Business Lending Guide 2015: Entrepreneurs overcome limits of local venture capital

When Linglestown resident Joshua Benton started a company called Hatchback a year and a half ago, he found early funding through Ben Franklin Technology Partners and angel investors.

But when he needed more money, he headed west to Silicon Valley.

If you need $10,000, the midstate might be an adequate source of funding, but big-ticket venture capital requests often need to be made elsewhere, said Benton, who started another company before Hatchback. The company collects and parses travel data in order to better target ads.

“If you’re going for several hundred thousand dollars or a million, that’s going to be hard to find in this area,” he said.

Local investors agreed but said companies can still find significant sources of venture capital close at hand.

While not many venture capital firms are based in Central Pennsylvania, that does not mean firms are not active here, said Jill Edwards, executive director of the Ben Franklin Venture Investment Forum.

Investment firms are interested in companies that demonstrate they can reach $50 million to $100 million in annual sales quickly, Edwards said.

Investors are fairly conservative today, as they have been since the recession. And Central Pennsylvania is associated more strongly with logistics, construction, agriculture and elder care than it is with the next killer app.

But that doesn’t mean investors are unwilling to take risks.

“There always will be people looking for venture capital, and there will be venture capital available,” John A. Norton, president of Access Equity Partners, said. “It depends on the quality of the opportunity and the management team in place.”

Today’s venture capital firms are looking not as much for ideas, but for people with track records and management teams with prior successes, Norton said. Funding for the initial phase, in which companies are proving concepts and exploring their markets, remains challenging.

Nonetheless, he added, “I think deals are still getting funded.”

Among the investors is Penn Venture Partners. The new markets venture capital fund sunk money into four companies in the past year, according to Dean M. Kline, a managing director at Penn Ventures.

“It’s never been real active, so I’d say it’s no worse or better than it was before,” Kline said.

Companies tend to look at private equity after hitting a certain size. Then there are the companies that look to private equity after having trouble with banks or angel investors.

“There are always early-stage, seed-stage companies with no revenue or very little revenue that want venture money, but it’s not really appropriate for them,” Kline said. “It’s very difficult across the country, except in Silicon Valley, to get early-stage investment.”

It’s a difficulty that was faced by Peter Sobotta, who has spent the last few years raising money for a startup software company, Return Logic, based in Harrisburg.

“There is no venture capital in Central Pennsylvania,” Sobotta said.

Instead, Sobotta travels to Philadelphia and Washington, D.C., in search of funding for Return Logic, the second business he has launched in 10 years.

Sobotta spent 2013 and 2014 undertaking customer discovery, then raised $200,000 to continue research and incubate the startup. After pilot tests of the software in 2014, he began to seek $500,000 but says he found the pool of investors to be small.

“When I was trying to raise money in Harrisburg, it always seemed like they had something better to do” than be at the meeting, he said, adding that it can take up to six months to win over potential investors.

In Philadelphia, he added, investors appear to be courting entrepreneurs and business owners.

Control, guidance on the table

In the first quarter of 2015, venture capitalists poured $13.4 billion into U.S. companies, according to the National Venture Capital Association in Washington, D.C.

Venture capitalists often seek a measure of control in return — such as a seat on a company’s board of directors — but they also can offer valuable guidance when it comes to growth.

Good investment partners know the industries in which they invest and can help businesses scale up and meet others in the same field, said John A. Norton, president of Access Equity Partners.

On the other hand, investors also may be able to dictate the timing of a company’s sale.

“It depends on how strongly handed you are when you go into negotiations,” he said, adding that companies seeking venture capital should have good transaction attorneys on their teams.

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