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Experienced, successful entrepreneurs are rare in the Midwest, and start-up companies have little or no access to early stage venture capital, said Thomas Churchwell, founder and managing partner of Midwest Venture Partners, LLC. Because of the lack of volume, only a few attorneys, consultants, and accountants in the region understand how the business works, Churchwell told the alumni-led Innovation Roundtable at Gleacher Center January 22.
“We still spend a chunk of our time explaining to the CEO why his brother-in-law who does tax law is not going to be useful in doing a venture capital deal, but that’s getting better,” he said. “The probability of attracting venture capital here is much less. It’s part geographical and part cultural.”
Because Midwest Venture Partners provides early stage venture capital, the company tries to strike a balance between internet technology and health care ventures, Churchwell said. “IT, theoretically, is smaller investments and smaller, faster returns,” he said. “Health care, theoretically, is a little longer to exit, but bigger returns. Everything is cyclical. This week we can get our health care companies through IPO. Next week it’s going to be only IT companies. We think there is some safety in balancing that way.”
On average in a total of more than 60 ventures, Midwest Venture has changed management teams on each project three times, Churchwell said. VC executives don’t like to admit it but entrepreneurs usually fit into three categories: “seed” developers who are good at creating products from abstract ideas, clinicians who are good at getting products to the Beta stage of industrial tests and clinical results, and analysts who are good at converting those results to scale, he said.
“The number of people who can do what Steve Jobs and Bill Gates did is infinitesimal,” Churchwell said. “We tell entrepreneurs as we’re investing, ‘Your probability of getting this company to exit is statistically 0. We ought to plan that it’s not going to happen, so let’s set it up so you get stock. We want you to make money, but we want you to make money doing what you’re good at.’”
For Midwest Venture to invest, a proposal must meet at least eight criteria, Churchwell said. Those include providing a proprietary product or service, showing a sustainable competitive advantage, presenting a viable business model, entering large markets, utilizing an experienced management team, appropriately using funds, targeting 10-15 times growth in five to seven years, and establishing the objective of a sale or IPO in five to seven years, he said.
VC firms don’t really build companies, but rather they “flip” them, Churchwell said. “For a lot of us, that’s a problem,” he said. “Life ought to be about building companies, not flipping them, but that’s not the job I’m in. So if you can’t build companies, at least you ought to build a fund. We want to build a fund that lasts, that is multi-generational, and that preserves some of the values that we think are in this business. Even though you’re flipping companies, you do some good doing it.”
– Phil Rockrohr