Venture capitalists are investors who provide capital in exchange for equity in a company, usually (but not always) a start-up firm. Venture capitalists are betting that their stake in the business will bring extraordinary returns within five to seven years, but since these are considered high-risk investments, they also require a large enough chunk of the company to make their risk worthwhile. Venture capital can be provided by wealthy individuals (sometimes referred to as “angels”), or large financial institutions with sophisticated investing operations, or organizations that fall somewhere in-between.
Venture capital investing has grown from a small investment pool in the 1960s to a significant part of the institutional and corporate investment portfolio, according to the National Venture Capital Association (NVCA). Currently, over 50 percent of these investments come from institutional pension funds, with the balance coming from endowments, foundations, insurance companies, banks and individuals. According to the NVCA, “The common denominator in all of these types of venture investing is that the venture capitalist is not a passive investor, but has an active and vested interest in guiding, leading and growing the companies he has invested in.”
Estimates of venture capital funding in the U.S. in 1999 range from $35.6 billion to $48.3 billion, with the average investment per company averaging over $8 million. Nearly two-thirds of the new funding went into Internet companies, with the remainder divided among other computer-related industries, medical/health companies, consumer products, biotechnology and industrial/energy concerns.
Venture Capital in Nevada
Currently, there is just one venture-capital fund of record based in Nevada: Millennium Three Venture Group, LLC. Although the company was formed less than a year ago, it expects to invest more than $10 million in four companies, including two in Nevada, by the end of this year. The group was able to secure $30 million in capital commitments from venture capitalists in its early stages, and expects to grow that amount considerably in the coming year.
Financial experts believe the absence of venture capital funds in Nevada has restricted the state’s economic diversification efforts and the business sector’s ability to grow or develop high-growth companies. “That’s not to say some companies won’t eventually come here, but the lack of venture capital funds definitely impacts some companies’ decisions to come to Nevada,” said Robb S. Smith, the managing principal of Millennium Three Venture Group.
Smith believes venture capital firms have historically shied away from Nevada in part because people have been unwilling to take the first step and just do it. “I really believe that pessimism has played a role in preventing it from happening here. No one was ever willing to make the bet and take the risk. They looked at some people who tried and failed and then decided it couldn’t be done,” Smith said.
The problem seems to be a venture capital vicious cycle, since venture capitalists usually like to be close to the action. Hence, states that house a large number of innovative, high-growth, high-tech businesses generally have a sizeable well of venture capital funds that entrepreneurs can tap into when they need cash to fuel their company’s growth or launch a new business. “That’s been a problem, since historically Nevada hasn’t been much of a magnet for high-tech firms,” said Smith. “If you don’t have the companies, it’s difficult to get the venture capitalists.”
But that’s beginning to change. The word is getting out, albeit slowly, that Nevada is actually a viable place to relocate a high-tech company, or even start one up. In the past three years, the number of high-tech firms locating in Northern Nevada jumped 24 percent, according to figures released this fall by the Economic Development Authority of Western Nevada. Representatives of the 140 firms that located in the Reno-Sparks and Lake Tahoe markets since 1997 cited a number of factors for coming to these areas including: the state’s favorable tax climate, Northern Nevada’s quality of life and its proximity to Silicon Valley, where the median price of a home has soared to nearly $500,000. “We have a lot of wonderful assets, both in Southern and Northern Nevada, and it’s just a matter of time before more companies discover them,” Smith said.
To help speed that process along, Las Vegas Mayor Oscar Goodman recently announced a deal that would convert an 11-acre downtown Las Vegas parcel into an “incubator” for fledgling high-technology companies. Incubators offer start-up services to entrepreneurs and often provide them with office space, furnishings and the computer systems and hardware they need to run their operations. Incubator facilities also provide business consulting services and marketing assistance, as well as recruiting and administrative functions.
The mayor believes the high-tech campus is the first step in a sorely needed effort to revitalize the city’s languishing downtown economy, which is dominated by casino operations and government-based businesses. “This is the beginning of a new Vegas,” Goodman said at the news conference. “I was committed to revitalizing and reinvigorating the downtown. … Today is the beginning of that renaissance.”
While representatives from high-tech giant Cisco Systems Inc. were present at Goodman’s press conference, along with executives from AT&T Corp., no formal announcement was made by either firm as to whether it would relocate or establish any employee-based operations at the center. However, AT&T officials did say it’s expected the company will use the location as a staging area for Internet servers and switches. Cisco, meanwhile, may take a seat on the incubator’s board and assist in the nurturing of inexperienced technology entrepreneurs.
The technology park, which could open as early as spring 2001, will tentatively include 85,000 square feet of office, retail and residential space. It already has secured three tenants including two Las Vegas Internet firms, Netbooth and Everycontractor.com, and a wireless service provider from Orange County, Calif. named Worldwide Wireless Networks Inc. The latter will lease about 7,000 square feet of space for its operations.
Netbooth plans to move its 32-employee-based operation to the center. The five-year-old firm develops Web sites and markets Internet kiosks. Tony Caporicci, chief executive officer of the company, cited a number of factors for relocating to the park including its location. The high-tech campus will sit on the old Union Pacific Railroad site. Netbooth taps into the fiber that runs alongside the railroad tracks. Caporicci also hopes that housing his company at a vibrant high-tech campus will help to entice more high-quality workers to his company. An incubator firm of venture capitalists, lawyers and business executives, who will provide start-up capital and other resources to the fledgling firms, will also be housed at the park.
Government-Sponsored Venture Capital
Supporters of Ballot Question 1, which goes before the voters this month for the third time, say the measure would help to diversify the state’s gaming-dominated economy and lure more high-tech firms to Nevada. The measure would amend the Nevada constitution and allow the governor and state legislature to consider investing state monies in high-quality, job-producing companies. If the ballot question passes, an investment panel established by the state would evaluate requests for venture capital and submit valid proposals to the legislature for approval. The money would come from the general fund and not result in any increase in taxes.
The argument to pass such an initiative is strong. States that do put a percentage of their coffers into venture-capital funds say it has produced strong job growth, and created a healthy return on their investments. In a recent eight-year cycle in Utah, the state funded nearly 280 companies that created a staggering 6,500 new jobs. And for every $1 Utah invested, private investors doled out $4.32. In Maryland, meanwhile, the state has seen its initial investment pool of $2.5 million earn a whopping $43 million in the past six years. And in Kansas, more than 9,300 new jobs have been created since that state amended its constitution in 1986.
“The problem is that many voters…do not understand why the amendment is important,” said Frank Tussing, executive director of the Nevada Alliance for Defense, Energy and Business, an economic development trade group in Las Vegas. Proponents of the measure point to the fact that 44 other states use some public monies for venture-capital concerns. Still, opponents argue Nevada should never use tax revenue for investment in private companies, regardless of the situation. “I’m afraid people … (regarded) it as a handout for businesses that couldn’t make it on their own. And that’s really a complete misunderstanding of the issue,” said William Monahan, executive vice president of the Nevada Technology Council, a non-profit consortium of public and private officials who work to nurture the high-tech industry in Nevada.
“What’s so ironic is that everyone is for it,” Monahan said. “Business and government leaders realize it would be one more carrot to help lure businesses interested in coming to Nevada, and one more tool to help diversify the state’s economy,”
It’s a hard point to sell, however, when the state’s economy keeps roaring along and several cities in Southern Nevada continue to rank among the fastest-growing and highest job-producing metropolitan areas in the nation. “People see the growth and see that we’re first in jobs and expansion, and they look at anyone who says the state should invest in Nevada companies like they have two heads,” Monahan said. Still, if the measure does finally pass, supporters say it could serve as one of the catalysts needed to launch more private venture-capital efforts in Nevada and break the vicious cycle at last.
