THE START FUND

A Seed/Startup Venture Fund working with, supporting and

compensating Incubators, Universities and Economic
Development Agencies

Elliott Dahan December, 2008 elliott@thegrowthgroup.com

http://www.thegrowthgroup.com 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.

2
Venture Risk Investing - One Size Does Not Fit All
RISK STAGE / SEED
VARIABLE STAGE
FUNDING CRITERIA #1 – belief in the guys
standing in front of you –
can they really do what
they say
CUSTOMER VC Firm, Corporate
partners, customers for
company’s products
GEOGRAPHIC REACH Same Day turnaround –
investors/company can
meet face-to-face and
be home in 1 day
RISK LEVEL OF Pretty much Blind Faith
INVESTMENT
VC FUND EXIT STAGE
STAGE (M&A or IPO)
“Traction” – validation by Can it be sold on the
usage/acceptance of the public market for IPO &
target market does it meet corporate
(consumers, B2B) goals for M&A
VC funds for follow on Operating groups within
rounds, corporations for a corporation for M&A,
M&A, investment Public markets for IPO
bankers for IPOs
Geographic hubs – The World Markets for
Silicon Valley, NY, LA, IPO
Seattle, London, Tel
Aviv
1/3 losers; 1/3 Little risk – IPOs are
breakeven & 1/3 pre-sold or called off
average 5X return –

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
3
 The Assumptions
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.

2) 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

5) Unlimited Geographic Reach is essential to source the quantity, quality

and sector focus of desirable portfolio candidates.

4
 SOLUTIONS
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.
5
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 1 2 3 4 5 6
IRR
10% $22.0 $24.2 $26.6 $29.3 $32.2 $35.4

15% $23.0 $26.5 $30.4 $35.0 $40.2 $46.3

25% $25.0 $31.3 $39.1 $48.8 $61.0 $76.3

40% $28.0 $39.2 $54.9 $76.8 $107.6 $150.6

% OWNERSHIP AT EXIT AVER RETURN FOR 10 FOLLOWONS IN YEAR 6

10%IRR 15%IRR 25%IRR 40%IRR

5% $70.8 $92.6 $152.6 $301.2

10% $35.4 $46.3 $76.3 $150.6

6
 SEED LEVEL WITHIN A VC FIRM
FUNDING
The START Fund
Fully
Funded
Standalone
Division
Funding
Committed

Variable VC Funding
Funding Committee

Ombudsman to the
No Entrepreneurial
Funding Community

Total Dependence Owned Independent

Relationship – Seed Level to VC Firm

7
 BACKUP DOCUMENTATION

COMMENTS, QUOTES AND DATA POINTS

8
 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
oversight to candidates after funding 9
 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.

11
 COMMENTS, QUOTES AND DATA POINTS

Angel Investors Shift To Later-Stage Deals By BOB SECHLER Staff Reporter of The Wall Street
Journal Oct. 23, 2006

"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
making follow-on investments in their new companies. 12
 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”
13
 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 (lasetert@darden.virginia.edu) serves on the faculty of the Darden Graduate School of Business at the University of Virginia.
David Kirsch (dkirsch@rhsmith.umd.edu) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at the
University of Maryland.
Brent Goldfarb (bgoldfarb@rhsmith.umd.edu) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at
the University of Maryland.
14
 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 later-
stage 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

15
ANGEL INVESTORS GROWING MORE CAUTIOUS

Angels continue to be the largest source of seed and start-

up 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

16
 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.

NOTE: Confirming the Funding Gap for Seed Companies

17
 COMMENTS, QUOTES AND DATA POINTS
Some Unrest Is Bubbling Beneath the Top Tier By MATT RICHTEL New York Times
5/11/2007

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.
18
 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

19
 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.”

20
 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

22
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.

23
 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.

24
 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.”
25
 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

26
 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.
NYTimes 11/14/2008

27
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 back-
office support. Bund’s company, Plymouth Management, will provide funding for at least one full-
time 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 Location
19 Maryland Technology Development Corp. Columbia, MD
16 Draper Fisher Jurvetson Menlo Park, CA
15 Ben Franklin Technology Partners SE PA Philadelphia, PA
15 Innovation Works, Inc. Pittsburgh, PA
14 New Enterprise Associates Baltimore, MD
13 Ben Franklin Technology Partners of NE PA Bethlehem, PA
13 First Round Capital West Conshohocken, PA
12 Mohr Davidow Ventures Menlo Park, CA
11 Kleiner Perkins Caufield & Byers Menlo Park, CA
10 Domain Associates LLC Princeton, NJ
** = First sequence financing in startup/seed or early-stage companies.

14) #1 (MTDC), #3 (Ben Franklin SE PA), #4 (Innovation Works) and #6 (Ben Franklin NE PA) are
ALL State Supported Economic Development Agencies
15) #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 <nates@sirti.org>

To: member@nbia.org
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
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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 31
 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.”
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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.

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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.

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 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”

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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.

37