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A Seed/Startup Venture Fund working with, supporting and compensating Incubators, Universities and Economic Development Agencies
firstname.lastname@example.org Office 650 903 9990
The Problem / Opportunity
1) The Seed Level Funding pool is shrinking (+/- $250K) while the cost of reaching sustainability is decreasing 2) Sourcing of Seed Level Candidates is haphazard at best and most often passive 3) Seed Level Funding must not be constrained by geography if the quantity and quality of portfolio companies is to be achieved. 4) Seed Level Funding is not economical in terms of ROI, Time and Personnel Costs for Traditional VC Firms (also geographically constrained). 5) The Seed Level Funding process is viewed by Funding Candidates as “Cautious” at best and “Adversarial” at worst – The Candidates genuflect and the VCs pontificate 6) After-Funding oversight of the Candidate ranges from inconsistent or ineffective to non existent.
Venture Risk Investing - One Size Does Not Fit All
RISK STAGE / VARIABLE FUNDING CRITERIA SEED STAGE #1 – belief in the guys standing in front of you – can they really do what they say VC Firm, Corporate partners, customers for company’s products Same Day turnaround – investors/company can meet face-to-face and be home in 1 day Pretty much Blind Faith VC FUND STAGE “Traction” – validation by usage/acceptance of the target market (consumers, B2B) VC funds for follow on rounds, corporations for M&A, investment bankers for IPOs Geographic hubs – Silicon Valley, NY, LA, Seattle, London, Tel Aviv 1/3 losers; 1/3 breakeven & 1/3 average 5X return – EXIT STAGE (M&A or IPO) Can it be sold on the public market for IPO & does it meet corporate goals for M&A Operating groups within a corporation for M&A, Public markets for IPO The World Markets for IPO
RISK LEVEL OF INVESTMENT
Little risk – IPOs are pre-sold or called off
Paul Gompers and Josh Lerner attempted to quantify the venture capital effect. They found that 90% of start-ups that were unable to attract venture capital within the first three years failed, while the failure rate dropped to 33% for those that did attract venture capital.
The (Not So) Puzzling Behavior of Angel Investors Darian M. Ibrahim University of Arizona Rogers College of Law February 2008
1) Funding a Candidate to Viability is getting less expensive – open source
software, cheaper hardware, ASP-based services to handle back office processes, Web 2.0 buzz – “I came to the conclusion that $500,000 is the new $5 million” – Mike Maples Jr.
The Funding Candidate is the “Customer” – simply spending less per investment
while still maintaining the passive VC investment model will not work. Understand the Customer. Live in the Customer’s World.
Seed Organizations want their Customers to succeed – incubators, local tech
organizations, tech transfers, universities, economic development organizations
Web 2.0 makes Virtual Incubation a real path for incubation, collaboration and
seed deal sourcing
Unlimited Geographic Reach is essential to source the quantity, quality and sector focus of desirable portfolio candidates.
1) LEVERAGE EXISTING INFRASTRUCTURE –
a) incentives for incubators, technology transfers, universities, local tech orgs, business school competitions, corporate spinouts, multinationals for both sourcing/pre-screening START candidates, and to provide post funding oversight. b) source and provide incentives local BOA & BOD members for vested interest involvement c) expanded geographical reach due to leverage of infrastructure for sourcing and oversight
2) THE START FUND - “OF THE ENTRERENEURIAL COMMUNITY”
a) Highly Pro-active, involved, responsive. b) High involvement with Infrastructure Community – endorsements, memberships
3) ONLINE EMPHASIS WITH IN-PERSON INVOLVEMENT –
a) Each Funded Candidate gets own secure web section for private communications b) Heavy use of Surveys, Forums, Blogs . . . Input / evaluation / change c) Recruitment Section – (1) New Candidates; (2) BOA/BOD/Personnel for Funded Candidates d) Schedule of in person meetings with both Funded Candidates and Infrastructure
4) WEB 2.0 TOOLS FOR COLLABORATION & CROWD SOURCING FOR TRUSTED INFORMATION
a) Secure Collaboration Tools for Companies: Wikis, RSS, Open Source Development, etc. b) Open Tools/Resources for Entrepreneurs: Blogs, Mail List, The Funded, SlideShare, etc.
START Fund IRR IRR based on $20 mil with $17.6 investable 6 year $20mil Fund with 2% mgmt fee Management Fee for 6yrs = $2.4mil Invest = $17.6 million = 50 Seed @$150K ($7.5mil) + 10 follow-on at $1mil ($10 mil) YEAR IRR 10% 15% 25% 40% 1 $22.0 $23.0 $25.0 $28.0 2 $24.2 $26.5 $31.3 $39.2 3 $26.6 $30.4 $39.1 $54.9 4 $29.3 $35.0 $48.8 $76.8 5 $32.2 $40.2 $61.0 $107.6 6 $35.4 $46.3 $76.3 $150.6
% OWNERSHIP AT EXIT
AVER RETURN FOR 10 FOLLOWONS IN YEAR 6 10%IRR 15%IRR $92.6 $46.3 25%IRR $152.6 $76.3 40%IRR $301.2 $150.6
SEED LEVEL WITHIN A VC FIRM
The START Fund Fully Funded
Ombudsman to the Entrepreneurial Community
VC Funding Committee
Relationship – Seed Level to VC Firm
COMMENTS, QUOTES AND DATA POINTS
COMMENTS, QUOTES AND DATA POINTS
How many business incubators are there? As of October 2006, there were over 1,400 incubators in North America, up from only 12 in 1980. Of those, 1,115 were in the United States, 191 were in Mexico and 120 were in Canada. NBIA estimates that there are about 5,000 business incubators worldwide. What are the different types of business incubators? Most North American business incubators (about 90 percent) are nonprofit organizations focused on economic development. About 10 percent of North American incubators are for-profit entities, usually set up to obtain returns on shareholders investments. 37 percent focus on technology businesses. Nearly a tenth (9 percent) of all programs draw clients from outside their region or from outside the United States. Who sponsors business incubators? About 25 percent of North American business incubators are sponsored by academic institutions. 16 percent are sponsored by government entities. 15 percent are sponsored by economic development organizations. 10 percent are sponsored by for-profit entities. 10 percent are sponsored by other types of organizations. About 5 percent of business incubators are “hybrids” with more than one sponsor. 19 percent of incubators have no sponsor or host organization.
NOTE: Add to the business incubators – local tech organizations, tech transfers, academic departments, online sourcing – the sourcing universe in in the tens of thousands – the problem is not is sourcing, it is in leveraging existing infrastructure to: (1) screen candidates and (2) provide 9 oversight to candidates after funding
2008 Angel Group Confidence Survey Results
Angel Capital Assoc. Feb., 2008
Number of new companies funded by your group in calendar 2007? • Average 4.5 • Median 4 Number of follow-on investments in existing portfolio companies by your group in calendar 2007 • Average 2.8 • Median 2 Average size of group investment per round: • < $150,000 35.4% • $150,000 to $250,000 23.1% • $250,000 to $500,000 32.3% • $500,000 to $750,000 9.2% • $750,000 and above 0% • Average dollars invested per round = $265,926
NOTES: 38% of Angel Funding went to Follow On Investment – NOT NEW COMPANY INVESTMENT 41% of Angel Funding was over $265K per Round per Angel Fund 10
Angel Groups are not dedicated to the Seed Funding of New Companies
2008 Angel Group Confidence Survey Results
Angel Capital Assoc. Feb., 2008
In what geographic region does your group invest?: Within two-hours drive of the center of the group’s metropolitan area 28.4% Within four-hours drive of the center of the group’s metropolitan area 18.5% Only within our state or province 16.0% Within a region (i.e. Midwest or Southeast) 19.8% No geographical restrictions 17.3%
NOTE – This geographic limitation greatly restricts the size of the seed pool thereby making seed investment more of an “avocation” than a “vocation” The START Fund, working with and compensating incubators, universities and economic development organizations for both pre-investment sourcing and post-investment oversight, will not be limited by geography – both within the United States and Internationally.
COMMENTS, QUOTES AND DATA POINTS
Angel Investors Shift To Later-Stage Deals By BOB SECHLER
Journal Oct. 23, 2006 Staff Reporter of The Wall Street
"Angel" investing has been on the rise this year, but entrepreneurs looking for their first outside funding may not have noticed. That's because angels -- or wealthy individuals traditionally willing to place bets on nascent businesses before anyone else -- have continued to shy away from seed-stage and start-up companies, a recent study shows. Overall investment by angels climbed 15% to $12.7 billion, through the first half of 2006 compared with the same period of 2005, according to the report from the Center for Venture Research at the University of New Hampshire. But only 40% of the 2006 money has gone to seed-stage and start-up companies, compared to 48% during the same period of 2005. The trend isn't new, with the percentage sliding steadily from around 75% several years ago. "What we're seeing is a redistribution of investment going from the seed [stage] to the post-seed" stage, said Jeffrey Sohl, director of the center. Mr. Sohl said the result is "a terrible seed- and start-up stage capital gap" that has the potential to stifle the pace of new-business creation and product innovation. According to the statistics, angel investors have been putting the bulk of their money into later-stage deals, either through follow-on investments in their existing companies or through new bets on post-seed companies. The study counted 24,500 "entrepreneurial ventures" receiving angel funding during the first half of 2006, a 6% drop from the same period of 2005, even as the total amount of investment climbed. The trend means average deal size is up, indicative of later-stage investing. Several reasons explain the shift. For one, venture capitalists -- who generally get on board after angel investors -- have been favoring relatively mature start-ups. Angels have had to bridge the funding gap by 12 making follow-on investments in their new companies.
COMMENTS, QUOTES AND DATA POINTS
• • • it costs less to start a software/Internet business these days, there are fewer large exits (both via IPO and M&A) taking place over the long-term (10+ years), seed-stage investing has had a higher return than any other stage of venture investing.
It also is a recognition of some of the challenges that larger venture funds face. Take a hypothetical traditional $400M VC firm. In order to achieve a 20% IRR, the fund must return 3x their initial capital over a 6 year term -- or $1.2B. Now say this hypothetical VC firm typically owns 20% of their portfolio companies at exit (an industry average). That means that at exit their portfolio needs to create $6 Billion dollars worth of market value (ie, $1.2B / 20%). Assuming that their average investment size is $20M, that means that they invest in 20 companies -this assumes an average exit valuation of $300M PER COMPANY. Given the tight IPO Market and an average M&A exit value of less approximately $150M, this math creates some real challenges.”
Josh Kopelman, Mng. Dir. First Round Capital – talking about Charles River’s “QuickStart” program in his blog, “RedEye VC”
COMMENTS, QUOTES AND DATA POINTS
Lessons of the Last Bubble by Tim Laseter, David Kirsch, and Brent Goldfarb
Smaller bets can make the next technological boom more productive and enduring.
We conducted a separate study of a random sample of companies seeking venture-capital funding in 1999 and found that the five-year survival rate was 48 percent. The 50 percent failure rate of the dot-com era still seems high, until we put it into perspective. Compare the dot-coms to other business realms: From 1996 to 1998, for example, the survival rate for independent restaurants open for three years ran 39 percent. That is, a form of business with a very measurable market, using cooking technology that has existed for decades or more, failed 61 percent of the time. By comparison, the failure rate of Internet-based businesses tapping unknowable market opportunities with an unproven technology platform seems far more tame. To avoid the bubble, we recommend lots of little experiments that send the herd in many different directions. Avoiding the “get big fast” strategy and the herd instinct allows for a more thorough investigation of the terrain. Many members of the herd will fall upon barren terrain and die, but in the long run, careful nurturing of the fruitful routes will produce a greater herd than overgrazing of the fertile patches discovered by the lucky few.
Tim Laseter (email@example.com) serves on the faculty of the Darden Graduate School of Business at the University of Virginia. David Kirsch (firstname.lastname@example.org) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at the University of Maryland. Brent Goldfarb (email@example.com) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at the University of Maryland.
COMMENTS, QUOTES AND DATA POINTS
ANGEL MARKET GROWS 10 PERCENT IN 2006
A total of 51,000 entrepreneurial ventures received angel funding in 2006, a 3 percent increase from 2005. The number of active investors in 2006 was 234,000 individuals. The sharp increase in total investment dollars was matched by a more modest increase in total deals, resulting in an increase in the average deal size of 7.5 percent, compared to 2005.
“While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap in the post seed investing stage are requiring angels to engage in more laterstage investments. New, first sequence, investments represent 63 percent of 2006 angel activity, indicating that some of this post seed investing is in new deals. This restructuring of the angel market has in turn resulted in fewer dollars available for seed investments, thus exacerbating the capital gap for seed and start-up capital in the United States,” Sohl said.
Center for Venture Research March 19, 2007
ANGEL INVESTORS GROWING MORE CAUTIOUS
Angels continue to be the largest source of seed and startup capital, with 39% of 2007 angel investments in the seed and start-up stage. Angels also exhibited an interest in post-seed/start-up investing with 35% of investments in this stage. Expansion stage investing (21%) showed the biggest increase. While angels continue to represent the largest source of seed and start-up capital, market conditions and the capital gap are requiring angels to engage in more later-stage rounds.
Center for Venture Research Director, Jeffrey Sohl – 2007 Angel Analysis
COMMENTS, QUOTES AND DATA POINTS Venture Capital Investment Surpasses $7 Billion in Q1 2007; Reaches Highest Quarterly Level in Five Years
WASHINGTON, April 24, 2007-- In the first quarter of 2007, venture capitalists invested $7.1 billion into 778 deals, the highest quarterly dollar amount since the fourth quarter of 2001, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial.
Funding dollars for Seed and Early Stage companies declined 30 percent in Q1 (2007) to $1.1 billion in 259 companies, a 26 percent decline in deals. Average post-money valuations of Early Stage companies were $11.13 million for the 12 months ending Q4 2006.
Confirming the Funding Gap for Seed Companies
COMMENTS, QUOTES AND DATA POINTS
Some Unrest Is Bubbling Beneath the Top Tier
5/11/2007 By MATT RICHTEL New York Times
the venture capital association reported that as of the end of 2006, the internal rate of return for venture funds was only 1 percent over 5 years, but 20.3 percent over 10 years and 16.6 percent over 20 years. Those figures include the amount paid to limited partners and unrealized gains, meaning that the measure does not give a definitive picture of the distributed profits. For instance, in the first nine months of 2006, venture firms invested $20 billion but paid out $10 billion; in 2005, they invested $23 billion but distributed $20 billion.
Since 1986, 32 firms have accounted for 10% of the venture capital raised but produced 56% of the total returns, said Diana Frazier, a managing director of fund-of-funds manager FLAG Capital Management LLC. She said her calculations, based on confidential data collected by FLAG, understate the discrepancy because they exclude Greylock Partners, Sigma Partners and Sutter Hill Ventures. Mr. Doppstadt said 10 of the some 165 funds that Ford has invested in since 1970 produced about 45% of its returns.
NOTE – VC FIRMS NEED TO “VERTICALLY INTEGRATE” – THEY NEED TO REDUCE THE COMPETITION FOR LATER STAGE DEALS BY BECOMING INVOLVED WITH SEED LEVEL COMPANIES. BUT SIMPLY DOWNSIZING THE CURRENT VC MODEL WITH ITS HIGH FIXED COSTS, ITS LIMITED REACH, ITS INABILITY TO PROVIDE OVERSIGHT WILL NOT WORK.
The Incredible Shrinking Venture-Capital Industry
The technology bubble popped years ago, but the downsizing of the venture industry continues. There were 844 venture firms investing in U.S. companies last year, 40 fewer than in 2006, according to the latest data from VentureSource, a research unit of VentureWire publisher Dow Jones. That is down 30% from the bubble year of 2000, when there were nearly 1,200 active investors. The total includes a substantial number of firms–224, or 27% of the total–who didn’t back any new companies last year, an indication that the ranks of active investors will continue to thin. While he declined to predict the effect on the NVCA’s membership, Heesen said he foresees a 15% decline in the next two years in the total number of venture firms investing in the U.S., many of them too small to meet the NVCA’s membership threshold of $5 million under management. The NVCA has about 470 member firms representing 90% of the venture capital under management in the U.S. Many of the active investors in 2007 did only a few deals. Less than half–45%– completed four or more investments. And 29% made just one investment. About 550 firms have made at least one investment in a U.S. company this year, according to VentureSource.
Posted by Deal Journal June 19, 2008
Venture Investors Wrap Up an Unusually Bleak Quarter
Matt Richtel, NYTimes, June 28, 2008
In the second quarter of this year not a single company backed by venture capitalists has gone public. It is the first time that has happened since 1978, according to a venture capital industry group. . . . That may come as little surprise to the well-heeled individuals and institutions that give their money to venture capitalists seeking big returns. Some of these investors have criticized venture capitalists for failing to provide substantial returns on a broad basis since 2000. Paul Kedrosky, an investor and the author of Infectious Greed, a venture capital-centric blog, said, “The Valley is operating in its own little world, and the capital markets don’t care about the things that are getting the Valley excited.” “Here’s an industry struggling in a big way to hang onto its investors, let alone find new ones,” Mr. Kedrosky said. “They’ve been hanging on by their fingernails.”
COMMENTS, QUOTES AND DATA POINTS
“The median share of U.S.-based companies sold to investors in Series A rounds fell from 50% in last year's study to 40% this year. Because first round valuations held relatively steady during the survey period, this appears to be the result of companies raising smaller first rounds.”
VentureOne Deal Terms Report, published by Dow Jones & Company. Nov. 9, 2006
Tech startup heading West AdInterax, now housed at RPI incubator, to relocate after purchase by Yahoo
By ERIC ANDERSON, Deputy business editor First published: Wednesday, October 18, 2006
TROY -- Web portal Yahoo has agreed to purchase Fysix Corp., which does business as AdInterax, and will move the company to the West Coast from the Rensselaer Polytechnic Institute incubator. AdInterax was founded in 1999 by Peter Matsuo and Marcus Doemling, both of whom earned their doctorates in physics from the University at Albany. The company originally incorporated video games into its online ads, but early on also began tracking and collecting all the data that tell advertisers who is looking, and what they're looking at. 21
COMMENTS, QUOTES AND DATA POINTS
SOFTWARE BUSINESS CLUSTER (SBC): San Jose - The motto of the Software Business Cluster is "Innovate, Incubate, Accelerate". The SBC provides early-stage software companies with an environment loaded with mentoring, funding and networking opportunities. The attracts start-ups to San Jose and expedites their growth by assisting with business plan refinement, the development of marketing plans, investor and customer presentations, office space, internet access, and website and email hosting. Of the 75 software companies located in San Jose, more than two-thirds developed in the SBC. City of San Jose, Website Mergers and acquisitions are predicted to deliver returns in 2007 with more than three-quarters of respondents (78 percent) saying M&A deals will be the exit of choice and only 22 percent forecasting a decrease from 2006 levels. NVCA Member Survey, 12/2006 Gov. Arnold Schwarzenegger announced Wednesday a $95 million proposal for medical, environmental and technological research. $30 million would go toward building a new research building for the Lawrence Berkeley National Laboratory's Helios Project, which is developing the next generation of efficient solar-energy technology. An additional $40 million would help build an Energy Biosciences Institute facility for research into alternative fuels. The remaining $19.8 million in the governor's proposal would be spread out among the California Institutes for Science and Innovation, which focus on information technology, wireless communications, biotechnology and nanosciences. The institutes are housed at UC campuses around the state and work with government and industries. By Steven Harmon MediaNews Sacramento Bureau Dec. 28, 2006
Four Maryland Startups get $75,000 each from TEDCO January 31, 2008
COLUMBIA, MD--The Maryland Technology Development Corporation (TEDCO) says that four Maryland technology companies have received $300,000 total in funding. Bamvet Laboratories Inc., HeMemics Biotechnologies Inc., Vivomind Intelligence Inc., and 3CLogic Inc., each received $75,000 from TEDCO’s Maryland Technology Transfer Fund (MTTF). This program is designed to foster greater collaboration between businesses and Maryland universities and federal laboratories to bring technology into the marketplace.
To date, 87 companies have received funding from MTTF and completed their projects. With an investment of $5,038,179.41 these companies have gone on to receive downstream funding from angel and venture investors, federal awards and other resources exceeding $168.3 million.
Georgia Tech's ATDC Graduates Six Member Companies May 15, 2008 By Stephen Johnson
ATLANTA, GA—The Advanced Technology Development Center (ATDC) at Georgia Tech honors its six 2008 graduating member companies at ceremonies at The Biltmore today. The graduation ceremony is the centerpiece of ATDC's annual Entrepreneur Showcase, an event that celebrates the success of the best young technology companies in Georgia. ATDC is a nationally recognized science and technology incubator. ATDC membership is highly competitive. Each year, more than 130 emerging firms apply for ATDC membership. The State of Georgia invests in ATDC, so its member companies companies aren't required to give up equity in exchange for ATDC's services. ATDC currently has more than 40 member companies in its program. ATDC has an impressive track record. More than 100 member companies have graduated from ATDC over the years. 30 ATDC member companies have been represented on the public markets via either acquisitions or IPOs. ATDC companies continue to break the mold of traditional startups. Most industry statistics show that four out of five startup businesses fail. ATDC companies are the opposite: 75 percent of ATDC member companies since 1995 are still in business or were acquired. In the past decade, ATDC member companies have raised more than one billion dollars of Venture Capital.
Kauffman Foundation Says von Liebig Center Fills Seed-Stage Funding Gap
Kansas City, MO, January 24, 2008 – An emerging approach to identifying, funding and commercializing university-based innovation is proving quite effective at seeding new companies, according to research conducted by the Ewing Marion Kauffman Foundation and the Max Planck Institute of Economics. According to the Kauffman Foundation, “proof of concept centers” are an effective vehicle to help launch the commercialization of university innovation and to fill the seed-stage funding gap for new technologies. The report examines two such centers, the Deshpande Center at MIT and the von Liebig Center at UC San Diego. According to researchers, since the two centers’ creation in 2002, they have collectively awarded nearly $10 million in seed grants and launched 26 seed-stage companies that have accumulated more than $159 million in private capital. Both centers are funded from philanthropic donations. The lessons learned from the proof of concept study have led the Kauffman Foundation to form a network that will bring centers together to study best practices, establish metrics and define points of future research. The Deshpande and von Liebig centers will be founding members of the new network. “The centers’ successes and strategies provide a promising model for replication, and this network will help advance this new approach,” said Lesa Mitchell, vice president of Advancing Innovation, Kauffman Foundation. “The network will help them to share strategies such as how to help grantees leverage more capital for their technologies.”
MIT students build mobile applications in 13 weeks
Doug Aamoth, CrunchGear, December 12, 2008
MIT professor Hal Abelson started today’s final presentation for the school’s “Building Mobile Applications” class by saying, “A course like this couldn’t have existed ten years ago… maybe not even a year ago. Courses like this right now are unique, but in two years they’ll be completely ordinary.” What’s extraordinary is that on top of a full college course-load at one of the most challenging schools in the country, these groups of students built fully working mobile applications for Windows Mobile, Android, and Symbian devices while mentors from the likes of Google, Nokia, Bank of America, and Microsoft oversaw their progress. Here are the ten applications that were presented today. Some of them might remain as small-scale projects, while others are full-blown, robust applications that have already undergone serious development and are poised to enter the marketplace.
Read the article http://www.crunchgear.com/2008/12/12/mit-students-build-mobile-applications-in-1 Also note the comments about other University efforts like this one at MIT
Connecticut Rolls Out New Cleantech Fund
Cleantech companies could get up to $1 million from the new Connecticut Clean Tech Fund, which will be managed by Connecticut Innovations, a quasi-public authority responsible for technology investing in the state. Connecticut Innovations and the Department of Economic and Community Development have each made an initial commitment of $3 million for the new fund. The Connecticut Clean Energy Fund, also run by Connecticut Innovations, is putting up $3 million for companies that meet its criteria. Companies don’t need to be based in Connecticut to get a chance at an investment from the new fund, but they need to have a significant presence in the state. But for Connecticut-based companies, there’s also the chance at additional funding from the Eli Whitney Fund, another Connecticut Innovations fund, this one focused on energy and environmental systems technology, photonics and applied optics, and advanced materials. Connecticut isn’t the only state putting cash into cleantech. Nearby Pennsylvania also has a history of investments in environmentally friendly technologies. Earlier this year, Pennsylvania Gov. Ed Rendell signed an energy bill handing out $650 million in loans and tax incentives for renewable energy projects in the state.
Michigan incubator partners with venture capitalist
OU INC, Oakland University’s business incubator in Rochester, Mich., is partnering with venture capitalist Ian Bund to invest in growing Michigan companies -- including incubator graduates. Bund will base his new $30 million fund at the incubator, which will provide staffing and backoffice support. Bund’s company, Plymouth Management, will provide funding for at least one fulltime staff person to run an office at OU INC. Bund founded Plymouth Management in 2003 and has since helped take 34 companies public. Bund also is co-founder of Innovation Capital Ltd., which brings Australian technology to the U.S. The agreement between Bund and the university calls for the fund to invest between $500,000 and $2 million in either debt or equity in growth companies, defined as having revenue and approaching the point where they are cash-flow positive. David Spencer, executive director of OU Inc., projects that the fund will begin accepting applications and inquiries by this fall. Founded in 2001, OU INC has nine resident clients and five affiliate clients. It is one of 12 SmartZones, technology clusters recognized by the Michigan Economic Development Corporation for their ability to incubate and accelerate emerging companies. Together, SmartZone businesses have created 8,300 new jobs and attracted more than $1 billion in public and private investment. NBIA Review June, 2008 28
Top Firms for Early Stage Companies**
Entrepreneur Magazine August, 2008
# Deals VC
19 16 15 15 14 13 13 12 11 10
Maryland Technology Development Corp. Columbia, MD Draper Fisher Jurvetson Menlo Park, CA Ben Franklin Technology Partners SE PA Philadelphia, PA Innovation Works, Inc. Pittsburgh, PA New Enterprise Associates Baltimore, MD Ben Franklin Technology Partners of NE PA Bethlehem, PA First Round Capital West Conshohocken, PA Mohr Davidow Ventures Menlo Park, CA Kleiner Perkins Caufield & Byers Menlo Park, CA Domain Associates LLC Princeton, NJ
** = First sequence financing in startup/seed or early-stage companies.
#1 (MTDC), #3 (Ben Franklin SE PA), #4 (Innovation Works) and #6 (Ben Franklin NE PA) are ALL State Supported Economic Development Agencies #2 (DFJ), #5 (NEA), #7 (First Round), #8 (Mohr, Davidow), #9 (KPCB) & #10 (Domain Assoc) are ALL Private Venture Capital Funds. 29
Email from Incubator in WA State re: establishing an Equity Fund
From: Nate Speer <firstname.lastname@example.org> To: email@example.com Sent: Mon, 14 Jul 2008 2:24 pm Subject: [NBIA Member] pre-seed and seed fund programs Colleagues, My name is Nate Speer I am a Client Services Consultant for an incubator/accelerator in WA State. We are currently in the exploratory phase of looking into the possibility of establishinga pre-seed type equity fund for our client companies. I was at the recent annual conference in San Antonio and recall a number of incubators with similar type programs. Could those of you with such Funds share with us any information on your programs and if you have any best practice or pitfall advice to pass along. We are specifically interested in examples of successful programs we can share with our board during our feasibility process.
Nate Speer Client Services Consultant Sirti The University District 665 N. Riverpoint Blvd. Spokane, WA 99202-1665
Hello Nate, (This email is in response to WA State email on slide #26) The key issue to determine is the nature of the fund you want to launch and its goals - focusing on the type of returns required (Economic Development vs. ROI) and the partners involved. One end of the spectrum is a "Technology Development Fund" which is closer to a grant-like model and tends to be non-profit. The other end of the spectrum is an ROI driven for-profit entity with general and limited partners, utilizing VC-like term-sheets that is typically formed as a separate legal entity (there are many hybrid options in-between). One of our local partners, Excell Partners (http://excellny.org/), can serve as a good example for a non-profit pre-seed/seed fund that employs VC-like methods. HTR and Excell often collaborate on various deals - where HTR will provide the Human Capital services (CEO/CXO...) and Excell will provide unrestricted cash investments.
Regards, Rami Y. Katz, MBA & Attorney (IL) Director of Technology Commercialization Lennox Tech Enterprise Center 150 Lucius Gordon Drive, Suite 100 West Henrietta , New York 14586 (585) 214-0596 / www.htr.org
The CRV QuickStart Seed Funding Program
2) “By offering up to $250,000 in the form of a loan (also referred to as a “convertible note”), we’re providing the capital to fuel ideas without that painful seed-stage dilution.”
2) “CRV will not seek a personal guarantee and will not hold you personally responsible for repaying the loan.” 3) “The loan converts into equity only if and when your company closes its next round of funding (typically a Series A round). CRV receives a discount on the conversion price when the loan is rolled into that next round. the discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to close the financing, up to the maximum) off of the per share price. A simple example: if CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock.” 4) “CRV will have an option to invest equally with other new investors in the Series A equity funding.” 5) “CRV appreciates that you want to appropriately reward the key people who helped you build the company. The corporation could issue a five-year warrant to purchase (exercisable at fair market value per share at the time of the Series A closing) shares of the company’s common stock representing one third of one percentage point of the company’s fully-diluted capitalization at the time of the Series A closing.” 6) “We will actively work with you to assist in making progress toward a formal first round of equity financing. To the extent your company holds board meetings during the seed phase, we will attend those meetings in an observer capacity to lend both strategic and tactical advice.”
source – www.crv.com website
FAQs from - QuickStart Seed Funding Program
Why is CRV doing this?
Because entrepreneurs kept asking us for this and we realized the whole startup funding market was entering a new long term trend. A trend where with $250K an entrepreneur could build out and prove a concept. We realize that CRV QuickStart could be viewed as disruptive to the business model of seed equity angel investors who traditionally ask entrepreneurs to dilute their stock during the seed phase. We didn't set out on purpose to disrupt anyone's business model. All we are doing is moving in the direction of the entrepreneurs' needs to get concepts out and tested quickly in a way that is palatable to the entrepreneur.
Why is it a loan?
Because entrepreneurs started asking us for their seed funding to be a loan. There is no equity dilution for taking the loan. It is also a simple 2 page loan that is easy to understand. And it is fast. There is no need to go out and convince and negotiate the "valuation" of the company for the entrepreneur. And since it is a loan, there is not the usual public registration of an equity investment. This allows for the entrepreneur to operate and33 prove out the concept in a stealthy way.
FAQs from - QuickStart Seed Funding Program
Can the entrepreneur include other investors in the seed round?
Yes. We are happy to include other investors in the seed round if the entrepreneur wants to include them. We aren't doing this to block other investors out. We are doing this to participate in new, really exciting concepts that are sprouting all over. So if inclined, other investors including angel investors can join in the seed round if the entrepreneur wants.
Assuming the entrepreneur accepts the $250K CRV QuickStart convertible loan, what are their obligations to CRV?
The obligation is a right for CRV to participate in the first EQUITY round (Series A) with other investors on an equal basis. On our website, we state that we have a right to participate in 50% of the Series A equity round. Frankly, we said that as most Series A investments have 2 venture firms as investors. And we'd like to be 1 of the 2. Thus 50% of the Series A round. But if the entrepreneur wants more than 2 firms, all we are asking for is the right to participate equally with other investors in that first Series A.
source – www.crv.com website
REALITY OF DEALING WITH QUICKSTART – POSTING BY AN ENTREPRENEUR FROM THEFUNDED.COM
Quickstart; renamed Quicksand Fund: Charles River Ventures Posted by blk911 on Sun May 06 22:54:18 EDT 2007 Public: The details of the program seem to be fairly straight forward: fund at the seed level, get a ConvDebt w/pref in exchange for shot at series "A". [sic] We'll fund some projects early, not expend a ton of overhead scrutinzing the incubation and launch then get more heavily involved at the first 'open' round. I made an inquiry on a Friday night at 9pCST, rec'd a reply in 40min. "Nice...but they didn't address my concern" which was that I wanted to have a phone conversation prior to sending in my Exec Summary. 4 days later the reply came "We can't do that...". So I sent a link which gave some public details and ask for a phone convo. "Sorry". Seemed like it was not too much to ask, since our business is in the mobile space and todate, a completely unique concept there (hence a bit concerned about a blind mail-in). 2 emails more and we concluded that I would contact them post-launch. As described above, I wonder if they are for real or fishing for ideas or getting educated on what folks are doing in what spaces. We have an experienced team, seasoned vets in mgmt, code done, beta launched...and won't even do a phone call? Odd.
BATTERY VENTURES ALSO RECOGNIZES THE OPPORTUNITY – BUT STILL DOESN’T GET IT
Battery'S New Seed Program Fund: Battery Ventures
Posted by Anonymous - 2008-02-26 12:04:06 FROM THE FUNDED WEBSITE Battery just started doing seed investments, and the process is definitely very entreprenuer friendly. It works like this - you take one 90 minute meeting with several partners, and then they get back to you within 24 hours with a decision on whether or not they're in. They do amounts of about 500K and give you a vanilla term sheet (no board seats etc etc), so you can close the deal and get the money within a week or two. They like it because it lets them build early relationships with promising companies at what (for a large firm like theirs) is a relatively small cost.
MY COMMENTS: 11) Where is the pre-funding sourcing ? And, much more importantly, where is the post funding oversight ? 12) What is the real cost of having a 90 minute meeting with several partners ? And the followup ? And who deals with the company if there is an investment ? 13) Investments of $500K – this is more than “seed” – As Mike Maples said, “$500K is the new $5 million” 36
Venrock’s Internal Incubator Conflict of Interests
Fund: Venrock Associates Posted by Anonymous on 2008-04-16
Venrock has an internal incubator, which is staffed by internal employees of the firm and receives advice from the GPs in terms of what ideas to build into companies. Once they get the idea to a certain size, they hire an executive team, give the company its next round of financing and take a sizable chunk of the company. As an entrepreneur this leaves me very concerned about pitching an early stage idea to the firm. Sure, they may have seen other ideas like it but they may not have as well. Does anyone know anything about how they manage this conflict of interest and whether they can be trusted? I'm not saying they can't be trusted, I'm just pretty concerned about it. 5. RE: Venrock's Internal Incubator -- Conflict of interests? Posted by anon on 2008-04-16 13:57:27
Stay away from them if you are an early stage company. 2. RE: Venrock's Internal Incubator -- Conflict of interests? Posted by Sharkbait on 2008-04-16 17:40:36
I strongly recommend keeping your initial pitch to a VC nice and vague. If they're interested in the category you are pitching, they'll ask you back. At that point, you can decide how to protect your idea, but it's worth mapping out an understanding, ideally an NDA, before the full pitch to the partnership. You probably won't get it, but doesn't hurt to ask. 3. RE: Venrock's Internal Incubator -- Conflict of interests? Posted by Entrepreneer on 2008-04-17 11:48:31
If you're worried about it, don't pitch them. They know that if they steal ideas, people will stop bringing them investment opportunities, so they have incentive to stay clean. But if what you're working on could so easily be duplicated, you've got to ask yourself why you're talking to VCs in the first place. See my earlier post about "Why you?" 4. RE: Venrock's Internal Incubator -- Conflict of interests? Posted by Anonymous on 2008-07-18 01:31:46
I am very concerned about pitching them. I have seen a large number of VC firms now have an incubator either internal or partners with them. Sometimes they give the incubator a separate name but the partners/managers of both entities are the same. I won't pitch these types of VC funds anymore because of bad experiences I had with a healthcare VC who had an incubator.