Pittsburgh: Long on ideas, short on cash

Good ideas for startups are as common as Terrible Towels in Pittsburgh. 

Carnegie Mellon, Pitt and Duquesne churn out graduates fired with dreams of being their own bosses and convinced that they can create something the world needs. So, with all those good ideas, why isn’t Pittsburgh spoken of in the same terms as Silicon Valley or Boston?
Donald H. Jones carried a particularly long and sharp pin to burst the balloons of those who think ideas are all.

“Ideas are easy. Idea is only 30%. Marketing is the rest and that costs money and that’s where venture capital is required,” said the late managing director of Draper Triangle Ventures, a Pittsburgh VC firm specializing in high-tech start-ups, and the man for whom Carnegie Mellon’s entrepreneurship program is named.

Pittsburgh’s entrepreneurial ecosystem lacks investment capital and experienced management, shortages that could limit its growth. Successful entrepreneurship almost always requires outside investment. Aspiring entrepreneurs can max out their credit cards, but they don’t have credit limits in the millions. And good management is necessary to guide startups to profitability and attract skittish investors.

Is VC MIA?

Of the 50 largest metropolitan areas in the country, Pittsburgh ranked 20th in amount of venture capital raised per 1,000 population in 2011, according to the Moneytree survey compiled by the National Venture Capital Association and Pricewaterhousecoopers. At $60 raised per 1,000 residents, the Pittsburgh MSA ranked behind such entrepreneurial hotbeds as Austin ($371), Seattle ($142) and Denver ($115), but ahead of Cleveland ($59), St. Louis ($44), Kansas City ($33) and Jacksonville ($20). Outlier Silicon Valley was tops at $2,499.

“Clearly, more venture capital could be used,” said Jones, who passed away in December, several months after this interview.

“The capital area is where we start to have some gaps,” agreed Dennis Yablonsky, CEO of the Allegheny Conference on Community Development, the region’s leading economic development organization. “We’ve got great early stage and seed money. We don’t have as much local, professionally managed institutional venture capital. We have some. We have a number of VC firms, but not enough. That’s an area where Pittsburgh needs to do better.”

Cautious investors

Pittsburgh is a medium-sized city with an outsized entrepreneurial ecosystem and while there might be a mismatch between need and demand, insiders say it’s more than that. Pittsburgh investors are more conservative than their counterparts on the coasts and less likely to take make the first bet on small startups and unproven technology. VC firms tend to specialize in certain areas and not look at a broad spectrum of possibilities.

Also, the recession that began in 2008 dried up funds and made investors of every stripe leery. Pension funds have been traditional investors in venture capital, but some no longer participate, Yablonsky said.

BlueTree Allied Angels, a Pittsburgh group of angel investors, saw its annual investments drop from $3 million to less than half that in 2008 and 2009, but it has rebounded, said CEO Catherine Mott.

Of course, startups in Pittsburgh don’t depend solely on local dollars. Outside money flows into Pittsburgh, sometimes as part of a syndicated deal and sometimes on its own. A recentAlphaLab Demo Day for early-stage companies attracted firms from California, Washington D.C. and Ohio as well as local investors. Seventy percent of BlueTree’s deals in the first quarter of 2012 were syndicated, Mott said.

Large deals almost always involve outside money. In summer 2012, robotics firm Thorley Industries raised $20 million in a round led by Boston-based Bain Capital Ventures. Web translation startup Duolingo last year secured $15 million is a series B round led by international venture capital firm NEA.

Of course, outside investment can come at a price to Pittsburgh. Out-of-state firms sometimes require startups to relocate nearby so they can keep an eye on their equity. That’s another reason why the Pittsburgh entrepreneurial ecosystem needs more local venture capital.

“At the end of the day, it’s the entrepreneurs and they’re wanting to build a company, but entrepreneurs go where the money is, entrepreneurs go where the support is, so if you want to keep them here, you’d better provide it here,” Mott said.

Jerry Paytas, a former director of the Carnegie Mellon Center for Economic Development, agrees that there could be more investment capital in the region, but doesn’t think the shortage is driving companies to greener pastures. Inferior product and poor business plans have stopped more startups than a lack of capital, said the vice president of research and analytics at Fourth Economy Consulting. “The good deals get funded and they raise the money locally or externally,” he said.

Managers wanted

Money needs minding. No matter how good the idea or promising the technology, venture capitalists are reluctant to invest if they think a startup does not have the management team to guarantee a return. Even placing a VC or two on the board of the startup might not provide enough reassurance.
“It’s a lot easier to assess the market than it is to assess the management team,” said angel investor Mott. “It’s never even been the technology; it’s always been issues with the management team.”

Finding skilled, experienced managers for startups is a difficult task for Renaissance Partners, an investment banking and consulting firm in Pittsburgh which acts as a matchmaker between startups and venture capitalists.

“It is a challenge matching all these startups with the available (managerial) talent,” said principal William Westberg. “Without the management you can’t get the money.”

The shortage of experienced managers is particularly acute in life sciences because Pittsburgh’s entrepreneurial emphasis is on software and technology, said John Manzetti, president and CEO of incubator Pittsburgh Life Sciences Greenhouse.

“We don’t have as many executives from successful companies that are coming back looking to run startups,” he said. “We’ve had to go outside the region to hire for our executive-in-residence program. We’ve hired people from Boston, New York, Philadelphia, Detroit, San Francisco, Texas. We’ve brought in people that we’ve found and put them to work as CEOs of startup companies.”

The Greenhouse has invested in nine companies which eventually failed, he said, because the entrepreneurs did not listen to experienced managers.

“Capital is always No. 1 in anybody’s book, but if you’ve got the capital you need the talent to pull it all off, too,” he said. “You can’t just hand money over to an entrepreneur and say, here’s $10 million. He’ll spend it, alright. It’ll be gone, but you won’t get much for it.”

 

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