly improved in the last 10 years, but they disagree on whether the area is ready for a large, $50 million-plus venture capital fund.
“There’s a lot of discussion today over whether or not there is sufficient private equity and capital ability for companies,” said attorney Jim Smith, founding partner of Fayetteville firm Smith Hurst PLC. “While I wouldn’t say there’s a misnomer that money’s not out there, I think that our clients and a lot of folks are able to get money to get started in knowledge-based companies.”
Smith has been watching the entrepreneurial ecosystem in Arkansas for 20 years, having practiced law in transaction and capital raising company representation during that time and working with the likes of Field Agent, VIC Technology Development and Acumen Brands.
“I remember what it was like before 2001, when there were no state-backed incentives and where it was really very difficult, so I have a bit of a different perspective, because now you do see [out-of-state] private equity investors and venture capital investors poking around,” Smith said.
In 2001, state leaders passed the Arkansas Venture Capital Act, which supports funds invested in Arkansas companies and also spurred more legislation geared toward growing the entrepreneurial sector throughout the years.
That’s when the tide started to turn, and the years that followed saw a huge growth in investment and resources available to entrepreneurs, including the establishment of a thriving angel investment community.
Smith said his companies do well, and that complaints of lack of next-level funding (the phase after seed and angel investing) often come from companies that are more green and, therefore, are not as attractive to investors.
“Our clients tend to be those who have business experience … and understand the business that they’re doing, they understand valuation, an appropriate valuation for the amount of capital they want to raise and have a pretty good understanding of what investors are wanting in a return or exit expectation,” he said.
He said the vetting process works, and there’s no need in raising a big fund just to put more money in a bunch of companies, unless there’s a philanthropic element involved.
“Investors are there to make money,” he said.
Smith believes the solution for any gap in funding lies within the companies themselves to raise the bar and meet expectations from commercial investors, and he believes — with a number of successful startups serving as role models — that will happen.
Jeremy Wilson, president and CEO of Bentonville-based NewRoad Ventures, agrees investors should continue to be pragmatic, but he also believes there are many early-stage companies that will soon be ready for more money, and that will justify the establishment of a much larger fund than the area has seen before, a fund in the $50 million to $100 million range.
“You couldn’t deploy $100 million right now,” he said. “It’s kind of a dual path between the time it’s going to take to raise that kind of capital and the time it’s going to take for these companies to mature.”
The partners at NewRoad two years ago raised by far the largest fund in Northwest Arkansas at $21 million, and has deployed nearly all of it in Arkansas in what Wilson said were all good deals.
James Hendren, founder of Fund for Arkansas’ Future, chair of the nonprofit Accelerate Arkansas and former owner of Arkansas Systems (acquired in 1998 by Euronet Worldwide Inc.) also supports raising a large fund, although he said there is some truth to lack of talent.
“Sure, there are places with hundreds of CEOs who have started, grown and cashed out of several companies, but that’s something you build over time,” Hendren said.
And as to the argument of which is needed first, companies or funding, Ramsey Ball, principal of Colliers International in Bentonville and an active participant in the investment world, said, “It’s kind of a chicken and the egg deal.”
Ball is leading the charge to establish a large venture fund in the area, having put in years of research. His team recognizes the region does not have decades of venture capital experience and has met with fund managers in large markets throughout the South in order to create a successful fund.
As far as talent lagging behind funding, Ball said the fund will not limit itself to in-state investment if it finds great deals elsewhere (a move that will help build important relationships abroad), but there will also be plenty of investment activity in Northwest Arkansas.
This is an important element for a lot of those watching the ecosystem, some of whom fear promising talent is forced to leave the area in order to get funding from sources that are less conservative with their investments.
That’s what Nhiem Cao, founder of Cyclewood Solutions Inc. was compelled to do back in 2011.
Cao and his team had earned seed money from competitions while in the MBA program at the University of Arkansas (his undergraduate was in chemical engineering about 10 years before) and were asking for $600,000 to grow the company, and “no one was stepping up to the plate,” he said.
But it wasn’t difficult to find a backer elsewhere. “We were fortunate to have investors coming to us,” he said.
Cyclewood ended up working with Trailblazer Capital in Dallas, a company that, as a rule, invests only in Oklahoma and Texas.
The investor made an exception, with the understanding that Cao and his partners would relocate, and they moved to Dallas after the first year.
Red Clay, a design-project hosting company, also relocated, partly for capital, this time to San Francisco — although startup watchers acknowledge it was not within the realm of the area’s expertise, which includes retail, consumer packaged goods, logistics and data analytics.
And while they agree there is still some “brain drain,” as it’s called, Wilson said New Road plugged a big hole there, as it is able to offer early series-A money.
Wilson said DataRank CEO Ryan Frazier, for example, was given plenty of offers to move his company when he participated in Y-Combinator, an accelerator event in California, but NewRoad’s funding helped him stay in Northwest Arkansas.
And others agree that NewRoad was an important addition to the ecosystem, and that the future is bright.
“I do think there’s a shortage of venture capital,” Smith said. “But we get a lot more calls than we did a decade ago. I think we’re headed in the right direction.”