Don’t Fret Scarcity, There May Be Too Much Money In Midwest Venture

The common wisdom is that capital is scarce in the Midwest venture scene, but not in the view of Daniel Fleming.

Fleming, managing director of River Cities Capital Funds, thinks there may be too much. In any event, money seems plentiful, he says, at least from the venture capitalist perspective of capital efficiency.

If the business was generating outsized returns, that might tell a different story. But outsized doesn’t seem to be the case. (Big returns would suggest more capital should hunt for deals.)

And besides, the investment pace hasn’t been running at full tilt. In the third quarter, investors in the region deployed $233.5 million into 60 startups, down 35% from the second quarter, but up from the same period last year, according to the Q3 MoneyTree Report released on Friday.

The market has been “frozen” due to the economic downturn, Fleming says. Some entrepreneurs were seeking rich valuations; others didn’t want to deal for fear of unfavorable terms.

Now, “there’s a general thawing,” he says. “The market is becoming more rational for expansion stage opportunities.”

So far this year, Cincinnati-based River Cities has not made a new investment. But it presently has three or four terms sheets out and expects to return to its traditional pace of three to five investments over the next 12 months.

It also is beginning to think about a fifth fund. Fleming says he hasn’t set a dollar target, but anticipates going to the market in 18 months. The firm has $390 million under management, with its $120 million fourth fund slightly smaller than its $132 million third.

Oh, and in case you forgot, some of the best startup fishing can be found in Indianapolis (medical devices), Cleveland (medical technologies) and Nashville (health care services). Out of towners are welcome.