As reported by The Hartford Courant, July 23, 2006.

The Venture Gap

Connecting State's Tech Entrepreneurs with Investment Money Is Falling Short

By Dan Haar

The guys who run LightSpace Technologies in Norwalk have a 3-D imaging system that shows strong promise for medical discovery, oil exploration and battlefield visualization.

The prototype works great, and the system is starting to sell, partner Lou Mazzucchelli said.

Over in Farmington, a 3-month-old business called VENOMIX Inc. is using spider venom compounds as a model for a new type of insecticide.

The fledgling firm's $1 million-plus partnership with Chemtura Corp., a large chemical company, will pay many start-up costs, said Glenn King, the University of Connecticut medical school scientist who invented the process.

These are the kinds of firms - start-up and early-stage technology ventures with admittedly high risk - that Connecticut's economy must nurture to maintain the sort of inventive spirit and commercial success that has made the state a wealthy cradle of industry for 200 years.

They are also key to building up badly needed vibrancy and youthful energy.

But despite endless lip service, it's not happening, at least not often enough.

LightSpace and VENOMIX both need more money, and soon. Both have had trouble finding it in Connecticut.

LightSpace is moving to Silicon Valley in California, where it is about to sign a deal with what Mazzucchelli calls a "top-tier U.S. venture capital fund."

As for VENOMIX, its roots in the labs of the state's university are not enough to ensure that Connecticut will reap the fruits of its growth.

"We're very close to getting some serious funding from Michigan, and as a result of that we may be forced to move the major part of our operation to Michigan," King said. "You go where the money is, and this is not where the money is right now."

For other types of investment, Connecticut very much is where the money is - hedge funds, real estate deals, bond trading, blue-chip stock ownership and the like. There is also no shortage of research and invention here, measured by academic activity and patents.

Having all this money and idea-development in such close quarters makes the search for capital all the more frustrating for early-stage tech firms, especially if they have a sober business plan, a proven idea and a desire to stay put.

This venture gap - the financial chasm between scientific invention and commercial development - is hardly new, and it's certainly not unique to Connecticut. Throughout history, entrepreneurs who are not flooded with investment capital have decried the shortage of money out there for ideas that could revolutionize the world.

Still, many people familiar with the technology scene in Connecticut say it's worse here than it ought to be.Few venture capital funds are looking at early-stage deals in this state.

Connecticut is losing ground to places such as Oklahoma and Iowa, which have public funding programs in place. The state's risk-averse culture and its mix of industries, changes in the venture capital business and a scattered set of agencies working on technology development all contribute to the problem.

It's hardly up to state government to solve the problem, but there has not been a coordinated approach or a broad sense of urgency in Connecticut.

For example, Connecticut Innovations, the state's quasi-public technology investment arm, has a depleted staff and has not backed a new business in at least a year. That may be changing: Officials there say CI has as many as five deals that will close by fall.

Just as there is no single cause of the venture gap malady, the cure is also multifaceted.

"We as people of Connecticut, we ought to apply the same energy and intensity to building high-growth small businesses as we did to saving the sub base. Clearly we can do it when the consequences are apparent," said Victor R. Budnick, a managing director at Ironwood Capital, a $150 million investment firm in Avon and Boston.

Budnick was at Connecticut Innovations for 14 years until 2005, most of that time as president. After he left, he and three partners tried to launch Sound Ventures, a fund that would have been devoted to early-stage investment.

"We needed a minimum of $40 million. We got $20 million," he said. "It's very hard to be a first-time fund if you have not sprung out of a nameplate fund."

The difficulty in matching fledgling technology firms with money in Connecticut springs partly from Connecticut's famously risk-averse culture, anchored by defense, insurance and money-management industries.

Back east, especially in Connecticut, "you get the investment bankers," said Mazzucchelli at LightSpace, who founded a software development company in 1982 and sold it 12 years later after it reached $50 million in annual revenue.

"Their idea of risk is being able to take a company public. Their long-term time frame is 90 days. Like any banker, they're there when you don't need them," he said. "Venture capital people are acting much like bankers used to act."

As the venture capital industry has matured, investors have looked for fewer, larger deals, said Matthew Nemerson, president and CEO of the Connecticut Technology Council.

"Venture capitalists are getting old," he said. "Once you make your first $10 million, it's more important to stay home and coach your kids' soccer team."

The result: They look for deals in hotbeds such as Silicon Valley, Austin, Texas, and Boston's Route 128, where an "innovative ecosystem" boosts the likelihood that a successful company will show explosive growth.

"It's a rich-get-richer kind of phenomenon," Nemerson said. "That's why we have to get up to a critical mass more quickly."

Part of Connecticut's problem is that the state has no major cities and, with the exception of New Haven, the mid-size cities that are here have no major universities. In Greater Hartford, the corporate presence - especially from United Technologies Corp., Aetna, The Hartford and Travelers - creates strong economic vitality, but not so much by way of small-company spinoffs.

But there are real solutions. Liddy Karter, an investor and organizer of the Angel Investor Forum, which meets in Stamford and Rocky Hill, said she believes Connecticut activists could do more to bring people and information together.

Angel capital - money invested directly by the people who have it, rather than through venture funds run by managers - is a key part of the mix.

"The angel capital that is being invested here is being invested on golf courses, through connections," Karter said. "That's fine, but it's not very systematic."

Karter is working with the technology council on a state-funded "innovation pipeline accelerator," a database of early-stage companies.

"Groups need to share information," Karter said. "The resources are here. ... I don't believe there is a lack of will to cooperate; there is a lack of success. Watching entrepreneurs try to figure out what's available to them has demonstrated to me that it's a very confusing process right now."

At GraphLogic Inc. in Branford, a 3-year-old firm with a platform that allows it to create customized software applications for the life sciences, health care and IT industries, managers are confident that they will secure the round of funding they need to grow in Connecticut. Matthew Roth, the company's vice president of life sciences, said he believes the state has made some progress, although it needs to do more.

"The competition is serious," Roth said. "Only Alaska loses more 25-to-34-year-olds."

Brenda Shipley, GraphLogic's marketing vice president, said it should be difficult for companies to line up investor money - a filter to make sure they are sound.

"There was no shortage of capital in the late '90s for bad ideas," Shipley said. "You didn't have to prove that you had paying customers, you didn't have to prove that you had proof of concept. I don't think from a business standpoint that that was necessarily a good thing."