Startup fundraising is never easy and the current pandemic crisis makes it even harder. Typical early-stage investors, such as angel investors and venture capital funds, today might be more reluctant to take risks and bet on early-stage startups. In such situations, entrepreneurs often turn to friends and family (2F’s) to support their endeavors.
Asking people close to you for money, however, has its challenges and needs to be done in a planned, sensible way. Here are a few best practices to follow:
1. Select potential leads carefully – Make a list of potential investors among friends and family based on two key factors: net-worth and personality. In terms of the former, you should only consider people you know have the resources to support you. Don’t put people close to you on the spot if you don’t think they can afford to lose the investment. If the business fails, you don’t want to see them struggling financially, no matter the circumstances. Regarding the latter, only approach people you have a good relationship with and that you think have the right temperament. Make sure the person is reasonable and understanding. Remember they will become your partners (or lenders) and business partnerships are often hard to manage. Money comes at a very high cost if the person is difficult to deal with or might freak out at the first adversity and become a headache for you and your other partners.
2. Prioritize those who might help – From your list above, try to identify people who might be business savvy, well connected, and who can bring something else to the table besides money. For example, prioritize the uncle who is a corporate executive or entrepreneur, and might help you with mentoring and contacts in the industry, over a friend who might even be more well-off, but is a medical doctor or an artist with no business knowhow or networks.
3.Approach them professionally – Just because these are people close to you and that you know might be inclined to help, it doesn’t mean you shouldn’t be professional when approaching them. Quite the opposite. Show them you are serious about your business and that you are proposing a business partnership that runs parallel to your personal relationships. Only approach them when you know exactly how much money you need and for what: present them with a use of funds table. Make them a compelling presentation of your business case and bring (or send them) printouts of your business plan, Lean Canvas, or executive summary. They will appreciate your professionalism.
4.Think through instrument options – Make sure you understand all investment instrument options before you approach friends and family because you will need to explain it to them. For example, are you selling shares of your company (equity)? If so, at what valuation (make sure it is not overvalued to be fair to them)? Do you want a loan (debt) and, if so, under what terms, ideally? Are you considering convertible notes, where the investment starts as a loan and can be converted into equity at the next round of investment, at a discounted valuation? The latter, by the way, is likely the best option for early stage startups. [Note: I will be covering these instruments in a future post – stay tuned by signing up to receive notifications of new posts by email].
5. Make them comfortable to say “no” – Unlike professional investors like angels and VC funds, these people are listening to you specifically because they like you and want to help you personally. Therefore, you have the moral obligation to not take advantage of that (which you might do unconsciously) and you must put them in a comfortable spot. After presenting your pitch and explaining how much you need, for what, and under what terms, answer all the questions they have, and give them time to think. Don’t ask for an answer on the same day (unless of course it is a clear negative) and tell them to sleep on the offer and come back to you on a later day.
6.Consider a “2F club” – Depending on the amount of money you are asking and the number of people on your list, it might be a good idea to have more people invest smaller pieces. For example, instead of getting $50,000 from your big sister, get 5 x $10,000 from her and four other friends. This is good for diluting any one person’s risk and might also provide you with extra help. If you are going for equity, though, be mindful of having too many people as partners – i.e., too many voices at the table. Get help from a corporate lawyer or legal mentor to design an effective way for these people to become your partners, perhaps by having them all come in through a company of their own, with each owning 20% of it.
7.Tell what you expect (and don’t) from them – When friends and family invest, with their best intentions, they often want to help in many other ways too. They may want to opine on the business strategy, suggest hires, introduce you to this or that person, try the product before you launch it etc. If not managed properly, this situation can escalate to your aunt, who’s a dentist, wanting to participate in your biggest contract negotiation! Therefore, before the investment deal is closed, make sure you tell them the level of involvement you expect from them. You may simply not want them to get involved at all, which is fine, as long as this is part of the agreement and they are ok with it. In any case, keep in mind that, as partners, they do have the right to at least receive updates and participate in quarterly or biannual meetings.
8.Be 100% transparent about the risks! – Avoid problems in the future. These are people you care about and may know nothing about startup investing. They are doing this because they care about you too. Ensure they are aware that this is a risky endeavor and that they might lose their investment (equity) or that you may take a long time to pay them back (debt) if the business fails. Certify that they are ok with the risks and that they can afford losing their investment without major personal financial consequences.
Times of crisis call far stringent cost management measures and creative fundraising, including from friends and family. If you do it right, the 2F’s can be a good option to help you through these troubled waters.
Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.
Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.
As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.
Recently, I was interviewed by the Montgomery County Economic Development Corporation about The Big Idea CONNECTpreneur Forum, of which they are a sponsor. Following is the transcript of the interview. I have been a Board Member of this tremendous organization for the past 4 years.
CONNECTpreneur recently entered our 9th year. To date, we have hosted 47 events, the last 4 being “virtual” events. Over 20,000 business leaders, investors, and entrepreneurs from around the world have attended our events. Our website is connectpreneur.org. Please check us out!
THE BIG IDEA
IN CONVERSATION WITH TIEN WONG, CEO, OPUS8, AND
FOUNDER & HOST, CONNECTPRENEUR
Get to know CONNECTpreneur, a unique forum which attracts the region’s top entrepreneurs, investors, innovators and game changers. Organizers of the top tech and investor networking events in the region.
WHY IS IT IMPORTANT TO MAKE CONNECTIONS BETWEEN BUSINESS LEADERS OF ALL STRIPES – CEOS, VCS AND ANGELS – TO EARLY STAGE COMPANIES?
Not just for early stage companies, but all businesses of all sizes, the old adage, “It’s not what you know, it’s who you know,” still applies very relevantly. People want to do business with people. Early stage companies, in particular, have many needs: capital, talent, customers, vendors, partners, product development, marketing, etc. and having a large and deep network gives an entrepreneur a huge advantage in the marketplace, for obvious reasons. There is a proven correlation between the size and quality of one’s network, and one’s overall success — in entrepreneurship and most endeavors.
WHAT IS THE SECRET SAUCE THAT MAKES CONNECTPRENEUR A TOP TECH NETWORKING EVENT IN THE REGION?
It’s our ability to attract the region’s top entrepreneurs, investors, innovators and game changers. We pride ourselves on organizing the top tech and investor networking events in Montgomery County and the Washington region as a whole. We think that the reason that over 70% of our surveyed attendees rate CONNECTpreneur as the “number one” tech and networking event in the Mid-Atlantic region is because of the high quality and seniority of our attendees, which is unprecedented. Over 20% of our attendees are accredited angel investors or VCs, over half are CEOs and founders, and we intentionally keep the ratio of service providers as low as possible. This makes for more meaningful connectivity among the participants.
HOW DOES CONNECTPRENEUR SUPPORT FEMALE ENTREPRENEURS AND ENTREPRENEURS OF COLOR?
CONNECTpreneur is very intentional about providing a diverse set of presenters and speakers in our programming. Our community of entrepreneurs and investors is highly diverse, and our selection committee is very tuned in to the benefits of gender and cultural diversity. We actively work with and partner with local, regional, and national players who share our values of “double bottom line” ethics which value social impact as well as financial gain. Some of our partners include Maryland Tech Council, TEDCO, Startup Grind, Founder Institute, Halcyon and Conscious Venture Labs to name a few.
WHY IS MONTGOMERY COUNTY A GOOD LOCATION FOR AN INNOVATIVE STARTUP COMPANY? AND, WHAT’S YOUR BEST ADVICE FOR SUCCESS?
Montgomery County is a top tier County nationally for startups, and that’s evidenced by numerous awesome success stories. MoCo has a tremendously educated talent base, world class government institutions, top schools, and a large base of angel and high net worth private investors who can provide seed funding. The best advice for success is to understand thoroughly your customer and their needs and pain points very deeply. That way you can get to “product market fit” more quickly, de-risk your opportunity, and be more capital efficient. Too many companies get enamored with their product and design, or culture, or getting media coverage whereas the true essence of any successful business is to provide excellent products and solutions to its customers and sell into their markets like crazy.
WHAT ARE SOME UNIQUE CHARACTERISTICS OF AN EARLY STAGE COMPANY THAT SPARK YOUR INTEREST TO EXTEND AN INVITE TO PARTICIPATE IN THE FORUM?
We are looking for presenting companies which have truly disruptive ideas, products and/or solutions which could be sold into huge markets. And of course, the most important criteria are the quality, expertise, and coachability of the founding team. We have had presenters from all kinds of sectors including life sciences, cyber, telecom, blockchain, wireless, mobility, e-commerce, marketplaces, fintech, medical devices, IoT, etc.
Learn more about CONNECTpreneur at our website: connectpreneur.org
This is a Guest blog post from Jeff Cherry, Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. He is a tech CEO and mentor, investor, philanthropist, and community builder.
I recently listened to a thought-provoking episode of the TED Radio Hour on NPR entitled What We Value. Its premise was that this economic and societal crisis in which we find ourselves is accelerating the move towards a new set of values when it comes to the practice of capitalism. Those of us in the social impact and Conscious Capitalism space are heartened to see this discussion gaining momentum, but the question remains: How will capitalism change now that the unhealthy state of business and our major societal institutions have been laid bare?
There are many indications that this shift was in the offing far before the onset of the coronavirus pandemic. Although late to the game, the statement released by the Business Roundtable in August 2019 signaled a transformative move away from the outdated notion of shareholder primacy and towards a more human and effective form of business. It certainly garnered the attention of the press. And others in the business mainstream who had been either unaware or hostile to the market forces driving this change, are now finding it hard to ignore discussions of stakeholder management and whether business should have a broader role in society.
These ever-expanding discussions about the purpose of business in society are now taking place in the context of what does a return to “normal” look like in the economy. And a growing sentiment that the normal we were experiencing — where greed, inequity, declining living standards, crony capitalism, rent-seeking, regulatory capture, share buy-backs, corporate welfare and environmental depletion were the norm — isn’t in fact normal. Nor a state of being for which we should collectively yearn. As you might imagine, I agree.
The challenge we face now then, is how do we actually execute on this new idea? Many people talk about business for good and changing the purpose of the firm. But in the real world of competitive advantage, pricing models, customer needs, shareholder demands, supplier, employee and community relationships, knowing what to do is hard. We speak to entrepreneurs all the time who are philosophically aligned with a new narrative about business. They can cite anecdotes about others who have been successful, and they lack a cognitive frame that they can use to build an organization that embodies this day-in and day-out.
I’ve written at length about why I believe a focus on stakeholders in business and capitalism needs to replace the old story. In this article, the first of a two-part series, I’ll describe a framework to begin the journey to business as an institute of societal well-being: Or Human Capitalism.
The New Narrative of Business in Society: Human Capitalism What does a new story about the practice of business and capitalism look like in practical terms?
In order to fully bring this new narrative to life, I believe we need to re-define the purpose of business as a societal institution. Then, we need to translate that definition into tools that real entrepreneurs and executives can use every day to guide how they formulate strategy, individual decision making and implementation.
When a new cohort of the Conscious Venture Lab convenes, I ask a question to frame the work we’ll be doing over the ensuing 16-weeks: “What kind of world could we create if investors, executives and entrepreneurs cared as much about people as they care about profit?” It isn’t a question I expect any of the teams to answer outright. It’s a rhetorical challenge to think about how these ideas impact their businesses and the broader society.
Over the last few months, I’ve reframed that question: What kind of world could we create if we decided our first duty in business was to simply care for each other? This is the essence of Human Capitalism.
This version of the question doesn’t pit people against profit, which I believe is a false construct. Instead, it captures the meaning we’re all experiencing in this moment: can we be a complete society if the overarching purpose of business is only to increase profits and not primarily to improve the human condition? Both of these questions are variations of the age-old investigation of “What is a business for?” Academics, economists, politicians, social scientists and businesspeople have been asking this question for decades, if not longer.
Liesel Pritzker Simmons, co-founder of the impact investing firm Bluehaven Initiative, has said, “A crisis gives us an excuse to have conviction earlier.” What we are experiencing in this moment has emphasized how interconnected we are as a society and as a world. It has emphasized the importance of health as a public imperative. The importance of economic, community and personal resiliency as interdependent societal imperatives to which individuals and all societal institutions, even businesses, need to contribute. This crisis is bringing along those who may not have reached a level of conviction to move to a more human form of capitalism had things stayed … normal.
In this new reality it’s clear that the question about what type of world we want to create can no longer remain abstract or rhetorical. The coronavirus pandemic has exposed the truth, that a focus on our interdependent well-being is necessary for society’s survival. Succeed together or fail together the choice is ours, but we can no longer hide behind a narrative that separates individual financial self-interest from our mutual survival.
In the post-COVID world, the new narrative of business in society is a narrative about authentic caring, societal resilience and collective well-being.
Practical Ways to Integrate Human Capitalism Herb Kelleher, the legendary founder of Southwest Airlines, once said, “The business of business is people — yesterday, today and forever….” But what does it actually mean to structure your business around people? What can you do tomorrow to transform the structure of your business, respond to this new reality and become the type of leader that society needs?
Caring is Job 1: Above all there is one thing leaders must do first in order to be successful in this new world: They must actually care! To be clear, leaders who embrace the idea of caring for stakeholders as a core value and primary motivation for running a business will be well-positioned to succeed in this new world. They’ll be more able to execute on the ideas described later in this article and more likely to attract talent, customers and investors in a post-COVID world of business as a vital instrument of society.
At first this seems obvious and perhaps, some would say, no different than the status quo. But the nuance of authentically treating employees, suppliers, customers and communities as individuals deserving of your care for their own sake, as opposed to primarily as fodder for creating returns is critically important. Not only to how your company will be perceived, but authentic caring — or the lack thereof — will have a tremendous impact on your competitive performance. People understand instinctively if you are treating them fairly simply as a form of manipulation for other ends. And, unless you’ve created a true culture of caring in your organization, you’ll be tempted to abandon that care when it comes into conflict with your “real goals.” The best leaders however will understand this simple truth: how we think about creating financial value is now, more than ever, clearly tied to the way we create societal value. Authentically caring is a key component of this new narrative.
With that as our foundation, there are two things that every leader can do to build caring into the operational DNA of their business:
First, adopt a specific set of guiding principals about what it means to care for each other in service of societal well-being. And second,
Institute a practical business operating system that provides a framework for living into those guiding principals.
Here in Part-1, I’ll discuss a set of guiding principles we’ve created at the Conscious Venture Lab to help entrepreneurs execute upon these cultures of caring.
Guiding Principles: The Five Promises of Collective Well-Being In order to seed this new culture of caring into the DNA of your operations, it is crucially important that you articulate and codify a set of guiding principles that the entire company can use to organize your thought processes and create operating norms, policies, procedures and metrics that will keep your culture on track in good times and in challenging times…like during a pandemic.
Companies that will lead us into a more effective model of capitalism and a future of broadly-shared prosperity have structured their business to deliver on what I call The Five Promises of Collective Well-Being, through which we vow to use business to make the world:
More sustainable and
More prosperous for all.
Let’s examine each principle:
Business as a path to a More Just society: Leaders who are best at this will work to create social justice by structuring their organizations to level the playing field and authentically create access to opportunity for all those in their ecosystem who want to contribute.
Conscious Venture Lab and SHIFT Ventures portfolio companies Hungry Harvest and R3 Score have built this promise into their business models, which drives impact and returns.
Hungry Harvest creates a more just world by providing fresh food to communities that wouldn’t otherwise have access to it and dignified work opportunities to people in need. As a result, they create scores of “Harvest Heroes” who loyally buy wholesome food from the company that otherwise would have gone to waste. In the process they have increase sales by more than 34,000% over the last 4 years.
R3Score creates a more just world by providing a dignified return to civil society for millions of formerly incarcerated Americans and allowing banks a way to engage with people they would otherwise ignore. Thereby expanding the banks’ customer base, putting financial assets to work that would otherwise lay fallow and giving the 1-in-3 Americans with a criminal record the opportunity to build a new life.
Business as a path to a More Joyous life: Leaders who bring more joy into the world will do so by focusing on a combination of the quality of the human interactions in their operations, eliminating misery as a core aspect of their business and/or creating products that bring authentic joy to more lives.
One of my personal favorite companies, Union Square Hospitality Group, uses a culture of caring and enlightened hospitality to bring joy to employees, customers and suppliers alike.
Startup Aqus Water, that was a part of the Vatican Laudato Si Challenge in 2017, has created a product that puts “three years of clean water in the palm of (the) hand(s)” of people in places where lack of clean water has been causing extreme hardship for centuries. With more than 780 MM people in the world lacking access to clean water, bringing joy will undoubtedly bring prosperity to many.
Business as a path to More Equitable communities: When leaders focus on creating a mutual exchange of value between all stakeholders, they move their organizations away from the negative consequences of shareholder primacy and create more equitable communities for everyone. Paradoxically, an equitable approach to business, or removing the shareholder blinders, often creates new paths to greater value for shareholders.
Greyston Bakery in Yonkers New York is a pioneer of open hiring. They create a more equitable world by focusing not on the tyranny of weeding people out in the hiring process but by providing the dignity of work to anyone who wants it.
Here in Baltimore, Jacob Hsu and his company Catalyte have created an entirely new way of identifying undervalued individuals who have the aptitude to become exceptional engineers. Creating new paths to equity and unleashing massive financial potential for communities, his clients and the company.
Business as a path to a More Sustainable world: The winning leaders of the new narrative think and plan for the long-term. They understand that sustainability in every sense is the key to enduring organizational health. They establish a circle of growth for the planet, the people who serve or are served by the organization and the organization itself.
Billion-dollar clothing company Patagonia has rejected the world of “fast fashion” by creating high quality, long-lasting products and offering a repair and reuse program to discourage customers from buying things they don’t need.
Business as a path to a More Prosperous existence for us all: The best leaders view value creation with a polarity, or both/and mindset. They actively look to create real wealth for employees, customers, communities, suppliers and shareholders. They work to manage the polarity of creating value for all stakeholders by asking themselves questions like: “How do we simultaneously achieve the upside of paying our employees as much as possible, and, the upside of creating great returns for shareholders?” This is in contrast to shareholder value leaders who see all stakeholder relationships as tradeoffs that need to be solved for the benefit of shareholders.
Starbucks has fed more than 10 million people through its FoodShare program, redoubled its commitment to eliminate gender pay equity gaps, and committed to becoming “… resource positive — storing more carbon than we emit, eliminating waste and providing more clean fresh water than we use …” — all while rewarding shareholders handsomely — even during the coronavirus pandemic.
Why Human CAPITALISM? In Part-2 of this series I will discuss how the tenets of Conscious Capitalism and stakeholder management will allow organizations to clear the clutter and build these principles into everyday operations.
For now, a note before we end to my main audience: The Skeptics:
I spend the majority of every waking hour thinking about how to support entrepreneurs who have previously been neglected and who are creating world changing companies despite the immense hurdles they face. I also spend a majority of that time thinking about how to invest on behalf of my limited partners in a way that will create exceptional returns. I am a capitalist who believes capitalism can and should be practiced in a way that unleashes its power to elevate all humanity. That we can create a more humane form of commerce and human cooperation. What I am suggesting is that capitalism, like any man-made system, must evolve as society evolves. To paraphrase my friend and mentor Ed Freeman, professor at the Darden School at The University of Virginia, the alternative to capitalism as we know it today is not socialism, but a better, more human form of capitalism.
For those who would push back on these ideas as leaving shareholders behind and giving away profits I would simply ask you to suspend disbelief for a bit. Take a few minutes to think not about what you might lose, but about what you might gain. What kind of world could we create if we decided our first duty in business was to care for each other? Look around…I think that time has come.
Jeff Cherry, is CEO and Managing Partner of SHIFT Ventures, and Founder & Executive Director of Conscious Venture Lab, an award-winning and internationally recognized early stage accelerator. He is also Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. Jeff is a pioneer in conscious capitalism and double bottom-line investing. He can be reached at firstname.lastname@example.org.
About 18 months ago, I was cold called by a young, ambitious MBA student who wanted some advice and guidance on something very very difficult to do: breaking into the venture capital business. Relative to huge demand, there are very few entry level VC positions available in the Washington, DC region.
Since his initial cold call, I have met him a few times at various events around town. I had not heard from him in several months until today when, in response to an email announcement my company sent out, he responded that he was still seeking my help in landing a VC job.
I emailed him my response:
Here’s how I may help, with some (free) advice:
YOU have to HELP you. The buck stops with you!
You have to create true value for your customers and constituents (boss, coworkers, investors, friends, etc).
You must give 110% every single hour of every single day, and MAKE SURE all of this is recognized.
Network like a machine. You should be out every night going to 2-3 events per, and genuinely HELPING others – Thats how you build YOUR brand!
Work 80 hours per week. There’s no substitute for hard work.
In this market, the ideal job does not come to you. YOU have to attack and make it happen. And the tools you need are contacts, credibility and expertise, all of which you will develop by following the advice above.
Pursue your dream and never give up!! It may take a month, year, or 10 years, but the persistent person ALWAYS wins…eventually!!
All the best, Tien
That’s advice I would give to my kids, the students I work with at Georgetown or Maryland, and anyone looking to land any kind of job, especially a high-demand job.
Bottom line: you have to help yourself, and there are no shortcuts. Buckle up because the road will be long and bumpy,
The event is regarded by many as “The Best Networking Event in DC.” InTheCapital calls CONNECTpreneur a “NETWORKING JACKPOT” of the DC Region’s TOP Entrepreneurs, Business Leaders, CXOs, Angels, and VCs.
Heavy NETWORKING before, during, and after the event
The venue is the Tysons Corner Marriott in Tyson’s Corner, Virginia. A plated breakfast is included. CONNECTpreneur is a quarterly networking mashup, which has been attended by over 2500 business leaders in the past 3 years. We expect another SELL OUT crowd, so there will be no on-site registration.
The Big Idea CONNECTpreneur Summer Forum is a “NETWORKING MASHUP” of 165+ of the DC Region’s TOP Entrepreneurs, Business Leaders, CXOs, Angels, and VCs. Most of the attendees are “INVITATION ONLY,” and we are limiting service provider participation in order to maximize the experience for our Attendees and Sponsors.
Presented by LORE Systems, this UNIQUE EVENT is like NONE OTHER in our region, due to the high quality of our attendees and participants, as well as our program and unprecedented networking.
Come see what happens when you put a group of “A List” business leaders and entrepreneurs in one room for a few hours!
“TURBOCHARGING Entrepreneurship” Discussion
“ART OF THE PIVOT” with “UBER” technology entrepreneur Reggie Aggarwal of CVENT
9 Emerging tech companies seeking funding will briefly tell their stories
Networking sessions before, during, and after the event
The venue is the Tower Club in Tyson’s Corner, Northern Virginia’s premier private business club. A plated breakfast and unlimited coffee are included.
7:00–8:00 am – ARRIVAL / NETWORKING
8:00 – 8:05 am – WELCOME
8:05 – 8:45 am – SESSION 1 – “TURBOCHARGING ENTREPRENEURSHIP IN THE DC REGION” with Uber entrepreneur and angel investor Doug Humphrey, CEO and Founder, CIDERA; Co-Founder, DIGEX
8:45 – 9:20 am – SESSION 2 – “THE ART OF THE PIVOT” with Uber entrepreneur Reggie Aggarwal, Founder and CEO of CVENT
9:20 – 9:45 am – NETWORKING BREAK
9:45 – 11:30 am – SESSION 3 – COMPANY PRESENTATIONS (all confirmed)
Last week, the State of Maryland became the first state in the USA to use an online auction to raise funds for a venture capital program. The auction yielded $84 million, a whopping 20% more than the original forecasted goal of $70 million. On September 24, 2011, I wrote a brief summary of the InvestMaryland program.
InvestMaryland will invest in the State’s promising start-up and early stage companies, as early as this summer. The $84 million raised was generated through an online auction of premium tax credits to 11 insurance companies (including Hartford Insurance, New York Life, Chubb, GEICO, and Met Life) with operations in Maryland. The inaugural round of investments will be made in innovative companies this summer through several private venture capital firms and the State’s successful Maryland Venture Fund (MVF),
Said Governor Martin O’Malley, “Our State is well-positioned to be a leader in the new economy as a global hub of innovation – a leader in science, security, health, discovery and information technology. That’s why last year, together with business leaders from across the State and the General Assembly, we chose to invest in our diverse and highly-educated workforce and the skills and talents of our people for the jobs and opportunity of tomorrow.”
Earlier this year, the Authority selected Grant Street Group to prepare for and run the tax credit auction and also recently selected Altius Associates, a London-based firm, to oversee the selection of three to four private venture firms to invest the InvestMaryland funds. The private venture firms will be responsible for investing two-thirds of the funds, which will return 100 percent of the principal and 80 percent of the profits to the State’s general fund. The remaining 33 percent will be invested by 17-year-old Maryland Venture Fund (MVF). The Maryland Small Business Development Financing Authority (MSBDFA) will also receive a portion of funds for investment. Returns on the funds invested through the MVF will be reinvested in the program.
InvestMaryland has the potential to create thousands of jobs in Innovation Economy sectors – life sciences and biotechnology, cyber security/IT and clean/green tech and attract billions of follow on capital.
Maryland has an outstanding infrastructure to support an Innovation Economy. The Milken Institute ranks Maryland #2 in the nation for technology and science assets. According to study results, while Maryland received high rankings in human capital investment, research and development inputs, technology and science workforce, and technology concentration and dynamism, it lagged behind other states in risk capital and entrepreneurial infrastructure, demonstrating the need for InvestMaryland and other programs.
How will Altius select the Venture Capital firms? Altius will be evaluating venture capital funds based on management experience, firm experience, investment performance and criteria defined in the legislation.
When will the firms be selected? Venture capital firms will be selected starting June/July 2012 for a projected18-month period and make first round of investments in summer 2012.
What is the investment return to the State? The selected venture firms will return 100 percent of the principal investment by the State before taking any distribution of profits and will then pay 80 percent of the profits to the State. Any returns on investments made through the Maryland Venture Fund go back into the fund for an evergreen program.
What is the projected average investment with venture capital companies? Investment will likely range from as low as $250,000 upwards to $10M.
Is there investment funding available from MVF?Maryland Venture Fund will continue to invest in early stage companies (tech, biotech, clean energy) from $50,000 to $500,000 as initial investments.
Maryland Venture Fund Authority (MVFA) will perform a monitoring role to ensure that investments and reporting meet the legislative guidelines.
In summary, as a member of the MVFA, and as a resident and business owner in Maryland, I am very excited to see this InvestMaryland program being implemented:
This program brings great benefit for taxpayers. It helps create the jobs and companies of tomorrow and builds an economic climate where the most promising ideas and innovations have a chance to mature.
This is a win-win for all constituencies within the State of Maryland. Through this initiative, we can:
Infuse much needed capital into our seed and early stage companies
Recapitalize the State’s successful Maryland Venture Fund
Ensure no up-front cost to taxpayers
Provide a tax benefit to insurance companies who bid today, who can begin claiming credits in 2015.
Thanks for reading. I’d appreciate any Comments or feedback you may have on InvestMaryland.
John Backus, Managing Partner of New Atlantic Ventures, Founder of Draper Atlantic Venture Fund, former CEO, InteliData
1:15 pm – MORE NETWORKING AND DEALMAKING
CONFIRMED PARTICIPANTS (partial list):
Over 110 Entrepreneurs and CXOs, plus another 40+ angels and VCs including Core Capital, Novak Biddle, New Atlantic Ventures, CIT, Capital Source, NEA, Maryland Venture Fund, MAVA, MTECH Ventures, Maryland DBED, Ruxton Ventures, Opus8, VentureCross Partners, McLean Capital, National Capital, Starise Ventures, Dingman Center Angels, Blu Venture Partners, Blue Heron, Washingon DC Archangels, Fortify.vc, Endeavor DC, Private Capital Network, APPTEL, Stanford Venture Advisors, MD Center for Entrepreneurship, SunWalker Group, Skada Capital, Keiretsu Forum, CADRE.
This is a groundbreaking effort by the State of Maryland, and I applaud all of the various business and political constituencies who made this happen.
The State plans to raise at least $70 million by auctioning off tax credits to insurance companies. About 2/3 of these proceeds will be invested into private venture capital funds, and 1/3 will be given to the Maryland Venture Fund, which will in turn invest in emerging companies in industried such as information technology, clean energy, and life sciences, among others.
Maryland is not the first state to employ this idea. Eleven other states already have programs similar to InvestMaryland. The expected benefit from InvestMaryland, according to some, is the creation of 2000+ new jobs while supporting at least 200 businesses.
I am encouraged by these kinds of initiatives and would love to see more states embrace these kinds of public-private efforts to stimulate capital formation, and help create jobs and nurture new technologies and emerging companies.
Thank you for reading. Let me know your thoughts about the InvestMaryland program or other ways in which technologies and small businesses can be supported. And please sign up for my Blog!