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

Loan insurance is provided through the Maryland Industrial Development Financing Authority and most states have a program to back the debt of a number of companies. Direct funding is usually carried out by a state-created corporation. In Maryland, for example, the Technology Development Corporation (TEDCO) doles out: $20,000 grants for CRADAs at federal laboratories; $50,000 for university-owned technologies; $50,000 for technology transfer; and $50,000 for technologies associated with naval aviation. If you decide to apply for this type of funding anticipate at least an eight-week review process and know that they are highly competitive.

The Venture Capital Fund of the State of Maryland has two components, the Challenge Investment Fund and the Enterprise Investment Fund. Initial investments through the first run $50,000 to $100,000, to a maximum of $150,000 and the second has a ceiling of $500,000. www.choosemaryland.org. More and more states have similar programs, although the economic downturn of 2008 and 2009 will restrict many of them, at least for awhile.

New Jersey funded a business support organization for nanotechnology. The New Jersey Nanotechnology Consortium is a nonprofit corporation headquartered at Lucent Technologies’ Bell Labs and wants to leverage that center’s decades of experience commercializing technology. Groups from government, universities and corporations have banded together for this effort and have pledged to meet an annual operating budget of over $10 million. Other regional groups focusing on this technology include Albany NanoTech in upstate New York and most university engineering departments.

North Carolina allocated $40 million from their tobacco settlement, administered by the Golden LEAF Foundation, for biotechnology investments. Funds are directed through two venture capital groups, BioVista and Aurora, in Durham, NC. Their focus is upon companies that could eventually build manufacturing facilities and provide jobs in the state but their charters are broad. The Iowa Cooperative planned on building a $40 million processing plant for specialty crops associated with biotechnology such as pharmaceutical grains. South Dakota has an economic development grant program that offers up to $30,000 for collaborative development efforts between entrepreneurs and state universities. Alaska’s Governor hopes to use the state’s $23 billion Permanent Fund to invest in companies that are willing to relocate jobs there. Check with the economic development agency where you’re located and they will give you a list of similar organizations and funding sources.

The State of South Carolina induced Pilot Therapeutics to move there from North Carolina, largely in return for $10 million of various incentives including $3 million in cash. North Carolina did everything they could to get them to stay, including an offer of a $2 million cash equity infusion—all for a company with only 14 employees, albeit excellent prospects for expansion. Clemson University and the South Carolina Research Authority (SCRA) constructed a 25,000 square foot innovation center in 2010 to support start-ups coming out of the university. Their focus is on advanced materials and is intended as an innovation chain that links academic research to the marketplace—an effort to expand the reach of the school and eliminate some of the barriers built into the academic community.

The Israeli Industry and Trade Ministry made a $10 million contribution for seed-stage investments that are earmarked for six venture capital funds. The Israeli funds themselves have to make a matching contribution so it can be seen as either doubling the money available or lessening the risk for the VCs and encouraging them to make more early stage investments. The Israeli government had previously helped establish a venture capital industry in that country in the 1990s by forming a state-owned company to match VC investments, which peaked in 2000 at $3.2 billion. With wonderful timing, the government sold off its stake in 1999. The definition of a seed-stage company in Israel is one that has been in existence for less than six months and has spent less than $160,000 since getting started.

The Arkansas Development Finance Authority contracted with the U.S. Partnership for State Investment to promote and pool venture capital investments in that state, following a model developed in Oklahoma where seed and venture investors team with public investors at the state level.
50. Government specialized funds.
Many federal agencies not commonly associated with funding have money available for technology development. The U.S. Fish and Wildlife Service, for example, has $2.1 million for technologies that promote their mission. The USDA has Rural Business Enterprise and Rural Business Opportunity Grants programs, both of which can be counted on as sources of capital in largely agricultural areas. Igen International inked a cooperative research agreement with the USDA’s Agricultural Research Service, leading to the development of a rapid test to detect E.coli in U.S beef shipments—a process that leverages research facilities of both organizations while speeding up the commercial process.

The National Science Foundation (NSF) is probably the place to go with an early-stage proposal, an idea that is searching for a home. In the Plant-Genome area alone, for example, they have a $35 million program that is deliberately seeking unconventional and high-risk approaches. They offer three forms of awards: virtual-center for large-scale collaboration at up to $2 million per year; individual laboratories and small-group awards between $300,000 and $500,000 per year; and young-investigator awards that go up to $350,000 per year. Details at www.nsf.gov.

An amazing variety of federal funding and assistance is available from groups located within agencies. A place to start examining these sources would be www.fedmoney.com/grants.
51. University technical transfer.
It’s been estimated that if Howard Florey’s work on penicillin for Oxford in the 1930s had been patented, that institution would have been self-supporting for years. The University of Florida reaped tens of millions of dollars by having a license with Gatorade. Lita Nelsen directs MIT’s Technology Licensing Office, a famously successful venture that returns a lot of money to the school and other universities such as Stanford, Wisconsin, UC Berkeley and Columbia receive impressive tech transfer revenues. Stanford and UC San Francisco have shared $250 million from their joint patent on gene splicing technology. Iowa State realized $30 million from a fax patent and Michigan State earned $200 million from two anti-cancer drugs. MIT produces over 400 inventions each year, signs at least 100 licenses, and is responsible for about 25 startup companies annually. The University of Minnesota involves its president in promoting workshops on technology transfer opportunities with the school. Universities now receive over $1 billion per year from technical transfer, a process that was mostly empowered by the Bayh-Dole Act in 1983 that gave the schools IP rights for federally funded work done at their institutions. The Association of University Technology Managers can be accessed at www.autm.net for a look at programs in various schools. MIT’s consulting arm, MITRE Corporation, has its own technology transfer program at www.mitre.org. And Oxford, a little late perhaps, formed Isis Innovation as that university’s technical transfer arm. Johns Hopkins appointed an experienced venture capitalist to direct its Enterprise Development Office but still hasn’t found the right direction for this technology-rich institution. These are incredible sources of technology and associated funding for entrepreneurs.

Too many schools are seeking funds from the entrepreneur to pay for patent and other costs, however, and lose sight of the need to have entrepreneurs take their technologies and try to build something worthwhile with them. University technical transfer offices have often been staffed by lawyers and academics: people who may not have had a clue about what is really required to sustain a young business. Their hope has been that Fortune 500 companies will license what comes out of school labs and pay lucrative fees back to the school while maintaining the ivory tower nature of their personnel, a model of up-front fees and downstream royalties. Are they afraid that many of their most talented instructors and researchers would much prefer to join a young company and make a lot of money than continuing to labor for the good of the school? When a technical transfer program is pushing for fees to be paid from an entrepreneur right away, their first order of priority may be to justify their budgets to sponsors and have little insight into business development. Former investment banker Larry Robertson of Lighthouse Consulting feels the few spectacular success stories in technical transfer have led to a totally unrealistic valuation by many university technology offices. This should still be one of the first places you look when considering a new business, however. When you obtain rights to technologies developed by recognized scientists and use the enormous research facilities and brainpower of our universities, you have an immediate asset in terms of the intellectual property as well as being able to place the development costs behind you.

The Stanford Research Institute (SRI) has been independent of Stanford University since 1970 but still holds a close relationship to the school for research and forming new companies. SRI has spun-off dozens of companies and maintained equity that climbed in value to hundreds of millions of dollars. Their relationships with nearby venture capital companies greatly facilitated technology transfer and funding while the lab itself emphasized market-ready proposals and even nascent management teams. The University of Utah has taken it a step further and has a distance-learning program: Launch Your Own VC: Create Your Own Funding Vehicle for University Technologies. The idea behind Utah’s initiative is to build an internal funding mechanism that doesn’t rely on outside investors. Brian Cummings and Gavin Christensen are the people to talk to at www.tco.utah.edu.

AT MIT, the annual student business plan contest draws 75 to 100 entries, a large portion of which are plans the students intend to turn into companies. Of the six semi-finalists each year, more than half receive venture capital and many who do not make the semifinals still go on to form successful firms.

Gene-Prot (proteomics) was spun out of the University of Geneva, bypassed VCs, and raised $100 million from institutions. Babson College in Boston and Duke University’s Fuqua School are actively seeking to spin-off companies that will make a profit for the parent institution. Early efforts for Duke are on the educational side, looking to use cheaper technology and teachers than they could access in-house.

A startup biotech in Spain, Oryzon Genomics, was spun out of the University of Barcelona and received funding from the Spanish Foundation, the Ministry of Science and Technology, and the Center for Information and Business Development. Oryzon focuses on DNA chips and rice production from its home in the Barcelona Science Park. In both France and Switzerland, university researchers are allowed to take up to six years’ leave of absence to form a new company with a guarantee of jobs and tenure when they return. Sweden gives university researchers sole ownership of their discoveries. In the United Kingdom, the Cranfield School of Management and Conference Center have generated continuous profits by spinning off new companies.
54. University funding.
Oxagen, a UK genomics startup, obtained seed finance from Oxford University, where the researchers had done their work, along with funds from the Wellcome Trust and two private investors. The University of California has a $20 million program called BioSTAR to match industry investments in UC research (88% of the partnering companies have been small businesses). University of California Discovery Grants funded over 1,000 industry/university research projects totaling $225 million since 1996. The University of Maryland began their New Markets Growth Fund (NMGF) with $20 million earmarked for early-stage ventures in the mid-Atlantic. Headquartered at their School of Business, NMGF invests between $100,000 and $1 million in companies that can commercialize innovative products into good-sized markets while creating new jobs and economic diversity (www.newmarketsfund.com). NMGF is demanding, however, and sets rigorous criteria to include: experienced management teams; sustainable competitive advantages; obtainable annual returns of over 30%; identified exit options; enterprise values under $10 million; net annual after-tax profits not exceeding $2 million for the previous two years; and either located or willing to relocate to designated low-income geographic areas.

A new entrepreneurship program at M.I.T. was funded with a $20 million donation by Gururaj Deshpande, the founder of Sycamore Networks. The money provides seed funding to faculty members whose research could give rise to a new generation of local technology companies. Ignition grants of up to $50,000 are designated for projects in conceptual stages and innovation grants of up to $250,000 are made available for those that have a demonstrated R&D path and intellectual property strategy. The Chancellor’s Fund was formed through a $10 million investment by Vanderbilt University’s endowment to invest in high-tech firms that were begun by faculty, students or alumni. The Chancellor’s Fund invested in 16 companies that rose to a value of $50 million and prompted the University to organize parallel efforts with a new company, Seges Capital Management. In the United Kingdom, British Technology Group Ltd. and the technology transfer unit of King’s College London, KCL Enterprises, are flagship organizations for funding university spinouts. British Technology’s antecedents date back to 1949.

The University of Rochester in New York State and Trillium Group jointly operate an $8 million University Technology Seed Fund to commercialize technologies. Rochester is targeting funding between the $100,000 to $250,000 level. Harvard Medical School created a Medical Science Partners fund and A.R.C.H. is a combination funding approach between Argonne National Laboratory and the University of Chicago. Venture Economics reported that over 100 schools in the U.S. had or were creating similar funds, usually in association with their technology transfer offices. The Wall Street Journal noted that two-thirds of American universities hold stock in startup companies that were begun within their walls.

A variation on this model was introduced in May 2008 by Jim Torina in Bellevue, WA with the arrival of The University Funds, LLC (www.theUfunds.com) which bills itself as “a company that builds companies.” Essentially, they start with an in-house VC fund, add a network of early stage investors and a network of serial entrepreneurs, all meeting around technologies that can be commercialized out of the University of Washington (LaunchPad at www.u.washington.edu)

Startup e-Cognita Technologies Inc., a maker of transaction–management software for the mortgage industry received the investment capital they needed from the University of Michigan. The University of Kentucky put part of its endowment into two regional venture capital firms, helped form an incubator, set up an entrepreneurship center and formed a club to have business students work with faculty. Under the Kentucky Innovation Act, companies can use up to $200,000 over two years to pay for R&D at any accredited university in the state (www.tig.kstc.com). Case Western Reserve sponsors an annual competition that awards up to $100,000 for the best technology and bioscience models out of that university (www.tiime.cwru.edu/bizlaunch).

Yale University launched a small venture capital fund named Sachem Ventures, LLC, run entirely by MBA students. The fund is oriented to job and wealth creation in New Haven, CT’s business sector and combines funds from Yale, the New Haven Savings Bank and Zikha Venture Partners. Along with money, the Yale Entrepreneurial Society (YES) provides workshops and a meeting place for new business interests of students, faculty and alumni from its undergraduate and professional schools (www.yes.yale.edu). YES is the most popular student-run organization at Yale and has an impressive roster of speakers on campus along with alumni networking forums around the country.