How hard is it for Minnesota entrepreneurs to raise seed capital?
The founders of Constant Data Inc. found out when they tried to raise $500,000 to support sales and marketing expansion. Veterans of Cray Research and other IT companies, they spent 2002 developing network software for data replication and disaster recovery. In 2003, they landed noteworthy customers, including Pratt & Whitney nationally and Digital River locally. Despite that market validation and their engineering and management experience, they found little interest from local investors.
Then CEO Paul Sustman, a St. Thomas M.B.A. student before he joined Cray Research, and VP of Engineering A.A. El Haddi, a current part-time M.B.A. student, heard about the William C. Norris Institute. A unit of the College of Business, the institute makes seed capital investments in technology-based, socially beneficial companies. Norris, the retired chairman and CEO of Control Data Corp. (now Ceridian), donated $2.3 million to St. Thomas in 2001 for the institute and its seed fund. That gift was the culmination of his three decades of efforts to address Minnesota’s shortage of seed capital for innovative entrepreneurs.
Fortunately for Constant Data, the institute had recently received a return on its investment in another company, CDMdata, developer of a mobile computer for automobile inventory and marketing. Called the DigitalLot Solution, the product drew the interest of Kelley Blue Book Company, which acquired CDMdata. With its share of the buyout the institute was able to make two new investments, including $100,000 for Constant Data in June 2004. According to El Haddi, the investment "saved us. We were able to survive and close some deals. It also gave us credibility, hope and stamina to fight."
Constant Data’s success in the hot market for data protection software attracted industry attention. On Nov. 15, 2005, the company agreed to be acquired by BakBone Software, based in San Diego. The Norris Institute more than doubled its investment. And again those funds were redistributed to other entrepreneurs, bringing to 14 the number of companies in its investment portfolio. Current M.B.A. students assist the institute in reviewing opportunities and working with portfolio companies.
"Risk Capital" Scarcity
The scarcity of seed capital for high-risk startups with innovative products but little revenue is not new. Norris co-founded the Minnesota Seed Capital Fund in 1980 to provide capital for innovative, development-stage companies with proprietary technology. That and other funds grew and matured into larger venture capital funds, but their appetite for early-stage investing decreased, with the exception of the late 1990s technology bubble.
A 2004 survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association found that early-stage companies received just 13 percent of the $347 million in venture capital invested in Minnesota companies in 2003. And most of that early-stage money goes to medical device and biotech companies that must raise tens of millions of dollars. Not much is left for entrepreneurs who need one million dollars or less. They find themselves searching for elusive "angel" investors, wealthy individuals who are willing to risk usually $25,000 to $100,000 on startups in industries in which they have experience.
The Norris Institute collaborates with angel investors to put together the $500,000 to $1 million necessary to commercialize new technology. To cultivate that collaboration the institute has helped to develop and manage the Early-Stage Investors Network, which convenes seed capital investment fund managers and angel investors to review company presentations and make syndicated investments. The institute also develops such syndicates through the extensive network of successful St. Thomas business alumni.
Gervaise Wilhelm, ’84 M.B.A., exemplifies that success. She became a medical device entrepreneur because of a classroom presentation by a venture capitalist who told of the startup phases of Medtronic, Cardiac Pacemakers and St. Jude Medical. She found her opportunity while working for an innovative cardiologist. "He was keeping one idea to himself because he knew it could be important, and he confided it to me," Wilhelm remembers. "I shared it with the venture capitalist, and we met with the cardiologist. At the end of the meeting there was $250,000 on the table earmarked for the beginnings of Angiomedics," which ended up being acquired by Pfizer. Wilhelm went on to lead three other biomedical startups that were acquired or went public, and she is still involved with three other companies.
One of those three is Closys Corp., which is developing a device to stop bleeding in patients who have had a cardiac catheter inserted through the femoral artery. Clotting at the site is painful and takes hours because patients are given heparin or other blood thinners to prevent clots during the procedure. The Closys system painlessly causes a clot to form in about five minutes. Wilhelm raised $1.3 million – $75,000 from the institute – to take the company through FDA approval later this year. She vows to make this a winner for the inventor, employees and investors, including the institute, which will use those winnings to continue investing in Minnesota?s innovators.
For more information about the William C. Norris Institute and its portfolio companies, see www.stthomas.edu/cob/centers/norris/.
About the author: Michael Moore is the director of the William C. Norris Institute.