Sunday, May 27, 2007

State of Florida is considering funding Venture Capital

The State of Florida is putting together a bill that would put together a substantial amount of funding to distribute as fund of funds to local VCs and funds.

Here is a snippet from the proposal

"This bill creates the Florida Capital Formation Act, which is designed to increase the amount of venture capital investment in Florida. The bill creates the Florida Opportunity Fund (fund), to invest in seed capital and early stage venture capital funds. The investments may not be direct investments with individual businesses, but must consist of partnerships with private venture capital funds (the “funds-of-funds” approach). Enterprise Florida, Inc. shall facilitate the creation of the fund. The fund shall be organized as a private, not-for-profit corporation under chapter 617. Enterprise Florida shall select a five-person appointment committee; this committee will select a board of directors for the Florida Opportunity Fund. The board shall select a Florida Opportunity Fund investment manager. The bill requires one dollar in private match for every one dollar the state invests; in addition, investments must be made in Florida-based businesses in life sciences, information technology, advanced manufacturing processes, aviation and aerospace, and homeland security and defense."

I personally hope we get the right bill passed. There is clearly a need for the State to help with economic development - especially new technology startups.

However, I am not sure these funds will end up in the right hands. The State of Florida has tried a few times in the past to fuel venture investments and it failed. One of the reasons I feel that past efforts were not successful is because they gave money to Venture Capital firms who had no experience in early stage investing, no experience in commercialization and no experience in building companies from the ground up.

If the State of Florida wants to ensure it's money is going to make an impact - they need to focus their attention on creating a "gap" fund. In Florida, there is a gap between the funding of research and development of technologies and actually raising a venture capital round of capital. Typically this gap is filled by angel investors because venture capitalists avoid early stage investing.

Let me put some perspective on the issue in the State of Florida. The major universities in the State of Florida receive over 2 Billion in research grants to develop new and innovative technologies. There are only 4 active angel funds in the State of Florida (one of which I founded) that make 2-3 investments per year. There is only 1 early stage VC in the State that I would classify as early-stage (Inflexion). Do you see the problem?

Here is a slide from a presentation I did at the Tech Transfer seminar for Florida.

To download the whole presentation click here.

So the question is where can the State make the biggest impact? I don't believe it can recruit outside VC's to open offices and look at Florida as a legitimate source for good deals - because we don't have a consistent flow of mature deals for VC's to consider. We have lots of interesting technologies floating in the halls of the licensing departments in our universities, but no real system for commercializing the technologies and creating companies.

I call this "Venture Creation". A colleague of mine was one of the father's of venture creation. Mike Buffa stated Milcom in the early nineties as a Venture Creation company that focused on taking raw technologies out of major corporations and spinning them out to create companies. The process of venture creation is complicated, but with the right people in place and the right funding in place it can be a powerful tool for economic development.

I modeled Startup Florida after Milcom, and started my own version of a Venture Creation company. Instead of licensing technologies, we had a team of people who looked for interesting markets and technologies and we launched our own ventures. For example - Movo Mobile was created after I met with a couple guys who had some experience in mobile marketing space and wanted to launch their own venture. We "incubated" the idea, created the technology, accelerated the idea through our Venture Creation process, and had launched a company in less than six months.

Why does Venture Creation work?
Simple. The people. A Venture Creation company is essentially a group of experienced entrepreneurs and investors who can work together to help launch new ventures. Unlike a venture capitalist, a venture creationist gets hands on in a venture, brings their expertise and helps accelerate the launch. After a venture is launched, management is brought on board to run the company and funding is brought in from angel investors or potentially venture capitalists. Many times ventures fail because they lack resources, knowledge and the network to grow a business. Venture Creation brings all those elements to the table on day one, and you can focus on building the business.

How does it work?
Simple. A Venture Creation company looks for innovating technology and experienced entrepreneurs. Once a technology or entrepreneur is located, it analyzes the market opportunity for the idea and decides whether or not to proceed to create a company (I am over-simplifying the process, but essentially this is a big step). The Venture Creation company licenses the technology (which already may have millions invested through R&D grants, etc) and creates a company. The company is accelerated through a venture creation process, business plan is executed, management team is formed, application is built and the company is launched.
Essentially, the venture creation process bridges the "gap" and brings real investment opportunities to the table - for Venture Capitalists to consider (both from Florida and outside the State of Florida). For example, most of Milcom's ventures were located in Florida, but received funding from top tier Venture Capital firms from all over the US and World.

What about the lack of Venture Capital?
The obvious question is "great, you helped create companies, but they still need money - what can we do about the lack of venture capital?"

Venture Capitalists will find good deals. Deal Flow is the life blood of venture capital, and most VC's starve for good deal flow. The reason VC's are not setting up shop in Florida (which by the way is one of the top green fields for technology innovation in the country) is because it lacks deal flow. A Venture Creation company would create deal flow, and leverage the massive amounts of R&D investments our Universities are making, and bring to the surface a vibrant entrepreneurial community. No matter how much money the State pumps into a fund, or gives to outside Venture Capital funds - they will not pay attention to Florida - until there is a consistent, high-quality influx of investment opportunities.

Even if they don't setup shop... a good company can raise capital from Funds outside of Florida.

I am excited about the future of Florida - because it has all the potential California did in the late seventies. Beautiful climate, influx of wealthy, retiring executives and innovative, growing Universities. We have a lot of essential assets to make a great place for entrepreneurs to live and create the next generation of companies.