Despite venture funding taking a tumble in 2022 with funding down 35% nationally, Oklahoma is seeing a surge in its growth of venture capital investments, accelerators and incubators in Oklahoma.
As with the rest of the economy, venture capital funding has seemed shaky — growing then slowing in fits and starts as the world works to recover from the pandemic. However, Oklahoma has seen significant growth in the amount of venture capital investments and the accelerators and incubators supporting startups and entrepreneurs, especially considering the tumultuous larger economy.
In fact, Oklahoma now has more entrepreneurial resources than it ever has, boasting more than 15 incubators or accelerators in the state. And in the last five years alone, venture capital funding has raised $120 million. This dichotomy raises the question: What will the future of Oklahoma’s venture funding look like? Leaders from three venture capital firms serving different entrepreneurial audiences — Justin Briggs, Prime Movers Lab partner and biologist, Susan Moring, Cortado Ventures principal, and James Spann, Boyd Street Ventures founder and managing partner — discuss what they believe lies ahead for both their industry and Oklahoma’s role in its growth.
For Oklahoma, what does the future of venture capital investments look like?
Briggs: Venture capital in Oklahoma will continue to see progress, limited only by our ability to cooperate as an asset class. Our job as venture capitalists is to identify and support companies to become successful. The more firms that take that work seriously, investing within the state and beyond, the better. The notable examples in Oklahoma are Cortado Ventures and Atento Capital, and the state needs more like them.
Moring: The future for venture capital in Oklahoma is bright. The past three years have seen tremendous growth in venture capital available in Oklahoma. (We estimate from $50 million in assets under management to $300 million.) And we expect that growth to continue. We still have a long way to go to be on par with major tech hubs in terms of capital available per capita. So, Cortado is excited about how an increase in available capital will contribute to the flywheel of building a great tech startup ecosystem. In terms of deals, we see Oklahoma developing as a tech hub for the industries we have particular expertise — energy, life sciences, logistics/aerospace, etc.
How has the national economic downturn impacted venture funding this year?
Briggs: Rising interest rates, IPO window open just a pinch and muted M&A in 2023 have deflated startup valuations. Angel funding activity is down considerably. To some, this is a catastrophe, to others a reset to valuations and deal flow levels to pre-pandemic levels. The funding downturn, as in the wake of the financial crisis, made the task to raise capital for emerging fund managers very difficult. Since most of our funds are quite young, only a few were able to raise last year. This year has been a bit brighter.
Spann: National venture capital investing declined in 2022, but it was still the second-biggest year in history for the industry. Having said that, VC investing declined 53% in the first quarter of 2023. Whether this trend continues throughout the year will depend on various factors, particularly the extent to which inflation declines and whether the economy slides into a recession. A recession typically results in a lower level of traditional venture capital investment, lower startup valuations and exits that take longer to materialize than in the past. As a result, startups often lower the size of their next funding round, which means they will need to operate with more austerity to make the money last. On the other hand, although VC firms are clearly being cautious right now, the industry has no shortage of cash and will likely be ready to increase its rate of investing the minute the economy’s prospects show signs of improvement.
Moring: At the national level, venture capital funding has certainly slowed. However, in the midcontinent, we continue to source and invest in great deals. We see significant benefits from being insulated from the swings of venture activity on the coasts.
What is your venture capital investment forecast for the coming year for Oklahoma? In the next five years?
Briggs: Despite the current macroeconomic headwinds, early-stage venture capital is still an attractive area for driving returns across an investor’s portfolio. In Oklahoma, recent state-level and federal incentives have enhanced the weighted return profile for investors. As the growth market valuations settle, the attractive opportunities will survive and surface.
Spann: The Oklahoma Center for the Advancement of Science and Technology (OCAST) has agreed to invest $47 million in four venture capital firms in the state, and those firms must match that money within 24 months in order to receive the investment. Assuming each firm does match OCAST’s investment, that will make a total of $94 million for those four firms alone to invest in Oklahoma startups. When you consider that those four firms will likely raise additional money beyond the matching funds, both inside and outside the state as Boyd Street Ventures certainly plans to do — and that other Oklahoma venture capital firms that did not receive money from OCAST will also be raising funds, it seems reasonable to expect that total venture capital investment in Oklahoma could run to $150 million or more over the next three or so years.
Oklahoma still has a relatively small venture capital industry, but it is growing, as are the different incubators to support such startups. What is making this industry grow? Why is it just now growing? Is it playing catch up to other states, or is there a reason for the growth now?
Spann: One big reason for the growth of the startup industry in Oklahoma is the critical mass that has been achieved by numerous business incubators and accelerators in the state, including OU’s Tom Love Innovation Hub, i2E and the Norman Business Development Coalition. What was missing until recently, however, is the means of funding the most promising graduates of those incubator and accelerator programs so their innovative technologies can be commercialized. Our focus at Boyd Street Ventures is to provide not only funding support but de-risking strategic and operational guidance to the startups we invest in so they can scale more quickly and profitably. In fact, we are one of the few venture capital firms with a full-fledged venture studio devoted to providing intensive scaling support to selected startups.
Moring: Entrepreneurial support organizations around the state of Oklahoma have been doing fantastic work for over a decade to build a thriving entrepreneurial ecosystem that has easy access to the resources and support that tech entrepreneurs need. We’ve seen tech companies like WeGoLook built and exited in the last 10 years. We’ve also seen multiple incubators, accelerators, coding bootcamps, etc. pop up in the last decade. The last three years of growth in available capital is making all that hard work more visible as entrepreneurs in those programs now have better chances of finding funding in state to grow their businesses.
What is your impression of Oklahoma’s startup community now in comparison to five or 10 years ago?
Briggs: We haven’t come back after the pandemic as strong as we were before. We have a lot of work to do.
Spann: I started my involvement in the Oklahoma startup community in 2015, when efforts to fund startups were very fragmented. Five to 10 years ago, it was exceedingly difficult for Oklahoma startups to commercialize. No matter how brilliant their innovations might have been, it was almost impossible to secure the funding necessary to take those innovations to market. And the reason is simple: Venture capital firms are the main source of funding for startups, and very few venture capital firms were based in Oklahoma. Moreover, the country’s big venture capital firms are cloistered on the East and West coasts and rarely, if ever, focus on discovering promising startups located in “flyover states” like ours.
What trends are you seeing in venture capital investments? What trends do you think you’ll see moving forward?
Spann: Our firm’s investment strategy is to focus on five sectors that are not only projected to demonstrate significant long-term growth but are areas where Oklahoma in general and OU in particular have outstanding research capabilities. Those sectors are life sciences, which has taken on added importance in what could be an age of ongoing pandemic threats; fintech, consistently the No. 1 sector for venture capital investment; energy tech and climate tech, two sectors that will continue to benefit from growing concerns about global warming; and aerospace/defense, by far Oklahoma’s leading industry and one that growing international tensions will likely make an ever higher priority for our country.
Moring: Artificial intelligence is definitely a hot trend right now. We’re specifically excited about opportunities for AI in industrial sectors like manufacturing. The recent banking crisis will likely lead to the creation of a new batch of innovative fintech companies. We’re also seeing a rise in health tech in the post-COVID-19 era, as telemedicine is no longer just a trend but rather a standard component of the healthcare system.
What infrastructure needs do venture capital firms have in order to grow funding for startups? What is holding back or slowing down growth in Oklahoma?
Spann: This is likely stating the obvious, but the single greatest need venture capital firms have is the ability to raise the capital needed to invest in Oklahoma’s most promising startups. Fortunately, there is a great deal of wealth among Oklahoma’s institutional and individual investors, and there are many strong reasons why venture capital investing makes sense for them. Venture capital funds have traditionally generated greater long-term returns than most other investment classes and shown less vulnerability to short-term economic disruptions. In addition, investing in venture capital is by definition an efficient way to increase a portfolio’s diversification. And venture capital funds offer a great enticement for individual investors: They can invest simply by shifting some of their SD-IRA funds, which means they can invest without having to write a check. We and other venture capital firms just need to continue to get the word out about the many advantages of investing in our funds.
Moring: We need to see more venture capital firms created to focus on different industries and stages. A robust venture capital market requires many different kinds of investors at different early stages of company formation and focused on different sectors. As part of this, we are encouraged to see more and more experienced angel investors backing new companies. Lastly, most other states have institutional investors that back emerging venture capital firms. For example, pension funds in Texas have emerging manager programs, investing in VC funds in the early years. This emerging manager allocation is a huge catalyst and a missing piece of financial infrastructure in Oklahoma. The motivation for these institutional investors are returns; often emerging managers outperform as they leverage expertise in new trends.
What are some of the current entrepreneurial resources available that startups might not be aware are available to them?
Spann: Many startups might not be aware of the accelerator and incubator programs — such as OU’s Tom Love Innovation Hub, i2E and the Norman Economic Development Coalition — that can help them with matters like early-stage technology development, intellectual property protection and proof-of-concept work. And high-potential startups that graduate from such programs or that get to the point of starting the commercialization process on their own could benefit from scaling guidance offered by the BSV venture studio. In addition, startups led by minorities, women and socially and economically disadvantaged individuals should contact the firms that have been designated for investment by OCAST, which places a priority on supporting such startups. In fact, Boyd Street Ventures established the Boyd Street Endowment Fund to support minority-, female- and SEDI-led companies almost a year before receiving the OCAST investment.
Moring: Hosting your business in a state-certified incubator not only provides you with access to resources but also to tremendous state income tax incentives. Community groups like 1 Million Cups and the Oklahoma Venture Forum offer entrepreneurs a place to share about their early-stage companies and get feedback from the community in a low-risk environment. Events like Tech++, the Innovation District’s happy hours and Cortado’s own quarterly Founder Hour offer entrepreneurs a chance to network and learn from others in the tech community.
With increased competition among venture capital investments groups, how do you ensure growth for all players?
Briggs: More funds in existence means more opportunities for funding for everyone. The most competitive funds are those that invest conscientiously.
Spann: Given the wealth of innovative research and development initiatives being pursued at OU and other universities and by other talented, driven entrepreneurs throughout the state, we believe there is ample potential for all of Oklahoma’s current venture capital firms and many more. The key will be to help investors in and outside of Oklahoma appreciate the caliber of the innovation being generated by the state’s most talented entrepreneurs and the many advantages of venture capital investing.
Moring: Oklahoma’s venture ecosystem is still quite young, and we are much more collaborative than competitive. For example, we have one portfolio company in which four different major Oklahoma venture funds are invested together. It’s crucial that we work together, when possible, to get deals done for Oklahoma companies.
Biologist and Prime Movers Lab partner
Prime Movers Lab invests in scientific startups focused on energy, transportation, infrastructure, manufacturing, human augmentation and agriculture.
Boyd Street Ventures founder and managing partner
Boyd Street Ventures provides funding for startups within the University of Oklahoma ecosystem.
Cortado Ventures principal
Cortado Ventures is an early-stage venture capital firm investing in businesses leveraging technology to scale in the fintech, biotech, aerospace, ag tech, energy tech and manufacturing and logistics sectors.