Tuesday, March 9, 2010

Midwesterners: Put Your Money Where Your Mouth Is

JumpStart: IdeaExchange Blog » Blog Archive » Midwesterners: Put Your Money Where Your Mouth Is

Posted By Lynn-Ann Gries

Last month the Brookings Institute published a report, authored by Frank Samuel, called “Turning up the Heat: How Venture Capital Can Help Fuel the Economic Transformation of the Great Lakes Region.”

The 54 page report makes the case for increasing the amount of pure venture capital in the Great Lakes region* as well as the amount of funding for those organizations that essentially “prime the pump” for VCs. For those of you who have read my blog posts you know that this topic is right up my alley, so I say “Right On!” to Frank and encourage the leaders in these states to read the report and take action.

For those of you who prefer the CliffsNotes version, here goes: The region in question has more than enough assets to support a vibrant venture eco-system — great university R&D**, quality graduates from top tier educational institutions***, a strong industrial base, and expertise in growth sectors such as biomedical and cleantech. Of all the venture capital raised in the U.S. approximately 40% is contributed by the Great Lakes region’s large public pension funds while the region only receives about 13% of that back in the form of investments. (Hmmm, does this seem fair?) Mr. Samuel’s proposal involves forming a fund-of-funds (with capital invested by Midwest pension funds) that will be invested in venture funds actively investing in the Midwest region. I love the idea and it makes tons of sense. More Midwest VC money = more Midwest deals funded = more Midwest economic growth = more Midwest employment = more Midwest prosperity.

The devil is always in the details, however. My guess is that the situation at present is a result of the average Midwestern pension fund manager claiming not to be able to find any “top tier” Midwestern-based venture funds to invest in. Most Midwest-based venture fund principals bristle at this complaint, but there’s some truth to it; there simply are not enough large VC funds in the Midwest with “top quartile” track records to absorb all of the money pension funds want to invest in this asset class.**** So, what’s the solution? I am sure there are several, but I can think of two at the moment. One, invest the money with a coastal firm only if it will open and staff a Midwest office (hint: Draper Fisher Jurvetson provides a great example of how to do this) and two, take some risks and invest in first time funds (something conservative pension fund investors have been historically loathe to do) as long as the principals at the fund can show they have experience successfully investing in and/or starting and exiting companies.

I hope this report creates momentum and cooperation among the leaders of these 12 states and, in turn, these leaders put pressure on the pension funds to invest in their own backyards (or put their money where their mouths are — pick your idiom). The benefits of a vibrant venture ecosystem are obvious (think Silicon Valley, Austin TX, etc.) and could be realized with a little bit of cooperation and whole lotta creativity.

* the Great Lakes region as defined in the report includes 12 states: Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, New York, Ohio, Pennsylvania, West Virginia, and Wisconsin

** 33% of all U.S. research and development dollars and 35% of all NIH research grants go to the Great Lakes region

*** who, historically, have fled to the coasts to look for work

**** most pension funds only want their investment to represent a small portion of the overall venture fund’s assets

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).


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