Venture capital is one of those terms that doesn’t bring to mind hot, young and sexy. For many, it doesn’t bring to mind anything at all.

Upstart firms enter the marketplace, pumping hundreds of thousands of dollars into an unproven business, West Virginia venture capital managers said. The firms’ investors dream that new technology will show explosive growth and bring in big money.

Most venture capital investors don’t want to keep their hands in the company their money helped start, but instead they want it to take off rapidly so the investors can sell, sell, sell.

In large cities, venture capital has taken a firm hold and become part of the business landscape.

West Virginia’s venture capital market is young and just getting on its feet, experts said.

It doesn’t have a following among average West Virginians and hasn’t yet put a backbone in the state’s economy. But its dedicated band of supporters and followers is starting a movement that will tie together investors with new ideas — and build upon a synergy that exists between the public and private sector.

The Basics

Venture capital funds, by their nature, start and end in a decade or so.

The progressive trail of money flows from seed capital to angel investments and then finally to venture capital. A lot of activity in the state is not defined as true venture capital but much earlier investing, such as angel and early-stage capital. Companies seek venture capital when they are ready to replicate their products or services and need a lot of money to gear up production.

Seed capital usually comes from family and friends who believe in an entrepreneur’s idea, whether it’s some super computer technology or a new way to make a baseball bat.

Both of those ideas made their way into companies with market research help from INNOVA Commercialization Group, an initiative of the West Virginia High Technology Consortium Foundation.

INNOVA is the only entity in the state that funds early-stage ideas, from business plans up to a prototype, according to Outreach Manager Patrick Gregg.

INNOVA funds projects when they’re in their infancy.

“We’re the highest risk-takers in the state. At such an early stage, they’re really not in the marketplace yet,” said Guy Peduto, INNOVA director.

The group pours untold hours into research and development before a company actually starts, Peduto said.

An angel investor comes in as a company’s seed idea begins to take shape.

Angels are people with money who want to invest and make more money — they sink funding into an idea and gain a percentage from future companies and proceeds from selling them off.

Public and private groups are working on a statewide angel network to fund high-tech ideas that are lunging forward with newly born legs.

“I do think it’s important, particularly if we can support emerging industries in West Virginia or research and development efforts in our universities,” said Kelley Goes, cabinet secretary for the Department of Commerce and executive director of the state Development Office.

Venture capital funding is used when a company grows up and needs major injections of cash. It comes from one or usually several firms.

“Everybody talks about venture capital, but early stage versus angel capital, it’s all money,” Goes said.

Mountaineer Capital partner Patrick Bond said a true venture capital company works this way: A general partner raises funds from people and corporations to create a fund and then invests the money, generally for 10 years. Investments are made for about the first four to six years. Then the parties agree to sell the fund’s productive companies.

The people and corporations become limited partners, who receive 100 percent of their money back and 80 percent of profits; the general partner gets 20 percent of profits, Bond said.

“The industry average right now for time to exit is seven years, so this is a long-term affair, generally,” said Lynn Gellerman, president of Adena Ventures, a venture capital firm.

Each company will be sold off in one of several exit strategies as it becomes successful. Some will be sold to larger companies. Others will go to other investors or lenders, Gellerman said.

Venture Capital in W.Va.

Bond said the state’s venture capital firms with an active fund can be counted not on one hand but one finger: Mountaineer Capital.

Mountaineer Capital opened its doors in 2001 with Small Business Investment Corp. backing to give it more credibility, Bond said. Part of its funding came from a $25 million pool created in January 2002 under former Gov. Bob Wise’s administration. Mountaineer Capital was the only West Virginia firm funded.

David Warner, executive director at the state Economic Development Authority for 17 years, said the primary goal was to strengthen small businesses that need venture capital money.

The state still has money in four venture capital funds it invested through the state Economic Development Authority, Goes said.

The state didn’t create the fund to make money, Warner said, but to help establish and grow businesses and create jobs. “If we can make money, that would be fantastic,” he said, but “getting our money back dollar for dollar is still a good thing.”

Mountaineer Capital’s companies already are growing toward profits, but some started out with other funders and moved up to receive funding from a venture capital firm.

MetalWood Bats is a prime example.

The company produces baseball bats with metal handles and wooden bat barrels that are interlocked by a patented mechanism. MetalWood Bats protect children from being injured or even killed, Bond said. Metal bats propel balls at higher speeds, potentially creating risks for players. Wood bats provide more cushioning but are more expensive, he said.

INNOVA provided market research to MetalWood Bats. Mountaineer Capital provided the venture capital dollars. Another Mountaineer Capital company, Plethora Technology, received test marketing from INNOVA on a USB key that can be plugged into a computer to access computers at other locations wirelessly with complete security. Bond said the key leaves behind no proof the user was ever on the outside computer.

Plethora has sold keys to the government, but it is focusing on individuals and private businesses that can subscribe for about $25 a month or $250 per year. The idea came from two young graduates of the University of Virginia and University of Maryland, Bond said.

According to Mountaineer Capital’s Web site, the 12 companies it funds have nearly $15 million in investments and represent more than 300 employees.

The companies, chosen from more than 400 proposals, generate more than $40 million in annual revenues, the Web site said.

Several other regional firms, such as Adena Ventures in Athens, Ohio, fund West Virginia projects in early and growth stages.

Gellerman said four out of its 10 investments — 40 percent — are in West Virginia. The fund opened in April 2002 and has three years left.

Adena’s average investment is $1.7 million per company. It has lost only one of its investments, which Gellerman calls a pretty good average.

In West Virginia, the company put money down on Threewide Inc. in Morgantown, Vested Health in Charleston and Emergent Game Technologies in Shepherdstown. Emergent was a high-growth company that left for Los Angeles and acquired a company in Chapel Hill, N.C., where a lot of the gaming industry is located.

Goes said it’s expected that some successful companies will move, as gaming grid system Butterfly.net did. But other companies will take their place if they know the state offers a healthy business environment.

Adena partners include the University of Charleston, West Virginia Jobs Investment Trust Board (JIT) and Mountaineer Capital, Gellerman said.

The state Development Office invested money years ago from its venture program and will receive that money back when Adena ends its fund. Adena hopes to double its investment from more than $30 million to nearly $60 million, Gellerman said.

Adena has seen intertwining investments from the public and private sectors through the Development Office’s West Virginia Enterprise Capital Fund, BB&T and WesBanco.

One of its investors, the F.B. Heron Foundation of New York City, focuses on multiple investments in Appalachia.

How the Market Looks Now

The national venture capital market saw companies ready to go public falter parallel to the stock market. For most, and in Adena’s case, Gellerman said, its companies never planned to go public.

“We’ve always had a much more traditional blocking-and-tackling strategy for what we’re doing,” he said.

The slowing economy still has its effect, dragging out the time it takes venture capital firms to sell a startup company, Gellerman said.

Just a few years ago, several venture capitalists said, companies sold in an average of three to five years, but that has increased to seven years.

“All states are experiencing the same issues with the economic downturn. It has impacted every state,” Warner said. Gellerman said Adena Ventures hasn’t seen a normal market during the life of this fund and may not.

“What startups need to think about these days is having a longer runway to achieve milestones. That probably means keeping expenses down and raising enough funding to get much further down the road,” Gellerman said.

“Running out of cash in this economy is not a good thing.”

Peduto said the flexibility entrepreneurs once had is probably not as strong in today’s economy, and they need broader and more varied support.

Venture capital in West Virginia is not failing, but it has leaps and bounds to go.

Gellerman said the region and state remain significantly behind the industry in terms of company creation. He said a number of factors probably inhibit faster growth, including lack of population. Historically, Gellerman said Appalachia is not known for technology startups.

“They are starting to bubble up, and some of them are doing pretty well,” he said.

Goes said when her office hears about successful companies, they publicize it to dispel the notion that startup success is not possible.

With national economic problems and scandals on Wall Street, Gellerman guesses Main Street is beginning to look more attractive.

He said building companies and real wealth will be more important to the national economy’s future, and Appalachia and West Virginia can play a meaningful role.

Goes said West Virginia isn’t known for having a strong venture capital presence, so the state has tried to build relationships with funds in northern Virginia and the Midwest.

The funds are still raking in ideas but are being careful about what they label as good investments.

The ideas INNOVA receives “run the gamut of type of product or capability. It’s a mix, and that’s what’s heartening,” Peduto said.

A lot of life sciences ideas are coming out of Huntington, and ideas for chemical engineering are coming out of Charleston, he said.

And West Virginia still has its strengths in the energy sector, Peduto said.

The state’s energy sector, the National Energy Technology Laboratory and National Institute for Occupational Safety and Health all help, as does research coming out of the universities.

“It’s just basically putting the resources we have together,” Peduto said.

Bond said a strength of West Virginia’s venture capital market is “this is basically an untapped market and a market that is small enough that we see everything.”

He said every idea comes through Mountaineer Capital’s hands, giving it a handle on where the market is going. Mountaineer Capital, which also is nearing the end of its fund, will start trying to raise a new fund shortly. Bond hopes that fund will have $30 million to $40 million in investments.

State Involvement

The state has little money to bring to the table in comparison with large venture capital funds. That doesn’t mean it can’t still give a helpful shove down the bike lane to anyone with a good idea.

Goes chairs JIT, the state venture capital agency created by statute to help attract companies.

The state can invest up to $2 million in a company with an initial investment of up to $500,000, although companies must create jobs to get money.

The Development Office also works with some small clients with venture capital needs. But the state wants to see the private sector fund venture capital.

Goes said the state’s effort “needs to be something that attracts other funding, as opposed to the state thinking it can get into the venture capital business.”

The JIT, EDA and others are looking at the state’s role given its limited funding, she said.

The state passed a tax credit last year to encourage startup companies that create good-paying jobs and benefits. It’s modeled after bigger companies’ tax credits, Goes said.

Bond and other fund managers want the state to give venture capital investors a tax credit to bring more money into the private firms. He and others proposed legislation last session for a tax credit to an individual or company investing in venture capital, with a 50-cent credit for every dollar invested.

“Once you get money, you split the profits 50/50 with the state, so the state has unlimited opportunity,” he said.

Goes said the state prefers back-ended tax credits — those that reward companies for good behavior after they become profitable and create jobs. She said previous legislation involved front-ended tax credits, which don’t have to show results.

A bill essentially the same in content will be forwarded this year by a coalition from the venture capital community. The state’s best scenario is to coax emerging technologies out of the universities and couple those with angel investors and networks, she said.

Universities are the Future

Instead of using a scatter-shot approach, the state wants to put all its money on one number, its biggest universities. So it split $50 million in its Bucks for Brains project, giving $35 million to West Virginia University and $15 million to Marshall University. The state Legislature passed Bucks for Brains in 2008.

The match program means universities can find a private donor and draw down the state match, Goes said. And investors already have come forward.

CSX Corp. gave Marshall $50,000 in late January, and Verizon announced Feb. 16 that it will give $250,000 each to Marshall and WVU.

The universities already are starting up research.

Marshall announced in late August 2008 that Eric Kmiec will be its first director and lead research scientist of its Institute for Interdisciplinary Research, according to a news release. Kmiec was a biology professor at the University of Delaware and director of applied genomics at the Delaware Biotechnology Institute. He began work at Marshall in January.

At WVU, the school’s Research and Economic Development Office is a conduit between research dollars and labs that create intellectual property.

The economic downturn has made the funding hunt harder, especially for intellectual property, said economic development Director Russ Lorince.

The projects coming out of the universities usually are in their infancy and aren’t ready for venture capital funds. Lorince is vocal in his support of TechConnect, a new nonprofit focused on getting capital to small companies to create opportunities.

“TechConnect will tell of successes and celebrate some of the small companies that have done well in their early stages,” Lorince said.

In meetings with Gov. Joe Manchin and Goes, Lorince said, they discussed how the concept of technology research is under the radar.

Smaller firms with 15 to 30 employees are significant contributors to local economies but aren’t known to most West Virginians. Venture capital experts see TechConnect as the marketing answer that will make companies such as MetalWood Bats and Vested Health household names. TechConnect will roll out its blueprint for economic development in March.

“We need deals to come through early-stage funding and move to venture capital, so hopefully we get that continuum moving,” Lorince said.

There are a number of players backing TechConnect: Marshall, WVU, research and development company MATRIC, the Claude Worthington Benedum Foundation and the High Tech Consortium to name a few. Goes wants the Development Office and its cohorts to give companies’ existing efforts a flourish and publicity.

“I think there will always be a role for the state to play in early stage capital,” she said.