New fund here to provide seed capital to tech firms
Venture will collaborate with SIRTI, U of I, others to give startups infusionsOctober 7th, 2010
A new fund is being launched here that will provide seed capital to technology startups and work closely with Sirti and Spokane-area universities to stimulate commercialization of new ideas.
Called Inland TechStart Fund LLC, the venture hopes to raise $1.5 million to $2 million yet this year and invest that money in startups that have developed viable business plans, but haven't reached the stage where they can attract capital from angel investors, says co-founder Steve Neff.
That kind of financing, also called gap funding or pre-angel investment, might be used by a company to build a prototype of its invention or to pursue its first sales, and it's the kind of capital that is hard to come by here, Neff says. The fund expects to make equity investments typically in the $25,000 to $75,000 range, perhaps beginning in the first quarter of next year, he says.
In a presentation about the fund made by John Overby, Sirti's director of client services, Sirti identified seed capital as a missing link in the Spokane area. Sirti, a state economic-development agency, helps technology-related startups shape, analyze, and validate their ideas, and determines whether a market exists for them and whether they have the needed management expertise. Then, it points such entrepreneurs to possible funding sources, typically angel investors that are willing to inject, say, $1 million to $2 million into the venture. The Spokane area already has such angel groups.
Angel investors, however, usually want startups to be further along in their development than they can be without having access to some form of seed capital, says Neff. Unless they can get money from friends or family, some startups never reach the stage where they are eligible for angel investment, he says.
"There are a lot of companies that didn't get friends and family (financing), and they just died, or moved to Seattle where they could get it," Neff says.
Getting money from friends and family isn't always the best path anyway, he says, because such investments typically are emotional, rather than strategic, and don't come with the kind of sound advice and mentoring that true seed capital can, he says. Inland TechStart Fund hopes to provide that mentoring, along with an investment, he adds.
Longtime technology investor and businessman Peter Sutherland, who moved to Coeur d'Alene from Santa Barbara, Calif., a few years ago, and is co-founder of the new fund, says he has brought ideas with him learned in his business and civic activities in Southern California.
One is to ensure that the startups the fund invests in are fully qualified before they hold their hat out for money, Sutherland says, adding that the Inland Northwest is "very lucky" to have Sirti to provide that kind of "filtering" and preparation before startups seek capital.
Inland TechStart Fund plans to work closely with Sirti, relying on the agency to provide it with startups that Sirti advisers believe have a viable product and market, good management, and a decent chance of success, says Neff.
To analyze such prospects further, the fund will assign a six-member vetting team of volunteer experts, split equally in to a red team and green team, to analyze the pros and cons of investing in the company. The green team will argue in favor of having the fund invest in the startup, and the red team will look for flaws in the plan.
In order for the prospect even to make it to the full board of the fund for possible investment approval, at least one member of the red team will have to jump teams and side with the proponent green team, Neff says. Even then, the red team still will get to raise its concerns before the board, he says.
Also, sometime during the process, one or more volunteers will be assigned to the startup, and they would continue to counsel the young company after an investment by the fund is made, Neff says. Also, the fund typically will ask to have a representative placed on the startup's board of directors, he says.
By its nature, a seed capital investment is intended to be finite in length, and though the new fund hasn't set specific rules about how long it plans to invest in companies, it will decide ahead of time on each investment how long it wants to be an equity partner.
"We'll know what the exit is before we enter," Neff says.
Inland TechStart Fund has been meeting with possible investors, and also with organizations that might team up with it in some way, including the University of Idaho, which has agreed in principle to assist the fund, partly by identifying inventions and intellectual property that could be commercialized here, says Marla Telin, the fund's executive director.
Telin is a longtime finance executive with tech companies, including World Wide Packets Inc., of Spokane, and Advanced Hardware Architecture Inc., of Pullman.
Gene Merrell, associate vice president for research and economic development at U of I, has joined the fund's board, as has John Pariseau, general manager of Spokane angel group WIN Partners LLC; and Jim Deffenbaugh, executive director of the Panhandle Area Council, in North Idaho.
Neff says representatives of both Sirti and Spokane-based Avista Corp., which has agreed to invest in the fund, also will serve on the board.
He says the idea for the fund came about two years ago, when he met Sutherland on an airplane. They talked about economic development and agreed that such a fund might help create jobs in the Inland Northwest.
"We asked ourselves, what is the biggest need?" says Sutherland.
Neff, who currently is a principal in Revita Institute Northwest, a Spokane company that is looking to create a chain of specialized physical therapy clinics, has an extensive background in investment advisory, for such companies as Signia Capital Management LLC and ICM Asset Management Inc., both of Spokane.
Sutherland, of Coeur d'Alene, owns his own consulting company that focuses on mergers and acquisitions, finance, and business development. He also is an angel investor, has owned manufacturing companies, and has helped launch a nonprofit incubator in California.