In a recent press release, The National Association of Seed and Ventures Funds (NASVF) announced it is working with a national innovation intermediary, Innovation America, to create a new National Innovation Seed Fund of Funds (NISF) to help remedy the lack of funding for young entrepreneurial companies and to get knowledge-based job growth going again. NASVF claims to be in discussions with the Obama administration about providing $2 billion to the NISF.
NASVF is a 12-year-old not-for-profit association that represents innovation capital leaders including private, public and nonprofit organizations that are committed to building their local economies by investing in local entrepreneurs. Innovation America has been developed by Richard Bendis, a recognized national leader in innovation based economic development. He was the first chairman and later CEO of the Kansas Technology Enterprise Corporation, the founder of Innovation Philadelphia and was a founding board member of both NASVF and the State Science and Technology Institute.
We are joined today by Richard Bendis as well as Jim Jaffe, President of NASVF.
Your organizations have identified a lack of funding for young entrepreneurial companies and a need to get knowledge-based job growth going again. As such, NASVF is working with Innovation America to create the NISF with the objective of leveraging the experience of the most successful early stage investors utilizing both private and public capital. Can you tell us where you are in your discussions with the Obama administration regarding your proposal for government funding for NISF?
Bendis: We began our discussions with the Obama administration transition team in December 2008. Team members and certain interested agency personnel also interacted with the White House Office of Management and Budget, who actually proposed increasing our initial $1 billion ask to $2 billion. Discussions are continuing and agencies are responding to these immediate stimulus response needs while continuing to review new program opportunities.
It has been reported that, in an effort to convince the government for the need for NISF, the NASVF surveyed over 5,000 early and seed-stage venture funds and their service providers. Those results indicate that the state of funding for entrepreneurial companies is dire. Will you summarize those results for us, comment on which findings cause you the most concern and share with us how the government responded to your survey results?
Jaffe: The survey was requested by federal agency personnel. NASVF responded in a timely fashion to this request to assist the Obama administration to determine the real early stage funding environment and needs in America. (We have attached a copy of the survey for your review as well as the press release that summarizes the surveys findings).
The government acknowledged that the survey findings are believable. The greatest concern is that the valley of death is widening, creating a bigger challenge for promising new innovation based companies that are trying to get their market-ready products and services into the commercial world. Many jobs will be lost and the U.S. innovation leadership is being threatened.
As I'm sure you are aware, there has been an ongoing debate in the private equity community as to whether or not there is already too much money available in venture capital. In fact, one of our VC Experts interviewees made the observation last month that when you look at the levels of investment and returns in recent years, there is a stark mismatch. For most of this decade, we've had an industry investing $30 billion a year, and returning $5- $20 billion a year. In light of those facts, how do you justify recommending that the government help sponsor a $2 billion fund?
Jaffe: The average VC investment last year was $8.3 million per deal, and the average angel group investment was approximately $340 thousand per deal. Seed investing by VC's represents only about 4% of total VC investments. There is adequate VC later stage capital but a decreasing amount of both angel/private and state based early stage capital.
The major gap is the $500 thousand to $2 million that high-growth innovative companies need to become both VC and market ready. We believe that the federal government can be a catalyst to lead this initiative by providing at least $1 billion of new money that could be leveraged 1 to 1 with other private or public funds at the regional level. Worst case would be a pilot program initiated this year to test the concept.
What role would the Small Business Administration play in your proposed program?
Bendis: The SBA has not played a major role in providing early stage seed capital to high growth innovative knowledge economy companies. They are a candidate to champion a new national innovation seed fund of funds but there are also other potential U.S. federal agencies that could lead this initiative.
Walk us through how your proposed program would work with funding being allocated to various groups under the sponsorship of Innovation America and with third-party investors matching the federal contributions on a dollar for dollar basis.
Bendis: A federal agency designated to manage this fund would work closely with a private-public partnership (PPP) similar to Innovation America to help administer the fund. The PPP would have connections in the innovation world and be able to identify the most experienced early stage investment managers that would be qualified to invest and generate returns on these funds. These managers could consist of angel groups or funds, best practice technology based economic development organizations or private seed funds -- all selected on their performance history at the regional level and their ability to have matching dollars. There would be a desire to invest the money in a timely fashion and have transparency and accountability that is visible to all stakeholders. There would be a double bottom line goal focused on return on investment as well as knowledge economy job creation.
Your presentation shows that venture capital investment in start-up/seed companies has declined as a percentage since 1995, with more focus being given to later stage companies. Will all of the NSIF be dedicated to start-up/seed companies?
Jaffe: It is conceived that it would be all to early stage / seed stage innovative knowledge economy companies that are beyond the proof of concept stage.
We thank you, both, for your time and insight.
Be sure to read the white paper "Creating a National Innovation Framework" by Richard Bendis and Ethan Byler.
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