When venture capitalists say “NO”—creative financing strategies & resources, by Ron Peterson

A capital fund of $70 million has been formed in London to support small businesses that are not yet attractive enough to interest major venture capital firms. The U.K. government’s Regional Development Initiative collected funds from Barclay’s Bank, pension funds, and the European Investment Fund, and expects to stimulate added private investment in the sector. Many young Israeli companies have felt they needed a U.S. or European location to be considered a world-class firm and have sought affiliations with funds and companies located in those areas.

Venture capitalists in Taiwan including The China Development Industrial Bank invested $5 million in U.S. biochip startup Aviva Biosciences. The condition imposed on the founders was that they would take the technology, developed on the mainland with Beijing-based Capital Biochip, into a U.S.-based company. The U.S. was felt to be the best market as well as a better area for biotechnology startups with products that could quickly reach commercial acceptance. The People’s Republic of China is investing considerable assets in biotechnology and will develop many new companies. The China Venture Capital Association (CVCA) claims they have 50 venture capital companies with a total of $40 billion under management. CVCA looks to Chinese universities for technology to launch companies or spin-offs created at the schools, and the prestigious Tsinghua University provides both technology and some investment funds. Many Chinese funds have partnered with American VCs and the founders of several first worked for American venture capitalists. Warburg made a 1,000 percent return on its investment in AsiaInfo and 300 percent on its bet with MediaNation in Hong Kong. IDG Ventures recorded a 65% profit it made on investing in over 100 Chinese companies. The law firm of Heller Ehrman sponsors seminars on establishing a wholly owned foreign enterprise in China (www.hewm.com).

The World Bank’s International Finance Corporation invested $10 million to assist a California venture capital firm make information technology investments in India. New Path Ventures combines this money with traditional capital providers in an incubator model to use venture capital as a stimulus for business development in the Asian sub-continent. The Indian Venture Capital Association suggests at least $1 billion per year is being invested in new firms by local groups in India. VC firm U.S. Benchmark raised a total of $260 million for investment in Israeli-based companies involved in communications networks, chips and optic markets.

Community development funds were introduced in 1968 with the Kentucky Highlands Investment Corp. first out of the chute. The Community Development Venture Capital Alliance (www.cdvca.org) now lists many more including the Boston Community Venture, the Rural Development Fund in Seattle and Portland, Cascadia Revolving Fund, New York Community Investment Company, Coastal Ventures Limited Partnership and MMG Ventures. CDVCA also references a number of fund profiles including several that operate overseas. SEAF Bolivia, for instance, is an $8.6 million fund that focuses on Bolivian enterprises (e-mail the fund manager John Bays, johnbays@aol.com). Some of the current projects in Bolivia include JOLYKA, a high-quality wood-flooring manufacturer that sells in the U.S. and European markets, Virtualismo, an Internet portal, and Service Pro, a developer of software for the gas industry. Case studies and primers on community development investors are available from CDVCA. The Investors’ Circle is a non-profit national network of angel and institutional investors, foundation officers and entrepreneurs who seek to balance financial, social and environmental returns, accessed at www.investorscircle.net. The Investors’ Circle has provided over $80 million to 120 companies and venture funds.

Columbia University in New York City has a Research Initiative on Social Entrepreneurship (RISE) under the direction of Professor Catherine H. Clark (cathy@cathyhc.com). In concert with the Lang Center for Entrepreneurship and Social Enterprise Program, she’s conducting a national survey of early stage social private equity and venture capital funds across industry and social purpose areas. Professor Clark founded one social venture fund herself and advises the National Social Venture Competition, a partnership among Columbia, UC Berkeley and the Goldman Sachs Foundation to reward social ventures in the U.S. and overseas. Commons Capital is a Boston social venture fund that invests in health, energy, education and the environment. Kleiner Perkins guru John Doerr created a philanthropic fund in San Francisco for education businesses and other social venture funds operate in many cities including Washington, D.C. and Seattle, WA.

A social sector fund is planned in the U.K. as an $80 million demonstration project to show that returns—at least matching venture capital—can be generated by investing in profit-oriented companies in the education, healthcare and renewable energy sectors. Catalyst, a London venture capital firm will take the lead in a teaming launch with The Big Issue, a magazine that aids the homeless.

Increasing pressure on university endowments and other pools of capital to make more socially responsible investments may easily alter the direction of investing by venture capital and pension funds. Conventional investing may need to take on some aspect of meeting social needs, even if the funds aren’t exclusively earmarked for such projects. Other social venture and social economic sites are www.siroli.com, www.culturecreatives.org and www.barkingowl.com.
25. Regional funds.
Tazz Networks of Providence, R.I. received $7.7 million in early financing from a group of venture capital firms that included Point Judith Capital, a small Providence-based fund that focuses on Rhode Island and southeastern Massachusetts, and Slater Center, a Rhode Island technology fund. Tazz provides a platform for network service providers to improve subscriber management and services, and expects to partner for distribution. Regionally based funding groups are good places to start even though they may not have all the capital you need. Slater and Point Judith can maintain close contact with a young company and give other funds the confidence that local oversight will be in place so that they can decide to add their money as well. Similar funds exist in most parts of the U.S. and you’ll probably find one in your area.
26. Government venture capital funds.
In-Q-Tel in Washington, D.C. was formed by the Central Intelligence Agency in 1999 to foster cutting edge technologies they felt would advance their own capabilities. With an early $150 million the idea was to funnel money into young firms that promised developments in areas the CIA felt would help their mission (www.cia.gov). The agency felt the government was being left behind relative to the developments in Silicon Valley and they wanted their needs to be addressed. Early companies included imagery analysis, pattern recognition, profiling agents, knowledge management and information security applications amidst many others. Companies receiving funding have a good chance of selling their completed work to the CIA and obtaining other government and commercial contracts, so an investment by this group brings special dividends. In-Q-Tel has a separate division that relates to university innovations and maintains contacts with people who regularly know what various universities have to offer. These people are not found in the technology transfer offices but instead are investors looking for places to put their own money.

The premise for In-Q-Tel is much like that of similar pools of capital formed by corporate America where the return on the investment is less important than finding ways to promote the mission of the parent organization. In fact, In-Q-Tel is a non-profit. The feeling in the government is positive about this experience and the U.S. Army asked for $25 million to create a similar venture firm for power and energy technology. The Navy developed plans for a fund as well and both NASA and the U.S. Postal Service have hopes of their own. The Homeland Security Agency allocated $500 million for their version of the Department of Defense’s popular Defense Advanced Research Projects Agency.

The Virtual Company (TVC) is a different approach to the essential concept that has been developed in the U.K. at www.businesslinkwessex.co.uk. Business Link Wessex starts with the invention, the earliest idea stage, and adds managers, technicians and business development people with the inventor to form a company. The group puts together the business plan, seeks early stage funding (often with Britain’s SMART program, see 41 below) and nurtures the process to a point where the company can operate on its own. A study on their website details the process, illustrates case histories, speaks to the formation of partnerships and shows the steps to obtaining grants.

The Harvard Endowment Fund was an early investor in venture capital funds. Making a case for a direct investment when you have a link to a particular interest of such funds could make the difference for you.

Ethnic groups provided money for members to start businesses throughout the 19th and 20th centuries in the U.S. and, to a lesser extent, are still doing so today. Pooled savings plans operate as a rotating-credit arrangement where members can access funds that are aggregated from the weekly or monthly contributions of members. Korean immigrants call their associations Kyes. Pakistanis call them Kommittis. Ethnic Chinese form Huis in the U.S. and Tontines are found in France. A number of banks including Chase Manhattan and Fleet Boston recognize these deposits as a measure of creditworthiness for a new firm. Following the 1992 Los Angeles riots, a Korean-American bank in Los Angeles offered existing customers loans of up to $50,000 without collateral to stimulate economic growth. Not one of the fifty who accepted defaulted.

The Indus Entrepreneurs (TIE) is a decade-old group of South Asians that forms an influential network in Silicon Valley. Hispanic-Net is a new organization in Silicon Valley that has been responsible for several companies but is seeking to mobilize their community for a real presence in the years ahead. The Latin Business Association in Los Angeles, CA has a website at www.lbausa.com. Also in Los Angeles, the Asian Business Association is at www.aba-la.org and Black Business Association at www.bbala.org. The U.S. Chamber of Commerce initiated the “Access America” program to facilitate the growth of minority firms and extend Chamber programs.

The Milken Institute in Santa Monica, CA and the Commerce Department’s Minority Business Development Agency (MBDA) reported that approximately 2% of private-equity money was earmarked for investment in minority-owned firms. Seeking to increase that proportion, MBDA developed an Equity Capital Access Program in concert with the Emerging Venture Network, to bridge the gap between venture capitalists and minority business owners. The program is competitive and features classes on how to attract venture capital investments and other forms of preparation for making a funding pitch. The focus from one recent panel was on networking, developing a good business story and upon closing a deal. Of the 15 business owners who participated in the program in 2001, six received venture investments and the rest were reported to be in talks with possible funders.

The Diana Project from www.entreworld.com explored venture capital access by women-owned firms in a study examining eight common myths. The study provides a number of websites and organizations (www.WomenAngels.net, Seton Hall College’s National Education Center for Women in Business, etc.) that support these companies along with statistical data that illustrates their potential. www.womenstechcluster.org has an array of services for both profit and non-profit organizations. The Women’s Technology Cluster was formed by philanthropist Catherine Muther and her entrepreneurial foundation, Three Guineas, to create economic opportunities for girls and women (www.3gf.org). The Ms. Foundation for Women has distributed over $10 million to women’s economic development organizations, and dates back to the 1980s in efforts to funnel foundation money towards the gender.

Tara Godfrey runs a financial education company in New England for children and parents called Independent Means. Among the variety of services she offers are Camp $tart-Up$ where teenage girls spend two-weeks putting together a business plan and another, Noise, to introduce teenagers to the business of music. In the heart of Silicon Valley, The Girl’s Middle School of Mountain View, CA, provides an Entrepreneurial Program for seventh graders under the mentorship of eighth graders. The middle-schoolers form business plans, present to venture capitalists, and run businesses. The Co-Director of the Program, Donna Fedor, says “We’ve never had a company that didn’t make a profit.” Across the country, Youth Entrepreneurship Springboard Awards for talented teens are available in the 13-state Appalachian region with details at www.arc.gov/-entrepreneurship.
32. Religious communities and non-profits.
An order of Catholic nuns took part of their pension fund and invested it in a Hollywood film in the 1990s and made a reasonable return. While it’s always difficult to figure net profits in the movies, especially with overseas, video and DVD revenues looming larger and larger, this was a decent business proposition and the nuns proved receptive to the idea. (A matchmaking service for media and investors is run by www.starlightexchange.com.) A group of Trappist monks in Chimay, Belgium regularly invests a portion of their brewing profits in local businesses. You may have been turned down by venture capital firms and other traditional sources of capital but if you consider non-traditional sources of funding and a little more creative thought along with a terrific business proposition it could resonate with many different groups, including charitable order pension and other funds.

Educational Systems Corp. was a non-profit government contractor that provided support services for the federal Office of Economic Opportunity. Later, as other work came their way, they formed a for-profit sister company called Executive Systems Corp., and dumped commercial contracts into the new venture. The first company provided the platform, experience, facilities and marketing to launch the second.