Wednesday, May 26, 2010

Invest Local: Just my thoughts

Today I attended the Fresno Region Jobs Initiative Annual Meeting. It was at such a meeting 5 or 6 years ago that I became highly motivated to get involved. Well, I left today's meeting motivated to share some thoughts about even greater involvement.

Warning: My words are typed during a major financial crisis, budget shortfall and likely layoffs.

Time to invest.

New York City recently announced the creation of a $22,000,000 venture fund to attract tech companies. It has already worked. Sorry, Jersey City. Why did it work? Because one of the biggest obstacles entrepreneurs face is access to capital.

Here is how the NY program is funded: NYC put in $3M and FirstMark Capital ponied up $19M. Not a bad place to start.

Sitting in today's meeting I sent @CityofFresno a tweet to try and test the waters. The response was accurate: we do not have the same resources at NYC, but we do care about local business.

The fact of the matter is this: Money is attractive.

My bar napkin proposal: $10M fund. City pledges $1M and outside Venture Capital firm allocates $9M.

This could actually work because in a big picture, the City is assuming very little share of the overall risk.

Scenario #1: Entrepreneur needs $500,000
First of all, the entrepreneur needs to raise 20% of the round through personal networks (self, family, friends, etc.) to show active "skin in the game." In this scenario that is $100,000. This is one step in unlocking the door to capital.

Second, for every dollar of "the fund" that is to be accessed, three dollars from outside the fund must come to the table. This can be in the form of other other VC or Angel groups. It is not uncommon for a round to be funded by more than one source...shared risk and collective expertise. In this scenario, this means that $300,000 is provided by an outside fund or investor (not family/friends/etc).

Finally, "the fund" would provide the remaining capital to finish out the round. In this case, $100,000 (remember, every dollar from "the fund" must be matched with $3 from the outside).

Given that the City originally contributed only 10% of the total fund, the City's share of the $100,000 investment is only $10,000. So, does it make since for the City to invest $10,000 to help deliver $500,000 to an early-stage business?

The Advanced Technology Development Center at Georgia Tech uses a similar 1 for 3 model. When I listened to them make a presentation at a conference a couple of years ago, they mentioned that the reality is that every $1 invested has attracted nearly $30 in outside investment.

I know the naysayer will claim that the City of Fresno should not be in the investment business. I get that, but I also challenge that. Every budget dollar is in a sense an investment. The money being spend for the development of a specific plan, is an investment. The City would have a voice as it relates to go or no-go on an investment. The good news is that the $1M would be invested very slowly.

One hundred $10,000 investments (using the math above) could represent $50,000,000 of total investment in early stage businesses. Jeeze, even if every business failed, the City spent $1M to get $50M spent in the community. That's a successful failure.

Share your thoughts? I'd really like to hear form elected officials, candidates and economic development professionals.

If we let Water, Energy and Technology companies know that there is money available, would they come.

Instead of asking if we have the resources or don't have the resources, let's ask a different question: In what ways can we make something like this work?

3 comments:

  1. Creative domino-effect idea! I like it. I've never worked on economic development projects, but have coworkers who do. Generally Cities will have an Economic Development Department. What is Fresno doing with their public ED dollars? I'd propose that 20% is too much risk for a public entity to contribute to an entrepreneur during a recession- My guess is that Fresno may decide that they are more willing to contribute 10% to the financial structure. They may be more amenable to the idea if their risk is lower...but then again, the more aggressive Cities are getting the bigger bucks from investors, and more money into the City as you said. How do you propose to attract the $9M from venture capital firms? What do they get in return? (not being accustomed to entrepreneurial deals, I have no idea how they operate). CDBG can be used for economic development, but usually is not as infrastructure and housing take priority. What other sources can be used for economic development??? I would love to know! I'll check back to see how your proposal is unfolding!

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  2. The city can't afford it because they invested so wisely in Granite Park.

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  3. Hey, I'm retiring Gustav's Groupie and reopening shop at Bench Dog for a new start. Update your blogroll and bookmarks if you so choose.

    GG will shut down tomorrow (July 2).

    ReplyDelete