Continuing with yesterday’s post on Rating the Atlanta Startup Scene, several people have asked how we get more local institutional capital. Institutional capital, like it sounds, is capital provided by institutions like university endowments, pension funds, etc. Generally, institutional capital is a much larger source of capital, as compared to angel capital, and thus an important part of a thriving startup scene, especially for startups that hit the growth stage (see Scaling a Startup is Expensive).
Here are four reasons there’s a lack of institutional capital in Atlanta (and all areas outside the Bay Area, Boston, and NYC):
- Track Record – New funds are forming all the time but most of them only have high net worth individuals and family offices as limited partners since institutional investors always require an investment track record of one or two funds (e.g. get started with a small fund from personal investors, show great results, and then raise money from institutions).
- Pedigree/Background – There’s a certain resume and pedigree that institutional investors look for, often including a name-brand college, work on Wall St., etc. that’s not as common outside the money centers.
- Big Exits – The goal of any fund is to make great returns, and that requires big exits, yet there are so few exits, let alone big ones, that the story of low cost of living and low valuations doesn’t resonate. Meaningful returns and exits resonates.
- Dot Com Bust – Many regional funds that had institutional capital went out of business after the dot com bust as they didn’t have strong enough returns to raise another fund. A whole generation of funds were wiped out and it’s 7+ years to build a new fund that gets to the point that fits the institutional capital model.
As expected, the answer to having more local institutional capital is to have more successful startups with solid exits that generate returns for first-time funds so that they can then raise another fund with institutional capital. It’s a multi-stage process that requires a decade or more to see results. The best thing we can do as a community is to help produce more successful startups.
What else? What are some other reasons for a lack of local institutional capital?