The Business of Helping Businesses
By Dean Anderson
Sometimes banks just aren’t the answer for businesses looking to take the next step in Oklahoma.
Enter Devon Sauzek.
Sauzek is the executive director of the Oklahoma Capital Investment Board which not only tries to bring investors into the state but actively invests in companies.
He says venture capital in the state is no longer in its infancy.
“I would say we’ve progressed a little beyond that,” Sauzek said. “The funds we have invested in, they’ve invested a little more than $100 million in the state. Oklahoma was extremely forward-thinking when they created the board. There are lots of states right now — states in a similar position that we are — all trying to create mechanisms to increase venture capital and develop the industry, and a lot of those states are trying to implement a model that is either identical or relatively similar to the board’s.”
Professionally managed venture capital firms generally are private partnerships or closely held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors and the venture capitalists themselves.
But Oklahoma has gotten into the business of helping businesses.
The state established the Oklahoma Capital Investment Board 15 years ago and supplied the group with a pool of $50 million in tax credits which can be sold to public utilities in the state.
The board borrows money from local banks with the tax credits as collateral, and then invests.
The board considers non-resident funds, but the funds commit to make a reasonable effort to invest in Oklahoma enterprises.
As part of the pitch, out-of-state funds have established part-time offices in Oklahoma to source deals and service portfolio companies. Interested firms might be those which already focused on the state’s traditional industries such as energy and healthcare.
If the board invests in the right products, returns on investment can be in the 20 to 30 percent range, which repays the bank debt and provides fuel for future expansion.
If the returns are insufficient, the board sells the credits to the utilities to make up the difference.
Sauzek’s board seems to be making headway.
A recent impact study conservatively estimates that so far the board has generated $881 million in economic activity for Oklahoma.
Another study cited the board’s support of the NBA Hornets which helped produce an additional $74 million in economic benefit for Oklahoma.
A recent state audit concluded that OCIB has more than met its legislative mandates, attracting $99.8 million of professionally-managed venture capital to Oklahoma entrepreneurs.
The report also commended OCIB for the results of its Oklahoma Capital Access Program which has allowed $38 million of higher-risk loans to be made to 1,300 small businesses throughout the state.
The board invests in funds throughout the state, one of which is the Oklahoma Life Sciences Fund managed by William Paiva.
As fund manager, Paiva raises commitments from those looking to invest in early healthcare opportunities that generally spin out of Oklahoma’s universities or the Oklahoma Medical Research Foundation.
Paiva scours Oklahoma for investment opportunities.
“Once we find something we like we then will call down some of the capital they have committed to fund the company,” Paiva said. “You can think of it as the limited partners make commitments to a pool of money that is managed by the venture capitalists that invest that money.”
Sauzek has seen much change in the venture capital industry over the last decade. The biggest change, however, is the number of investors.
“How you define who is a venture capitalist and who is not is sometimes difficult,” Sauzek said. “When we started back in the early 1990s there were probably two or three investors that would categorize themselves as venture capitalists. Now I would say there are probably 14 or 15 groups that are headquartered and, to some degree, classify themselves as VC. There are probably that many more that are headquartered outside of the state but have a regional adviser here or we have attracted them to where they have a regular presence.
“It has grown significantly in that area.”
No matter how many investors there are, Paiva says the goal is the same: To put money into deals, take risk out of them, and get them to the next point in their development where they raise subsequent rounds of financing at higher valuations.
“Our ultimate goal is that we will sell the company to another company or make it public, at which point our equity position has value,” Paiva said.
The chicken and the egg
The argument over the amount of venture capital in Oklahoma is somewhat akin to the discussion of the chicken and the egg. Venture capitalists argue there aren’t enough good ideas in the state to invest in while start-up companies argue there isn’t enough venture capital in Oklahoma to be had.
Greg Edwards, who manages Mesa Venture Oklahoma, says the deals are out there.
“I think Oklahoma has more than enough interesting opportunities to invest in. I think there is a shortage of capital,” Edwards said. “What people seem to forget is that public markets are very liquid and there is no inefficiency in the market. I’m willing to invest in Merck stock even though Merck is in New Jersey because the company is big and mature and I don’t need to necessarily have a lot of oversight of the management of Merck. Private, small technology companies need a lot of handholding.
“What you tend to find is venture guys tend to invest locally. It’s really a function of just logistics. In Oklahoma, we have the inability to attract coastal capital to our opportunities. My argument is if we’re not investing in them, they’re not going to invest in them.”
Edwards manages the $12 million Mesa fund, in which OSIB invested $3 million.
He shuns away from the term venture capitalist and prefers to go by the term of equity partner.
Startups aren’t on the menu for Mesa, but early-stage companies are.
“We’ll invest in a company that has a proven product and has a market place that is discernible and that we can gauge the size of that marketplace,” Edwards said. “We can see a legitimate stair-step path to success with our capital and our managerial experience.”
Edwards and partners own several companies and have bought and sold several companies. It’s that experience, along with funding, which young companies are looking for.
“I think it takes a lot of broad-gauged experience,” Edwards said of what it takes to be successful in venture capital. “In my case, I’ve been in business for 40 years doing commercial banking and investment banking. I have started banks. I have been president of CMI Corporation and president and CEO of several other companies. My partner Doug Frans is my partner in five other companies.”
Paiva said venture capital in Oklahoma would benefit if the state’s larger pension funds decided it was time to enter the market.
“Diversification works at the fund level, too,” Paiva said. “I think one of the challenges in Oklahoma and for us to really get traction in the private equity side it to get our local pension funds to start focusing on this asset class because it’s the right thing as evidenced by the fact they’re all under water right now, and it will help stimulate the local capital formation in the state."