Fritsche sees problems with venture capital mindset

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Jerry Fritsche’s long career in investment banking began in almost 40 years ago, when he went to work as a stockbroker in Colorado Springs. In 1992, he founded Fritsche Capital Group, which now maintains offices in Colorado Springs and Los Angeles. The company is an independent corporate finance advisory boutique thataims to provide sophisticated corporate finance expertise to smaller, less mature companies that seek venture funding from $3 million to $25 million.

We’re perennially short of venture capital, according to local entrepreneurs. Your thoughts?

It’s not that we lack critical mass, or that there aren’t any capable entrepreneurs, or that we’re too isolated from the VC world. The two biggest issues have to do with mindset. VCs often want to bring in their own CEOs, but local entrepreneurs will come back with the response that ‘Well, we’ve a got a lot of smart people here; we don’t need somebody from outside to run my company.’ So right off the bat they’ve established an adversarial relationship with a potential funder. The second issue –and I think this is even more critical — is simply a lack of sophistication on the part of the typical company in this town that is trying to raise money.

I have a tremendous amount of respect for the guys at CTI (The Colorado Technology Incubator). They’ve done good work in bringing companies along. But by the same token, when we sit down and talk to these companies, they have no idea how to talk to an investment banker. They have no idea what to expect. They aren’t prepared, in any way, shape, or form to go talk to a tier one or tier two venture capital firm. As a result, when we talk to companies that have been recommended in this town, we don’t get beyond reviewing the first letter of the draft of engagement, because there’s no understanding. If you work with a company in this town, you almost have to start at the professorial level, teaching them how to be a company doing a capital raise.

Has local venture capital dried up because of the hollowing out of our local tech industry?

If you’re talking about the availability of venture capital, there’s an enormous amount out there. In the last two years, guys who have established huge companies have put together their own VC funds. They’re looking for new opportunities; they want to be back in the hunt again.

Why aren’t they investing here?

Total, total lack of understanding. I’ve sat down with so many companies, and they’ll say they won’t deal with VCs because they’ll want 65 percent of their company. They don’t understand that you take a pre-money valuation and a post-money valuation, and whatever percentage of the (agreed on) post-money valuation the (venture capital) investment is, that’s their ownership. Again, it’s a lack of understanding of how the venture capital world works.

What advice would you give to a local entrepreneur?

Unless he has other contacts that can get him into a VC firm, he should bite the bullet and work with an investment bank. There are a lot of deals out there, and venture capitalists aren’t willing to talk to someone who just walks in the door.