Establishing Community-Based Seed Capital Funds

Gregg Barcus

Emerging Growth Group

Des Moines

Increasing Interest

• Heightened Interest In Venture Investing– 1990’s Media Coverage of VC Returns– View that Venture is Possible for More

Investors– Economic/Community Development Interest

• “Brain Drain”• “Gazelle” Companies

• 2002 Legislative Initiatives– Programs and Media Coverage

2002 Legislative Initiatives

• Fund of Funds– Iowa Capital Investment Corporation– $100M State Tax Credits to Develop a VC Industry

• Angel Tax Credit– Iowa Capital Investment Board– 20% Tax Credit for Cash Investments in

• Qualified Businesses, or • Community Based Seed Capital Funds

• Reduction in State Premium Tax– Insurance Industry VC Commitment

“Qualified Business”

• Iowa-based

• Less than 3 Years Old

• Less than $3 Million in Net Worth

• Minimum $250,000 in Equity Secured

• Entrepreneurial Management Experience

• Certain Excluded Business Types

Community Seed Capital Fund

• $500K-$3Million in Size

• At Least 10 Investors

• No One Investor > 25% Ownership

• Invests at least 33% of Investments in 2 Qualifying Businesses in 3 Years

• Qualifications Modified in 2004:– $125K Minimum Size– At least 5 Investors– 1 Business Investment Required Within 3 Years– (Also Expands Qualifying Business Tax Credit to Corporate

Investors & Previous Investors)

Result:Many Local Community Funds

• Iowa City

• Cedar Falls/Waterloo

• North Iowa (Mason City)

• Several More in Discussion

• Plus New Managed Funds– Cedar Rapids– Des Moines (2)

Starting a Seed Capital Fund

• Rural Angel Investor Network (RAIN) Funds– State Template – IDED– Low Cost– LLC Structure– Volunteer/Member Management

• Managed Funds– Individually Designed– Typically LP Structure

Issues to Consider

• Investment Objectives– ROI, ROI, ROI– Investment “Territory” -- Local or

Statewide?– Deal Flow of Qualified Companies– Defined Investment Process– Management Issues – Intake, Due

Diligence, Monitoring, Exit– Legal Counsel– Patience

Biggest Hurdles

• Adequate Deal Flow

• Management

An Initiative Coming…

• An Angel Network Fund of Funds

• Organization, Management of Pooled Funds– Broader State Coverage– Retain Local Focus– Best of Both Worlds