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JUNE 21, 2001

VENTURE CAPITAL

Betting on Boise
A venture-capital network finds opportunity off the beaten path

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There's gold in them thar hills. That's what Matt Harris, CEO of Village Ventures Inc., found when he started investing venture capital in such out-of-the-way places as Boise, Id., Lexington, Ky., and Providence, R.I.

While VCs and entrepreneurs were trying to elbow their way through the competition to clinch a good deal in Silicon Alley, Silicon Valley, and the high-profile tech spots in between, Harris was spreading seed capital in fertile fields where no VC had tread. The Village Ventures network of funds, founded early last year, now extends to 10 cities, and Harris expects to have at least twice that many locations within four years.

Harris and his team look for places that have a high concentration of intellectual capital (which means a good university), high quality of life, relatively low cost of living, and a dearth of VC money. "In most of the places we're in, we're the only game in town," says Harris. That means no competition for the good deals, no talent-poaching, and low company valuations. "We haven't lost an employee in 18 months," he says. They also haven't lost a company.

Village Ventures has a list of about 50 areas that fit its criteria. The key to being able to set up shop, though, is finding the right team to run the local fund. The "homerun combo," Harris says, is a well-connected local with business experience and someone from the VC world. In Boise, for example, that team is James Hawkins, "an incredibly well-connected guy" who is former director of the Idaho Department of Commerce, and Mark Solon, who was in the VC business near Boston. When he and his wife had their second child they wanted to return to Boise, her hometown.

LOCAL SPECIALTIES. "Boise, Idaho, has got to be the biggest positive surprise. Two-thirds of Hewlett-Packard is there. Micron is there. I bet 25% of the population is associated with technology," Harris says. "It also has all these wealthy folks interested in investing. All these tech people formerly would have to leave Boise to start their own business." That fund is $25 million "and the deal flow is phenomenal," says Harris. Village Ventures funds provide the first institutional round of investing. Once the companies progress to second- or third-stage financing and require bigger chunks of capital, Village Ventures' larger partners -- including Bain Capital, Highland Capital Partners, and Janus Capital Corp. -- step in. "We're sort of the farm team for Bain and the rest," Harris says.

Towns tend to have specialties. In Nashville, Vanderbilt University is a great source of health-care intellectual property. Biotechnology dominates in Charlottesville, Va., and IT security is the frontrunner in Providence because, as Harris explains, "Brown University is dynamite at that."

Three-quarters of the nation's venture capital goes to markets with only 17% of the population and 25% of the graduate degrees.

As in the rest of the VC world, "deep, deep networking" is the key to finding the right people and right deals. Although the Village Ventures' office is in Williamstown, in the northwest corner of Massachusetts, Harris has spent a lot of time finding co-investors in Boston and New York. Also, seven of Village Ventures' 35 employees are focused on raising money and doing other spade work for its individual funds. Part of the pitch they can provide to potential investors: Three-quarters of the nation's venture capital goes to markets with only 17% of the population and 25% of the graduate degrees. High-tech employee turnover rates are 70% higher in those markets than in Village Ventures' markets. The cost of doing business outside the hot spots is one-third what it is in Silicon Valley, and company valuations in Village Ventures' markets are 50% lower than in the more popular locales.

OLD COLLEGE TRY. Village Ventures grew out of Harris' experience as founder of Berkshires Capital Investors in 1997. Some alumni from Williams College, Harris' alma mater, were interested in attracting venture capital to Williamstown -- economic development would make it easier to attract faculty as well as students. Williams College committed $1 million, and Harris, working with other alums, raised another $4 million by the end of 1997.

One of Berkshires Capital's first investments was in Tripod, an Internet portal that was started by Bo Peabody, Harris' college roommate. The following year, Tripod was purchased by Lycos and Peabody went on to join Harris as co-founder of Village Ventures. Of the 12 companies funded by Berkshires Capital Investors, 5 went public and none has failed.

"We didn't have to move to get what we needed."

It was a Berkshires Capital contact who suggested that Brian Rigney approach Village Ventures when he was looking to start BlueTarp, Inc., in Portland, Me. Rigney had already approached VCs in New York, Boston, and Silicon Valley about financing his online purchasing and job-cost-tracking program for the construction industry. "Some said: 'If we fund you, will you move?' They would say: 'What are you, six hours from Boston?' We felt that said more about their own lack of knowledge about Maine than about Maine not being able to produce a high-quality company," says Rigney, who received $3.5 million from the Village Ventures network in May 2000.

STAYING PUT, SITTING PRETTY. Rigney, who has worked in the construction and financial-services fields, hired a chief technology officer with 20 years of development experience, including stints at Compaq and Digital. "We didn't have to move to get what we needed." he says.

Village Ventures latest fund, the Larger Northern New England Venture Fund, was launched this month. It will be based in Hanover, N.H., home of Dartmouth College, and headed by Philip Ferneau, a professor at Dartmouth's Tuck School of Business, and Jesse Devitte, chairman of the Software Association of New Hampshire. The size of the fund was not disclosed, but a typical fund in the network is $15 to $20 million. Altogether, the funds network has raised $250 million and invested less than 10%. Says Harris, "It's a pretty scary time, and we're doing something pretty ambitious," Harris said.

In scary times, ScholarOne's "boring, methodical approach" was attractive, says Bill Carden, CEO of the 18-month-old company, which manages the peer-review and publishing process for scholarly journals and abstracts. He recently received $3.7 million from Village Ventures and its fund in Charlottesville, Va., called Tall Oaks Capital. When Carden first went looking for VC money, early last year, he recalls how, "people really wanted outrageous risk and return...ScholarOne wasn't sexy, but I think that helped us in the end."

CONSTANT VIGILANCE. Being in a major university town -- Carden can see the University of Virgina from his Charlottesville office -- means he has access to a knowledgeable labor pool. "In today's job market," Carden says, "we're a medium-size fish in a small pond."

There's a drawback, of course, to financing companies located off the beaten path. Most of the entrepreneurs in the Village Ventures network have never before started a company. "The theory is that venture returns are driven by people who've done this before," Harris says. "A lot of our people are new at this. That means we have to be more hands on, watch them closely."

Harris knows that in some locations, he won't be the only game in town forever. Eventually, "two or three of these areas will be comparable to Austin. It's our job to stay the leaders. Being first helps." At least until the VC competition materializes in places like Boise and Portland, Village Ventures stands to profit from the bias against the boondocks.