There's a widespread perception among Midwest entrepreneurs that the Midwest lacks venture capital. That's simply not true! There is as least as much investment capital available in the Midwest as there is on either Coast.

However, there IS a problem in accessibility. Most Midwest capital is "private" capital, i.e, in the hands of private investors -- doctors, attorneys, businesspeople, etc., who do a little venture investing on the side. Unlike the "professional" investors -- the seed and venture capital funds, where the entrepreneur has a door to knock on and can walk away with a definite "Yes" or "No" -- private investors tend to "hide". They're busy running their business or practice. They don't want every Tom, Dick and Harry calling on them -- especially since they know that no more than one in a hundred will be of any interest to them at all.

The Problem

First, all they can do is broadcast their investment "opportunity" as widely as possible -- and hope that the right person hears about it. (And the public media -- including the business media -- will not cooperate. The last thing they want is any exposure to a lawsuit from a deal gone bad.)

Second, lacking any face-to-face feedback from investors who turn them down, they have no way of improving their investment proposals to make them more salable. This is a double whammy -- and at the heart of the perception that the Midwest lacks venture capital.

This second problem -- lack of feedback -- is probably the region's most serious long-term economic problem. In my experience, Midwest entrepreneurs are just as capable as any I've met on the Coasts. But they just don't know how to play the investment capital game! And how are they going to learn if they don't have pros -- or at least faces they perceive as pros -- to practice the game with?

If an entrepreneur lays a proposal on a couple of dozen pros -- people they know have done successful deals in the past -- and they all turn him down, if he's got anything on the ball at all, he knows pretty damn well what he's done wrong -- and he'll either rework his plan into the kind of thing they're looking for or he'll find a different venture that does meet their needs.

Entrepreneurs on the Coasts have this learning opportunity. Midwest entrepreneurs don't -- unless they go to the Coasts. And even that has its problems -- lack of connections, not part of the grapevine, etc. -- unless they move to the Coasts.

This is the classic Catch-22 situation. We don't have many pros because our entrepreneurs don't know how to use them -- and our entrepreneurs don't know how to use them because we don't have many pros. We have lots of entrepreneurs running around frustrated and discouraged because there's no investment capital available. And we have lots of private investors, equally frustrated and discouraged, because our entrepreneurs don't know how to put together investable deals!

Solutions

Recognize, first, that private investors can make smaller deals than the professionals. And recognize, also, that most startups -- 99% of them -- need only "small" investments ("small" being less than a million or two).

The pros really can't look at investments of less than a couple of million -- because of the costs of "due diligence". They've gone out and raised money from private investors, promising them a higher return than prevailing alternatives. But if those returns don't pan out, business and legal prudence dictates that they have well-documented -- with "outside expert" evaluations -- why they made each and every investment. That costs money -- and sets a minimum level of investment they can make. The private investor is under no such constraints.

So Midwest entrepreneurs are at a serious disadvantage in making the big deal. Entrepreneurs with visions of being the next Microsoft or Genentech probably should move to the Coasts. But for most -- at least as far as the accessibility problem is concerned -- the problem's no different on the Coasts than it is here. Private capital's tough to find wherever you are!

The training problem's a little more difficult. The fact that there are many more pros on the Coasts, means that there are many more semi-pros -- and quarter-pros(?). There's simply much more knowledge of the investment process on the Coasts -- and it's much wider spread. It's the rare Coast entrepreneur who doesn't have a basic knowledge of the process and a pretty good understanding of what's required to sell a deal. Contrast this with the understanding of all too many Midwest entrepreneurs -- "I wanna do this. It's gonna be big. Gimme the money!"

But even the training problem's not that intractable. Knowledge of the investment process is available here; it's just not as widespread and, especially, not as "inculturated" here as it is on the Coasts. But all that means is that entrepreneurs need to work a little harder to acquire it. For entrepreneurs on the Coasts it's "in the air". For Midwest entrepreneurs, they have to go to where it is -- and dig it out.

One place it's at is the local Enterprise Forums. The whole purpose of these Forums is to expose local investors to local entrepreneurial activity -- in order to encourage then to invest more locally. When administered well, they bring out everyone in the area -- bankers, investors, service providers -- who are interested in working with entrepreneurs -- maybe not to every meeting, but certainly several times a year.

Entrepreneurs may get put off by the number of service providers attending. Don't! Yes, these service providers are there looking for business from entrepreneurs. But more than a few of them are also there to keep an eye out for investment opportunities that might be of interest to their clients. (Historically, the path to private capital has been through the "old boys" network -- the entrepreneur's attorney knows an accountant who knows a banker... who knows an attorney who has a client who might be interested in the particular kind of situation. Private investors do tend to "hide" -- but they hide behind one or more of their service providers.)

The Enterprise Forums are by far the best startup-business resource available to Midwest entrepreneurs -- if they'd USE them!

Using the Forums

Yes, the investors are hurting from the problem too -- in opportunity loss -- but it's much less crucial to them. They have many other opportunities available to them -- including investing in the Coasts' venture funds.

And government -- which has the need (in the name of economic development) -- doesn't have the ability. When government trys providing capital directly, they just blow it (and those are your tax dollars, too). If they had anyone capable of venture investing, that person would soon be working for a real venture firm where they could make some "real" money -- not wasting their time playing bureaucrat. When they try providing capital through our few pros, they still blow it because the other half of the equation -- you knowing how to play the game -- is missing. And government can't even "teach" you how to play the game. Learning how to put together and sell investable deals is something you learn from experience -- especially the experience of repeated rejections -- not in a classroom.

So... it's your problem. You can do something about it -- if you'll start using the Forums. How should you be using the Forums?

First, "using" the Forums is not just attending a couple of times asking for money. Yes, you may get some money because some investor happens to like you or likes what you're doing. But one can argue that that's not good for either you or the investor. Any deal that's not based on a thorough understanding -- by all parties -- of the needs, motivations and goals of the other parties is, almost by definition, headed for trouble. And that's what we're seeing far too often.

What "using" the Forums is is attending regularly -- several times a year -- long before you have any need for capital. And attending actively -- mixing, networking -- not just standing around looking.

Knowledge of the investment process is there -- but you need to actively dig it out -- by making a concerted effort to meet the other attendees and feeling them out on what they perceive local investors are looking for.

For those attendees who seem to have some knowledge, you need to probe deeper. Try to get them to talk about past deals (or attempted deals) that they know about or were involved in. For each deal, why was it done or not done? What were the problems? If it was done, how did it work out? What were the problems there? Try out some hypothetical scenarios on them -- and gauge their reaction.

Spread out your probing. Don't try to probe in depth at each meeting -- tying people up for extended periods. Get a little information, mentally record it -- and then at subsequent meetings, use that information as re-introduction and probe a little deeper. By doing so, you're not only more likely to get the knowledge and understanding you're looking for, but you'll be building relationships with people who could well be useful when the time comes that you do need capital.

Fundamentally, you need to start thinking of investors -- and that includes bankers -- as customers -- not service providers. After all, you're trying to sell them something -- an investment opportunity. How do you sell customers? You research them, talk with them, get into their head, understand their motivations -- and then you make your best pitch based on what you've learned. And that's all that's required for investors.

Postscript

That's still my message. I still favor bootstrapping -- substituting imagination for capital. However, now that I understand the problem a little better, I'll add a qualifying message -- one paraphrased from advice I give to inventors trying to play the patent game: "If you want to play the investment game, first learn the rules. If you don't want to put in the time and effort to learn the rules, please don't try to play the game."