What is a Seed Fund and how does it work?
Why did Excell Partners do the research and write a report on Venture Capital and Seed Activity in NY?
How much money would a NY state seed fund require annually?
Do seed funds provide a return on investment?
In the current economy, when the state is cutting spending across the board, is this the right time to spend money on establishing a seed fund?
Doesn’t the state already support seed stage companies?
Doesn’t the Comptroller already support seed stage companies through the Common Retirement Fund or CRF?
What is a Seed Fund and how does it work?
Seed, Angel and Venture capitalists (VCs) invest in seed, early, expansion, and later stage companies in that order. Seed stage investing occurs at the point of highest risk because the companies are not yet producing revenue. Seed stage companies that have recently incorporated are typically filing patents, writing business plans, building management teams, finalizing prototypes and proving their technologies actually work outside the laboratory. This takes time and money and must occur before revenues can be generated. Companies need financial support to make it through this developmental period commonly known as the Valley of Death.
As the name implies, a Seed Fund is committed to providing capital to qualified seed stage companies in exchange for equity. If the company is successful, the equity position can be sold or liquidated for cash. Successful seed funds can become self-sustaining through the money they generate in their seed stage investments.
Why did Excell Partners do the research and write a report on Venture Capital and Seed Activity in NY?
In the four and one-half years Excell Partners has been operating as a small seed fund, it has become apparent that tremendous economic opportunity exists to leverage the research and development at NY’s universities to create start-ups. However, both Upstate and Downstate are suffering from a lack of seed-stage capital to help launch these companies. At Excell, we wanted to document our experiences with data so that we could make relevant comparisons with the best practices of other leading states and better validate the case for seed funding in NY.
How much money would a NY state seed fund require annually?
To be successful, we believe the size of a state-sponsored seed fund should be proportionate to the amount of research and development expenditures at the state’s universities, which continue to be a major source of high potential startup companies. Pennsylvania, home of the successful Ben Franklin Technology Partner Funds, could perhaps serve as a model. The Ben Franklin Fund provides $20 million annually for $2.4 billion of research and development expenditures at Pennsylvanian universities. To achieve the same ratio, a New York State seed fund would have to invest $37 million annually for its $4.5 billion in research and development. If a NY State fund was split between Upstate and Downstate, the pro-rata subdivision of capital would be $20 million Downstate for $2.5 of R & D, and $17 million Upstate for $2.0 billion of R & D.
Do seed funds provide a return on investment?
As in any type of high risk investing, there are no guarantees. Given enough time, however, it is not unreasonable to expect that a state-sponsored seed fund would become self-sustaining and make a substantial contribution to the state economy. Two examples are the Ben Franklin Technology Partner Fund (mentioned above) and a very successful state sponsored seed fund in Maryland. Both have recovered their operating costs and are generating significant returns for their respective states. An independent study commissioned by the Ben Franklin Fund, for instance, reported that the state of Pennsylvania garnered more than $517 million in additional tax revenue as a direct result of the fund, boosting the state economy by $9.3 billion from 2002 through 2006.4
In the current economy, when the state is cutting spending across the board, is this the right time to spend money on establishing a seed fund?
The timing is right because we need to start building an entrepreneurial ecosystem in New York now. While finance and manufacturing companies have traditionally comprised much of our current economy, it is clear that the state cannot rely on these industries alone to provide economic opportunity moving forward.
Universities and academic research centers are emerging as powerful economic engines capable of jumpstarting NYS’s economy into the 21st century. If we are serious about building an innovation-based economy we have to enable the formation of new companies from the innovations generated within our universities. The creation of startups is essential to the continued growth and prosperity because the companies formed today are the jobs of tomorrow. NYS’s economy can be transformed into a globally competitive knowledge-based economy through new cutting-edge technology startups. Industry research shows that these startups thrive in an entrepreneurial ecosystem with abundant capital.
Doesn’t the state already support seed stage companies?
Our research shows very little NY State supported venture programs, particularly at the seed stage. The National Association ofr Seed and Venture Funds (NASVF) conducted a survey called “State Commitments to Current Capital Programs.” The study focused on programs that provided funding primarily for technology commercialization and start-up to later stage capitalization. This included capital programs that provide research, pre-seed, seed, venture, mezzanine and late stage capital, grants and development loans. NY State ranked 25th below West Virginia, Alabama, South Dakota, Arkansas, Maine, Idaho among others.
This study validates what we already know. The entrepreneurial community in NYS lives with this reality every day.
Doesn’t the Comptroller already support seed stage companies through the Common Retirement Fund or CRF?
No, seed companies are not being financed throught the CRF fund and quite frankly, they probably shouldn’t be. That doesn’t mean that the CRF program isn’t excellent.
We applaud what the Comptroller is doing. The name of the program is the “In-State Investment Program”. By itself, this is huge. The Comptroller 1) recognizes that there is an in-state investing problem (as discussed in our first white paper – 91% of the money invested by NY VC’s is being invested in out-of-state start-ups) and 2) he is encouraging/obligatingVCs to invest in-state if they receive CRF monies. But, as appropriate, the Comptroller is investing in companies at a later stage of maturity than seed. He controls the retirement savings of state employees and has a fiduciary responsibility to manage the CRF money wisely. Those monies are placed under the management of well establishedVC firms to invest in “de-risked” companies with the clear expectation of generating high returns. If the monies help NYS companies at the same time that they generate a hefty return, then all the better. But at the end of the day, the Comptroller’s job is not economic development nor to “fill gaps” in the venture investing continuum. It is to maximize ROI for retired state employees.