HomeMy WebLinkAbout11.d. Resolution of Thanks - William NorrisCITY OF ROSEMOUNT
EXECUTIVE SUMMARY FOR ACTION
CITY COUNCIL MEETING DATE: OCTOBER 20, 1992
AGENDA ITEM: RESOLUTION OF THANKS TO
AGENDA SECTION:
MR. WILLIAM C. NORRIS
NEW BUSINESS
PREPARED BY: STEPHAN JILK
CITY ADMINISTRATOR
AGENDA
ITEM # 110'
ATTACHMENTS: RESOLUTION, PRESENTATION
NARRATIVE, WELLSPRING REPORT
� J
On October 6, 1992, Mr. William C. Norris provided a presentation to
members of the City Council, Port Authority, Planning Commission, City
Staff and interested citizens. An overview of this presentation is
provided, in written form, and attached herein.
Mr. Norris is presently the Chairman of the William C. Norris Institute and
past President and Chairman of the Board of Control Data.
As one of the attendees I would like to indicate my thanks to Mr. Norris
for taking time to share his insight and experience in business development
with us.
Because Mr. Norris was willing to spend this time with us and that I
understand he is respective of a show of appreciation I would recommend the
Council's adaption of the attached Resolution of Thanks.
RECOMMENDED ACTION: MOTION TO ADOPT RESOLUTION 1992 -
A RESOLUTION OF THANKS TO MR. WILLIAM C. NORRIS FOR HIS ASSISTANCE
TO THE CITY OF ROSEMOUNT AND HIS CONTINUED DEDICATION TO THE
DEVELOPMENT OF SMALL BUSINESS
COUNCIL ACTION:
CITY OF ROSEMOUNT
DAKOTA COUNTY, MINNESOTA
RESOLUTION 1992 -
A RESOLUTION OF THANKS TO MR. WILLIAM C. NORRIS
FOR HIS ASSISTANCE TO THE CITY OF ROSEMOUNT
AND HIS CONTINUED DEDICATION TO THE
DEVELOPMENT OF SMALL BUSINESS
WHEREAS, Mr. William C. Norris, Chairman of the William C. Norris
Institute, supports the continued development and support for
small business in this country and others throughout the world;
and
WHEREAS, Mr. William C. Norris provides support, for small
business, through his efforts in many organizations, the William
C. Norris Institute, being one of them; and
WHEREAS, Mr. William C. Norris has exhibited his belief in the
establishment and support for small business through venture
capital opportunities, mentoring and evaluation methods; and
WHEREAS, Mr. William C. Norris continues to spend his personal
time and energy in assisting small businesses and governmental
units in developing and maintaining programs in support of small
businesses; and
WHEREAS, Mr. William C. Norris has taken his timeandenergy in
presenting ideas and support for business attraction and
development in Rosemount.
NOW, THEREFORE BE IT RESOLVED, that the City Council of the City
of Rosemount extends its thanks to Mr. William C. Norris for his
efforts and support, and for providing his insight to the City in
these efforts.
DATED this 20th day of October, 1992.
E.B. McMenomy, Mayor
ATTEST:
Susan M. Walsh, City Clerk
Motion by: Second by:
Voted in favor:
Voted against:
Presentation
by
WILLIAM C. NORRIS
CHAIRMAN OF THE
WILLIAM C. NORRIS INSTITUTE
TO THE
CITY OF ROSEMOUNT
October 6, 1992
Rosemount, Minnesota
ATTRACTING INNOVATIVE BUSINESSES
TO ROSEMOUNT
I AM PLEASED TO MEET TO SPEAK ABOUT INNOVATIVE BUSINESSES AND HOW
ROSEMOUNT COULD BEST ATTRACT THEM. I'LL DESCRIBE A SPECIFIC
APPROACH, WHICH IS AFFORDABLE AND EFFECTIVE. HOWEVER, BEFORE DOING
THAT, I SHOULD PROVIDE SOME BACKGROUND.
FIRST, LET ME MENTION THAT INVOLVEMENT WITH INNOVATIVE BUSINESSES,
IN ONE WAY OR ANOTHER, HAS BEEN AND CONTINUES TO BE A PRIORITY WITH
ME. I HELPED START AND MANAGE TWO INNOVATIVE COMPANIES,
ENGINEERING RESEARCH ASSOCIATES, WHICH EVENTUALLY BECAME A MAJOR
DIVISION OF UNISYS, AND CONTROL DATA. I'VE ALSO PARTICIPATED IN
COMMUNITY-BASED EFFORTS TO DEVELOP SUPPORT FOR THE STARTUP OF
INNOVATIVE COMPANIES. E.G., I HELPED ESTABLISH THE'NORWEST GROWTH
FUND, THE MINNESOTA SEED CAPITAL FUND, THE M1119NESOTA COOPERATION
OFFICE, AND I CHAIRED TASK FORCES FOR 11 YEARS IN MINNESOTA
WELLSPRING FOR GETTING STATE LEGISLATION IN SUPPORT OF STARTUP
COMPANIES, AND SO ON. HERE ARE COPIES OF THE REPORT ISSUED IN
DECEMBER 1990 BY THE LAST WELLSPRING TASK FORCE I CHAIRED, WHICH
RECOMMENDED STRATEGIES FOR THE STATE OF MINNESOTA TO PROVIDE MORE
SEED AND VENTURE CAPITAL TO STARTUP COMPANIES.
CURRENTLY, MY INSTITUTE CATALYZES AND MANAGES COLLABORATIVE
PROGRAMS TO EXPAND JOB CREATION THROUGH INNOVATIVE COMPANIES.
THIS ACTIVITY WILL BE ENLARGED IN SCOPE AS THE RESULT OF THE
AFFILIATION OF MY INSTITUTE WITH THE UNIVERSITY OF MINNESOTA, WHICH
IS BEING PLANNED. I'LL HAVE MORE TO SAY ABOUT THE INSTITUTE/
UNIVERSITY PROGRAM LATER.
AT THIS POINT, IT IS APPROPRIATE TO COMMENT ON WHAT IS MEANT BY THE
TERM INNOVATIVE -BUSINESS. TO ME, IT IS A BUSINESS BASED ON VALUE
ADDED TECHNOLOGY, I.E., KNOW-HOW. MANUFACTURING COMPANIES ADD
VALUE, AND THERE ARE SERVICE COMPANIES, WHICH ADD VALUE, SUCH AS
THOSE ENGAGED IN DATA PROCESSING AND EDUCATION AND TRAINING. MOST
OF THE BETTER -PAYING JOBS ARE IN INNOVATIVE COMPANIES.
UNFORTUNATELY, THERE ARE NOT NEARLY ENOUGH OF THEM TO PROVIDE THE
BETTER JOBS SO SORELY NEEDED.
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METHODS OF ATTRACTION
BECAUSE OF THE NEED FOR MORE AND BETTER :PAYING JOBS IN EVERY PART OF
THE COUNTRY, ATTRACTING INNOVATIVE COMPANIES TO LOCATE IN A GIVEN
COMMUNITY IS A HIGHLY COMPETITIVE PROCESS. _
THERE ARE TWO CATEGORIES OF INNOVATIVE COMPANIES: WELL
ESTABLISHED AND STARTUP.
WELL ESTABLISHED: IN THE WELL ESTABLISHED CATEGORY, THERE ARE THE
POSSIBILITIES OF RELOCATION OF THE ENTIRE COMPANY OR A BRANCH PLANT.
AS YOU KNOW, GETTING A COMPANY TO RELOCATE OR ESTABLISH A BRANCH
PLANT IN A GIVEN CITY IS ACCOMPLISHED PRIMARILY WITH ATTRACTIVE
PLANT FINANCING AND TAX CONCESSIONS.
RELOCATING COMPANIES IS A ZERO-SUM GAME. WHAT ONE COMMUNITY
GAINS,, ANOTHER LOSES. E.G., YOU MAY HAVE READ ABOUT THE
MINNESOTA -BASED LEWIS BOLT & NUT COMPANY ANNOUNCING A PLAN TO
MOVE TO LA JUNTA, COLO. LA JUNTA, WITH A POPULATION OF 8,000, HAS
COMMITTED TO INVEST $1,000,000 TO BUILD ANEW PLANT FOR THE COMPANY.
THE STATE OF COLORADO HAS AGREED TO PROVIDE $170,000 IN LOANS TO HELP
WITH TRANSITION AND TRAINING COSTS. THE COMPANY HAS 35 EMPLOYEES. IF
THE MOVE IS MADE, MINNESOTA LOSES 35 JOBS, AND COLORADO GAINS 35 JOBS.
RIGHT NOW, THE MOVE IS BEING BLOCKED BY THE STATE OF MINNESOTA,
BECAUSE OF A POLLUTION PROBLEM AT THE COMPANY'S FACTORY IN
SOUTHEAST MINNEAPOLIS. WBETHER THE MOVE IS MADE OR NOT, IT IS AN
EXAMPLE OF THE SUBSTANTIAL COST OF INDUCING A SMALL COMPANY TO
RELOCATE.
ATTRACTING A BRANCH PLANT DOESNT HAVE THE STIGMA OF TRANSFERRING
JOBS, BECAUSE BRANCH PLANTS ARE USUALLY THE RESULT OF BUSINESS
EXPANSION. HOWEVER, THAT PROCESS CAN BE AS COSTLY AS RELOCATING A
COMPANY.
STARTUP COMPANIES: ATTRACTING AND ASSISTING STARTUP COMPANIES IS
LESS COSTLY AND MORE EFFECTIVE IN THE LONG RUN. AT THE SAME TIME, IT
IS A POSITIVE SUM GAME BECAUSE NEW JOBS ARE CREATED AND NOT
TRANSFERRED FROM SOME OTHER PLACE. MOST COMMUNITIES HAVE SOME
TYPE OF PROGRAM TO ATTRACT AND ASSIST STARTUP COMPANIES, SO
COMPETITION IS ALSO PRESENT IN THIS APPROACH; HOWEVER, THERE ARE
MORE ENTREPRENEURS SEEKING ASSISTANCE FOR STARTING INNOVATIVE
COMPANIES THAN THERE IS ASSISTANCE AVAILABLE.
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THE CATEGORIES OF ASSISTANCE INCLUDE FINANCING, FACILITIES AND
EVALUATION AND MENTORING.
LET ME COMMENT BRIEFLY ON EACH OF THE THREE CATEGORIES.
FINANCING: ASSISTANCE WITH FINANCING TAKES MANY FORMS, INCLUDING
SEED CAPITAL, VENTURE CAPITAL, AND LOANS. SEED CAPITAL IS THE INITIAL
STARTUP CAPITAL. VENTURE CAPITAL IS USUALLY SECOND STAGE FINANCING.
TEN YEARS AGO, VENTURE FIRMS WERE ALSO OFTEN A SOURCE OF INITIAL
FINANCING. HOWEVER, NOW THEY PREFER TO INVEST IN COMPANIES WHICH
CAN DEMONSTRATE PROGRESS IN BRINGING A PRODUCT TO MARKET. STARTUP
COMPANIES USUALLY CANNOT QUALIFY FOR LOANS BECAUSE OF LACK OF
ASSETS ACCEPTABLE AS COLLATERAL. SEED CAPITAL IS THE MOST DIFFICULT
TO OBTAIN. IN FACT, TODAY, MANY MANY ENTREPRENEURS ARE UNABLE TO
LAUNCH AN INNOVATIVE BUSINESS BECAUSE OF LACK OF INITIAL FINANCING.
ALTHOUGH SEED CAPITAL IS IN THE SHORTEST SUPPLY, VENTURE CAPITAL FOR
FINANCING GROWTH IS ALSO UNAVAILABLE TO MANY COMPANIES,
PARTICULARLY THOSE WHOSE SALES ARE NOT LIKELY TO EXCEED $10-15
MILLION WITHIN FIVE YEARS.
THE SCARCITY OF RISK CAPITAL IS VERY FRUSTRATING TO ME, BECAUSE OF MY
COMMUNITY-BASED EFFORTS, NOTED EARLIER, TO HELP ASSURE ITS
AVAILABILITY. MY FRUSTRATION WAS COMPOUNDED BY A RECENT
EXPERIENCE IN RAISING STARTUP CAPITAL FOR A COMPANY BASED ON
TECHNOLOGY DEVELOPED UNDER THE AEGIS OF MY INSTITUTE. I CONTACTED
THE NORWEST GROWTH FUND, THE MINNESOTA SEED CAPITAL FUND AND THE
STATE OF MINNESOTA IN AN EFFORT TO FIND SEED MONEY TO FINANCE THE
COMPANY. NORWEST WASN'T INTERESTED. THE MINNESOTA SEED CAPITAL
FUND IS FULLY INVESTED, AND NO STATE FUNDS WERE AVAILABLE. FINALLY,
AFTER A PROLONGED EFFORT, FUNDING WAS OBTAINED FROM A NUMBER OF
INDIVIDUALS. AVAILABILITY OF SEED FUNDING WOULD INCREASE
SIGNIFICANTLY IF MORE FAVORABLE TAX TREATMENT WERE ACCORDED
HIGH-RISK START-UP INVESTMENTS.
FACILITIES: ASSISTANCE WITH FACILITIES INCLUDES BUSINESS INCUBATORS,
RESEARCH PARKS AND INDUSTRIAL PARKS. A BUSINESS INCUBATOR PROVIDES
LOW COST, FLEXIBLE SPACE, PLUS COMMON SERVICES SUCH AS SHIPPING,
RECEIVING, RECEPTIONIST, MEETING ROOM, FAX MACHINE, LIBRARY, ETC.
EACH TENANT PAYS ONLY AS A SERVICE IS USED, HENCE, AVOIDING THE COST
TO ESTABLISH AND MAINTAIN THOSE WHICH ARE REQUIRED INTERMITTENTLY.
RESEARCH PARKS PROVIDE OFFICE, LABORATORY AND MANUFACTURING SPACE
FOR INNOVATIVE COMPANIES IN BUILDINGS ON LANDSCAPED SITES. A
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RESEARCH PARK OFTEN INCLUDES AN INCUBATOR. COMPANIES THAT
OUTGROW THE INCUBATOR MOVE INTO ANOTHER BUILDING IN THE PARK. A
RESEARCH PARK IS USUALLY LINKED TO A UNIVERSITY, WITH A MANAGEMENT
FUNCTION TO FOSTER COLLABORATION BETWEEN THE UNIVERSITY AND
COMPANIES LOCATED IN THE PARK IN RESEARCH AND THE TRANSFER OF
TECHNOLOGY. THERE ARE SEVERAL HUNDRED RESEARCH PARKS WORLDWIDE.
ONE OF THE LARGEST IN THE U.S. IS THE RESEARCH TRIANGLE PARK IN NORTH
CAROLINA. IT WAS ESTABLISHED IN THE LATE 1950'S AND IS ASSOCIATED WITH
THREE UNIVERSITIES. THE STATE OF NORTH CAROLINA HAS HEAVILY
SUBSIDIZED THE RESEARCH TRIANGLE. FOR EXAMPLE, IT CONTRIBUTED $175
MILLION TO THE MICROELECTRONICS CENTER IN THE PARK. LARGE STATE
CONTRIBUTIONS HAVE HELPED GENERATE SIGNIFICANT PRIVATE SECTOR
INVESTMENT. IBM, MONSANTO, UNION CARBIDE AND A NUMBER OF OTHER
LARGE COMPANIES HAVE INVESTED SEVERAL HUNDREDS OF MILLIONS OF
DOLLARS IN LABORATORY AND MANUFACTURING FACILITIES.
INDUSTRIAL PARKS USUALLY ONLY PROVIDE SPACE WITH INCENTIVES IN THE
FORM OF FINANCIAL SUBSIDIES TO ATTRACT COMPANIES TO LOCATE IN THE
PARK. HOWEVER, THERE ARE VARIATIONS ON WHAT IS OFFERED. LOCALLY,
THE TECHNOLOGY CORRIDOR IN MDgNEAPOLIS IS AN EXAMPLE OF AN
INDUSTRIAL PARK. IT HAS GROWN VERY LITTLE SINCE IT WAS ESTABLISHED IN
1986. A MAJOR REASON IS THAT ABOUT ALL THE PARK OFFERS IS LAND FOR
BUILDINGS WITH LITTLE IN THE WAY OF FINANCIAL INCENTIVES AVAILABLE.
EVALUATION & MENTORING: EVALUATION AND MENTORING ARE IMPORTANT
BECAUSE MOST ENTREPRENEURS DO NOT HAVE MUCH BUSINESS EXPERIENCE
NOR THE RESOURCES TO PURCHASE THE NECESSARY CONSULTING SERVICE FOR
MANAGEMENT AND TECHNICAL ASSISTANCE. WITHOUT SUCH ASSISTANCE, 80%
OF NEW BUSINESS STARTUPS FAIL WITHIN FIVE YEARS; WHEREAS, WITH SUCH
ASSISTANCE, 80% SUCCEED.
IN MINNESOTA, VARYING DEGREES OF EVALUATION AND MENTORING
ASSISTANCE ARE PROVIDED BY SMALL BUSINESS DEVELOPMENT CENTERS
LOCATED AT COLLEGES AND UNIVERSITIES, BY THE MINNESOTA COOPERATION
OFFICE AND BY COMMUNITY ECONOMIC DEVELOPMENT PARTNERSHIPS.
THERE IS A DEFICIENCY IN THE AREA OF SUCH ASSISTANCE FOR INNOVATIVE
COMPANIES. THE ONLY SOURCE WHICH FULLY MEETS THE NEEDS OF
INNOVATIVE STARTUP COMPANIES IS THE MINNESOTA COOPERATION OFFICE.
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OPTIONS FOR ROSEMOUNT
THERE'S MUCH MORE TO BE SAID ABOUT THE ASSISTANCE INFRASTRUCTURE
FOR INNOVATIVE STARTUP COMPANIES; HOWEVER, WE MAY HAVE AN
ADEQUATE COMMON BACKGROUND FOR OUR DISCUSSION TODAY. THEREFORE,
AT THIS POINT, LET ME SUGGEST OPTIONS TO BE CONSIDERED BY ROSEMOUNT
FOR ATTRACTING INNOVATIVE COMPANIES. SINCE, AS YOU MAY HAVE
INFERRED FROM MY EARLIER REMARKS, I BELIEVE THAT ATTRACTING
EXISTING COMPANIES IS NOT IN THE BEST INTERESTS OF SOCIETY, NOR IS IT
THE MOST COST-EFFECTIVE APPROACH FOR A COMMUNITY, I WILL ONLY
REVIEW OPTIONS FOR ATTRACTING AND SUPPORTING INNOVATIVE STARTUP
COMPANIES.
SEED CAPITAL & EVALUATION AND MENTORING
FIRST, AND MOST IMPORTANT, TO BE CONSIDERED ARE THE OPTIONS OF
PROVIDING A SOURCE OF SEED CAPITAL ALONG WITH EVALUATION AND
MENTORING. WITHOUT THE COMBINATION, A COMMUNITY WILL HAVE LIMITED
SUCCESS ATTRACTING INNOVATIVE STARTUP COMPANIES. ON THE OTHER -
HAND, OVER TIME, A SEED FUND, PROPERLY MANAGED, ALONG WITH
EVALUATION AND MENTORING, WILL PROVIDE MORE JOBS PER DOLLAR OF
COST THAN OTHER TYPES OF SUPPORT. THE VALUE OF THE JOBS CREATED TO
THE COMMUNITY WILL BE MANY TIMES THAT OF THE COST. ALSO, QUITE ASIDE
FROM THE ADVERSE ZERO-SUM GAME ASPECTS, THAT SAME LEVEL OF
EXPENDITURE ISN'T LIKELY TO PRODUCE NEARLY EQUIVALENT RESULTS IN
JOBS BY ATTEMPTING TO ATTRACT EXISTING INNOVATIVE COMPANIES TO
'RE -LOCATE OR SET UP BRANCH PLANTS.
THERE ARE A NUMBER OF CRITERIA ATTENDANT TO A SUCCESSFUL SEED
CAPITAL FUND. LET ME MENTION THREE OF THE MOST IMPORTANT. ONE IS
THAT THE MINIMUM SIZE FOR A VIABLE SEED FUND IS $5 MILLION IN ORDER TO
AFFORD HIGH QUALITY PROFESSIONAL MANAGEMENT; HOWEVER, THROUGH
COLLABORATION, A CITY CAN PARTICIPATE IN A SEED FUND WITHOUT
INCURRING A COMMITMENT TO A FIVE MILLION DOLLAR INVESTMENT. THE
SECOND CRITERION IS THAT INVESTMENT DECISIONS MUST BE INSULATED
FROM POLITICAL PRESSURE. THIRD, SEED CAPITAL INVESTMENTS ARE ONLY
MADE IN CONNECTION WITH A CONTINUING EVALUATION AND MENTORING
PROCESS.
THE MINIMUM ANNUAL COST OF PROVIDING AN ADEQUATE LEVEL OF
EVALUATION AND MENTORING BY A SEPARATE ORGANIZATION LOCATED IN
ROSEMOUNT WOULD BE AROUND $300,000. AGAIN, THERE ARE COLLABORATIVE
ALTERNATIVES TO CONSIDER. ONE IS TO CONTRACT WITH THE MINNESOTA
COOPERATION OFFICE TO PERFORM THE FUNCTION. ANOTHER, WHICH I'LL
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ELABORATE ON LATER, IS A COMBINATION OF A SEED CAPITAL FUND WITH
EVALUATION AND MENTORING.
INCUBATOR
ALSO TO CONSIDER, AS PART OF A SUPPORT INFRASTRUCTURE, IS A SMALL
BUSINESS INCUBATOR, WHICH PROVIDES FLEXIBLE SPACE AND BASIC SERVICES
AT LOW COST. EXPERIENCE SHOWS THAT MINIMUM BUILDING SIZE FOR AN
INCUBATOR IS AROUND 30,000 SQ FT. OLDER BUILDINGS, ARE PREFERABLE IN
ORDER TO KEEP DOWN THE COST FOR OFFICE AND MANUFACTURING SPACE.
CONTROL DATA COMMENCED OPERATION IN A 75 YEAR OLD WAREHOUSE IN
MINNEAPOLIS. PLYWOOD PARTITIONS WERE USED, WHICH WERE EASILY
MOVED AS THE COMPANY GREW. IT WAS AN IDEAL ARRANGEMENT -- LOW
COST AND FLEXIBLE.
AN INCUBATOR COULD BE AN ENHANCEMENT TO SEED CAPITAL AND
EVALUATION AND MENTORING OR IN LIEU OF THEM. HOWEVER, AN
INCUBATOR, BY ITSELF, WILL NOT CREATE AS MANY JOBS AS THE
COMBINATION OF SEED CAPITAL AND MANAGEMENT AND TECHNICAL
ASSISTANCE. THERE IS ALSO A GOOD POSSIBILITY THAT THE ESTABLISHMENT
OF A SEED FUND AND ASSISTANCE WOULD DEVELOP AN ENVIRONMENT WHERE
AN INCUBATOR IS SET UP AS A COMMERCIAL ENTERPRISE WITH NO CITY
INVESTMENT REQUIRED.
INDUSTRIAL PARK
THE OPTION OF A RESEARCH OR INDUSTRIAL PARK CAN ALSO BE CONSIDERED.
HOWEVER, ASSURING THE SUCCESS OF EITHER, ESPECIALLY A RESEARCH PARK,
WILL REQUIRE AN INVESTMENT FAR GREATER THAN THE OTHER OPTIONS.
FURTHER, A RESEARCH OR INDUSTRIAL PARK CAN BE LOGICALLY CONSIDERED
AFTER THE OTHER TYPES OF SUPPORT ARE IN PLACE.
WCNI-UM
NEXT, I SHOULD DESCRIBE THE RELATIONSHIP WHICH IS BEING PLANNED
BETWEEN MY INSTITUTE AND THE UNIVERSITY OF ME-TNESOTA, BECAUSE IT
CAN OFFER THE MOST COST-EFFECTIVE APPROACH FOR ATTRACTING
INNOVATIVE STARTUP COMPANIES TO ROSEMOUNT.
2
BY WAY OF BACKGROUND, I SHOULD NOTE THAT A STEERING COMMITTEE,
COMPRISED OF REPRESENTATIVES OF MY INSTITUTE AND THE UNIVERSITY HAS
PREPARED A PRELI IINARY PLAN WHEREBY THE INSTITUTE BECOMES A PART
OF THE UNIVERSITY OF MINNESOTA. THIS PLAN HAS BEEN REVIEWED BY THE
PRESIDENT, AND THE NEXT STEP IS TO FINALIZE IT FOR THE APPROVAL OF THE
BOARD OF REGENTS.
THE INSTITUTE AT THE UNIVERSITY OFFERS A NEW KIND OF ORGANIZATION
FOR COLLABORATION AMONG INDUSTRY, ACADEMIA, GOVERNMENTS AND
COMMUNITIES TO FACILITATE THE APPLICATION OF TECHNOLOGY TO
TRANSFORM EDUCATION AND EXPAND JOB CREATION THROUGH INNOVATION.
IT WILL HAVE AN ENTREPRENEURIAL THRUST FOR BETTER UTILIZING THE VAST
RESOURCES OF A LEADING RESEARCH UNIVERSITY TO MEET THOSE GOALS.
SINCE THE SOURCE OF MOST NEW JOBS IS INNOVATION, I.E., THE PROCESS OF
DEVELOPING NEW AND BETTER PRODUCTS, INNOVATION MUST BE EXPANDED.
THE SINGLE BEST WAY TO ACCOMPLISH THIS GOAL IS TO IMPROVE OUR ABILITY
TO BRIDGE THE GAP BETWEEN RESEARCH OUTCOMES AND COMMERCIAL
PRODUCTS. DESPITE THE FACT THAT ENORMOUS AMOUNTS OF INFORMATION
AND TECHNOLOGY ARE CREATED IN UNIVERSITIES, GOVERNMENT
LABORATORIES AND LARGE FIRMS, ONLY A VERY SMALL PERCENTAGE IS
CONVERTED TO PRODUCTS AND SERVICES. A SIGNIFICANT PART OF THE
REASON FOR THIS SERIOUS DEFICIENCY IS INADEQUATE ASSISTANCE FOR
STARTUP COMPANIES, ESPECIALLY THE LACK OF SEED CAPITAL AND
COMPREHENSIVE TECHNICAL EVALUATION AND MENTORING.
A NEW COLLABORATIVE ASSISTANCE SUPPORT MODEL WILL BE DESIGNED AND
IMPLEMENTED BY THE INSTITUTE AT THE UNIVERSITY. IT WILL COMBINE SEED
CAPITAL AND CONTINUOUS AND COMPREHENSIVE EVALUATION AND
MENTORING BY EXPERTS UNDER ONE JURISDICTION. LET ME ELABORATE ON
THE ONE JURISDICTION ASPECT. TRADITIONALLY, SEED CAPITAL FUNDS AND
ASSISTANCE ARE PROVIDED SEPARATELY. THIS IS INEFFICIENT AND, ON
OCCASION, UNDERLIES STARTUP COMPANY FAILURES. HENCE, THE REASON
FOR HAVING THEM UNDER COMMON MANAGEMENT.
THE SUPPORT PROCESS BEGINS WITH A PROPOSAL BY AN ENTREPRENEUR FOR A
STARTUP COMPANY, BASED ON RESEARCH RESULTS WHICH HAVE THE
POTENTIAL OF BEING COMMERCIALIZED. THE PROPOSAL IS EVALUATED BY A
GROUP OF EXPERTS. IF THE PLANNED OUTCOME IS DEEMED VIABLE BY THEM,
SEED FUNDING IS PROVIDED TO COMMENCE DEVELOPMENT. EVALUATION AND
MONITORING ARE CONTINUOUS. AS LONG AS PROGRESS IS VIEWED AS
SATISFACTORY BY THE EXPERTS, SEED FUNDING IS CONTINUED UNTIL A
DEMONSTRABLE PROTOTYPE IS COMPLETED. AT THAT TIME, OTHER INVESTORS
ARE BROUGHT IN.
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EXPERTS TO PROVIDE EVALUATION AND MENTORING CAN BE READILY
IDENTIFIED THROUGH THE EXPERTS DATABASE SERVICES. AVAILABLE FROM
TELTECH, INC. THIS DATABASE CONTAINS PROFILES ON 10,000 EXPERTS. THE
INCENTIVE FOR EXPERTS TO PROVIDE THEIR SERVICES IS A SMALL
PERCENTAGE OF THE EQUITY OF THE STARTUP COMPANY.
THE SIZE OF THE SEED CAPITAL FUND IS SET INITIALLY AT $10 MILLION.
SEPARATE FROM THE SEED FUND WILL BE A MUCH LARGER VENTURE CAPITAL
FUND OF $100 MILLION.
FUNDING THE INSTITUTE WILL BE ACCOMPLISHED BY A COMBINATION OF
ENDOWMENT, GRANTS, CONTRACTS, INCOME FROM ROYALTIES, OWNERSHIP IN
COMPANIES AND OTHER SOURCES.
MORE SPECIFICALLY, THE SEED FUND WILL BE COMPARTMENTALIZED SO THAT
A SINGLE CITY CAN PARTICIPATE WITH ITS SEED MONEY DEDICATED FOR
STARTUP COMPANIES TO BE LOCATED IN THAT CITY. THE MINIMUM
INVESTMENT FOR A CITY IS $1,000,000. THERE COULD BE A ROSEMOUNT SEED
FUND IN THAT AMOUNT FOR FINANCING STARTUP INNOVATIVE BUSINESSES IN
ROSEMOUNT. COUPLED WITH THE SEED FUND WOULD BE EVALUATION AND
MENTORING. THE COST OF THE LATTER WOULD BE SIGNIFICANTLY LESS THAN
IF PROVIDED BY A SEPARATE ORGANIZATION IN ROSEMOUNT.
IT IS ESTIMATED THAT SEED CAPITAL FOR STARTUP COMPANIES AVERAGES
AROUND $250,000. THUS, $1 MILLION WOULD GET FOUR COMPANIES STARTED.
IT IS EXPECTED THAT CITIES WILL WANT TO PERIODICALLY ADD FUNDING
COMMENSURATE WITH THEIR JOB CREATION GOALS. PART OF THE STRATEGY
IS TO REQUIRE A REPAYMENT PROVISION OF THE SEED INVESTMENT BY
STARTUP COMPANIES WHEN THEY REACH A CERTAIN STAGE OF SIZE AND
PROFITABILITY. THIS PROVISION SHALL RECOVER BOTH THE INITIAL SEED
INVESTMENT, PLUS ADDITIONAL GAINS APPROPRIATE TO THE NATURE AND
TIME PERIOD OF THE INVESTMENT. THERE MAY BE EXCEPTIONS WHERE THE
SEED FUND WILL RECOVER ITS INVESTMENT WHEN COMPANIES GO PUBLIC OR
ARE ACQUIRED BY OTHER FIRMS. IN ANY EVENT, RECOVERED FUNDS ARE
REINVESTED SO THAT THERE IS A PERMANENT SOURCE OF SEED CAPITAL.
WHAT I HAVE SUGGESTED IS IN CONSONANCE WITH EXISTING ENTERPRISE
DEVELOPMENT PROGRAMS IN THE METROPOLITAN AREA, SUCH AS METRO
EAST, WHICH SERVES PART OF DAKOTA COUNTY OR THE PROPOSED DAKOTA
COUNTY ECONOMIC DEVELOPMENT PARTNERSHIP. BY DESIGN, THESE
PROGRAMS DO NOT INCLUDE PROVISION FOR ADEQUATE SUPPORT FOR
INNOVATIVE STARTUP COMPANIES.
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THE SUGGESTED APPROACH IS ALSO IN CONSONANCE WITH LIKELY FUTURE
TRENDS IN STATE AND FEDERAL INVESTMENT IN INNOVATION, ESPECIALLY
THE LATTER. FOR EXAMPLE, CONGRESS IS IN THE PROCESS OF TRIPLING THE
SIZE OF THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM, WHICH
EARMARKS A PERCENTAGE OF FEDERAL AGENCY R&D BUDGETS FOR SMALL
BUSINESS TO SHARE IN THE COST OF THE DEVELOPMENT OF NEW PRODUCTS.
THIS ACTION AND OTHERS BEING CONSIDERED IS A REFLECTION OF THE
GROWING RECOGNITION THAT THERE MUST BE INCREASED FEDERAL
GOVERNMENT SUPPORT FOR COLLABORATIVE EFFORTS WITH COMPANIES AND
COMMUNITIES TO EXPAND INNOVATION TO CREATE MORE GOOD JOBS.
ALSO, INVESTMENT IN JOB CREATION MUST BE INCREASED BY COMMUNITIES IN
ORDER TO GAIN MA)GMUM BENEFIT FROM GREATER FEDERAL SUPPORT.
INVESTMENT BY MOST COMMUNITIES IN JOB CREATION IS MINUSCULE,
COMPARED TO THEIR INVESTMENT IN OTHER AREAS SUCH AS SCHOOLS. YET
GOOD JOBS AND GOOD EDUCATION ARE EQUALLY IMPORTANT. THE PRESENT
SERIOUS LACK OF ENOUGH GOOD PAYING JOBS WILL ONLY GET MORE ACUTE
WITHOUT GREATER COMMITMENT TO JOB CREATION BY BOTH THE FEDERAL
GOVERNMENT AND COMMUNITIES. OF COURSE, THOSE COMMUNITIES WHICH
MOVE AGGRESSIVELY WITH NEW APPROACHES AND GREATER INVESTMENT
WILL BENEFIT MOST FROM INCREASED FEDERAL SUPPORT.
MUCH MORE CAN BE SAID ABOUT THE SUGGESTED APPROACH; HOWEVER, I'LL
STOP AT THIS POINT, SO THAT WE CAN DISCUSS THE VARIOUS ASPECTS OF
ATTRACTING INNOVATIVE COMPANIES TO ROSEMOUNT.
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9
REPORT
OF
THE WELLSPRING WORKGROUP ON SEED/VENTURE CAPITAL
DECEMBER 1990
Introduction
The Wellspring Workgroup on Venture Capital was formed to consider strategies to
provide more risk capital for smaller businesses and start-up ventures in Minnesota. The
Work -group defined risk capital to be financing for the development and growth of
companies who are still unable to qualify for traditional sources of bank credit, secured
asset financing and public equity. While new enterprises formation is critical to job
growth and the State's economic well being, new companies and small businesses are
have the most dificult time finding the capital they need.
This topic is particularly timely in the current environment of tighter bank credit.
Problems in both the banking and savings and loan industries coupled with declines in
the stock market have reduced the availability of risk capital. Further while in the early
80's there was a boom in the growth of professionally managed venture capital funds, the
increase in their size has for many funds resulted in a shift away from investments in
smaller and start-up stage companies.
The Workgroup entered into its work mindful of the fact that many new venture
proposals simply "don't deserve capital". At the same time, experience has shown that
many ventures have succeeded when needed capital was found even though they had
previously been turned down by venture capitalists. As one successful venture investor
observed, "working to make a new business succeed is more important that how the deal
initially looks on paper."
Finally, the Work -group gave special priority to the need for risk capital in businesses
located outside the seven county metropolitan area.
Wellspring Workgroup on Venture Capital
December 1990 Report, Page- 2
Findings
The Workgroup reached these conclusions:
1. Risk capital for smaller businesses and start-up ventures is available
generally only from private investors.
2. Institutional venture capital for companies whose sales are not likely to
exceed $15,000,000 in 5 years is almost non-existent.
3.Outstate firms are at a significant disadvantage in attracting risk capital.
4. Early stage companies require both capital and management assistance.
5. State tax credits are needed encourage more private investment in start-ups.
Comments on Findings
Risk Capital in General: The availability of risk capital for early stage ventures is a key
factor in both new business formation and community economic growth. The need is
greatest in businesses that apply technology to develop products and local resources for
sales outside the immediate community and the state. These same companies are the ones
that result in the most new jobs and incremental spending in the community. New money
flows through local jobs and purchases of support services to benefit local retail trade.
In the early stage work must be done to show product feasibility, develop prototypes, and
gather evidence of market potential. Seed capital to cover these expenses is needed
before other sources of financing can be approached. First round financing can vary
greatly ranging from $50,000 to $250,000. "Sweat equity" and investments from from
family and friends are the most common ways first round capital is raised. There are also
numerous sources of economic development monies that are used.
But entrepreneurial development is no where near the level it could be if more capital
were available. Scarcity of capital greatly extends the time required for starting up new
ventures and may result delays that even cause the business to miss the "window" of
market opportunity.
Capital for Smaller Ventures: There are many niche market businesses that may reach $5
to S10 million in annual sales and be strong, profitable companies. But these are much
less attractive to traditional venture capital funds because of their smaller size. Even
though they are smaller, their need for risk capital often exceeds amounts that can be
raised from a few individuals. This is the "gap" in the risk capital supply that needs
public attention. V
Institutional venture capital fund managers meeting with the Workgroup members
underscored the hard fact that most funds focus on businesses that show the potential for
rapid growth well above the $10 million level. Traditional venture capitalists are looking
for a very small category of opportunities where rapid growth is likely and there is a high
probability for subsequent public stock offering.
Wellspring Workgroup on Venture Capital
December 1990 Report, Page- 3
Funds managing $50 million and up typically concentrate their investments in perhaps 20
to 35 companies. In short they prefer ventures where they can place between $1 and $3
million. Several of the smaller venture capital firms told Workgroup members that they
didn't look a deals under $250,000.
The Workgroup concluded that there is a definite "gap" in the availability of funding for
small and start-up companies.
Seeing the Oor)ortunity: Seeing the investment opportunity is often very difficult. A
local firm reported that after failing to interest venture capital firms, it finally found a
corporate investor. One year later pursuing the same business with the same product, a
venture capital firm that had previously said "no", approached them willing to invest
twice as much as the company had originally requested.
What was different? The product concepts were seal and tangible. There were customer
contracts evidencing the market interest. This case serves to make the point that at the
start-up stage even experienced venture capitalists frequently don't see the business
opportunity.
Outstate Companies: Companies located outside the seven county metropolitan area are
at a significant disadvantage. Generally there isn't a local source of institutional risk
capital. Generally there are fewer private individuals able to provide risk capital.
Additionally, the opportunities for "networking" to finding both investors and
knowledgeable business assistance is limited.
Yet there exists talented people with valid business concepts and a capable workforce to
harvest these opportunities throughout the State. Providing incentives for risk capital in
outstate Minnesota is good public policy because a stronger, diversified rural economy
benefits the entire State.
Programs in Other States: Other states have already recognized the importance of
providing programs to support entreprenurial growth and new business formation.
Massachusetts has provided public funds to its Massachusetts Technology development
Corporation and the Massachusetts Community Development Finance Corporation.
xA �P
Michizan;several programs including the Michigan Venture Capital Fund and the
Michigan Strategic Fund which has programs for seed capital investment and product
development.
New York has the Corporation for Innovation Development which is a state capitalized
venture fund. for technology-based start-ups and young growing business ventures.
Pennsylvania through the Ben Franklin Partnership has a Seed Fund leveraging private
investment capital investments.
Tax Credits have also been used in other states to promote private investment. Indiana,
Kentucky, Iowa, Missouri, Oklahoma, South Carolina and West Virginia have tax credit
programs. The credits offered typically range between 30 and 50 percent.
Wellspring Workgroup on Venture Capital
December 1990 Report, Page- 4
The Council of State Policy &Planning Agencies published in November of 1989 a
report on State Technology Programs. This report states:
"One powerful way in which new technologies enter the market
place in the United States is through start-up companies... formed
to commercialize research."
The report goes on to say "state intervention" should change the very nature of the capital
markets so that private firms begin making the kinds of investments needed to
commercialize new technologies. Public monies should be used to leverage private
capital to make more investments needed to commercialize new technologies.
Minnesota Programs: The Minnesota Legislature has authorized several programs to
allow the state to provide financial assistance to new start-up companies. The State Board
of Investment was authorized to invest funds in venture capital funds. Over the past four
years the State Board of Investment has made a substantial commitment to venture
capital formation in Minnesota. However, these funds have been used to finance mature,
established enterprises and have not been available for new, start-up companies.
It has given the Rural Development Board authority to make funds available to establish
regional revolving loan funds to encourage greater private investment. The Board is also
empowered to make cghallenge grants to regional organizations to encourage private
investment. The regional organizations must be non-profit organizations and funds
allocated to each must be used to establish a revolving loan fund for new or expanding
businesses in Minnesota. These funds are not available for equity investments.
The Greater Minnesota Corporation is authorizied to make financial assistance available
for long-term economic growth and job creation through innovation and new product
development. Thus far most of the GMC programs have been research grants for work
done in the University System on projects related to commercial requirements. But the
GMC has not established a program of seed capital investment. Although the GMC has
the authority to invest in new start-up companies, recent actions by the Legislature to
limit the allocation of lottery proceeds to the GMC has resulted in a budget which is
insufficient to provide seed capital for new companies.
Minnesota offered a Small Business Equity Investment Credit of 30 percent of the net
equity investment in excess of $25,000 in a qualified small business. These credits were
available in 1984 to 1986.
Regarding Tax Credits: The Workgroup discussed avariety of incentive options
including providing Minnesota tax credits for investors in qualifing small businesses and
start-up companies. A similar tax credit had previously been available for a short time.
Coupled with its other recommendations, the Workgroup concluded that a tax credit
incentive given time would encourage more private investment in start-ups and in small
businesses located outside the metropolitan area.
The experience with the 1984-86 investment tax credit program supports the Taskforee's
conclusion that tax credits can be an effective incentive. There were critics of the 84-86
tax credit program that said it wasn't widely used. But several factors need to be
considered. First it takes time for the public to become aware of changes in the tax code
and to respond. Little effort was made to publicize these tax credits.
Wellspring W4rkgroup -on Venture Capital
December 1990 Report, Page- 5
Second, this was a period when major changes in the Federal tax code were being
proposed and later enacted. Attention was being diverted during this period to the Federal
tax "simplification" legislation and the State's response. Tax advisors were discussing
changes that would takeaway many credits and deductions and change the tax benefits of
many investments.
Third, the credit was on thenet equity investment in excess of $25,000". For all but the
very wealthy, venture investments made by individuals are nearly always under 525,000.
This restriction on the claim effectively excluded its application for most seed capital
investments. In effect the program provided a very small credit or no credit most private
investors. Even with this limitation, the Minnesota Department of Revenue reported
claims for over $500,000 in credits in the last two years of the program.
Alternative Strategies:
A number of ideas and proposals were reviewed by the Workgroup. Two of the concepts
discussed at some length were:
1. Tax credits for investment in R & D in small companies.
2. A fund for providing liquidity for private investors in small companies
While merit was found in these concepts, the Workgroup concluded it should focus in on
one integrated strategy that leverages more individual risk capital and one that involves
local community participation. The result of this focus is found in the following
recomendations. These recommendations envision venture fund managers and
community leaders collaborating to organize several regional funds. To better see how
this would be done, a hypothetical "prospectus" was prepared for such a fund and is
included with this report.
The Workgroup's recommendation provides an incentive and opportunity for
experienced venture fund managers to organize and raise private risk capital that is
specifically directed to filling this "gap" in available risk capital. Funds raised using these
incentives are required to commit a significant portion for investment outside the seven
county metropolitan area.
Minnesota tax credits for individuals add a needed incentive to raise additional risk`
capital. The use of tax credits is justified by the public policy benefit of providing more
venture investment capital outside the Twin Cities. This is State intervention to
encourage more balanced growth and economic development.
The proposed plan takes advantage of small business assistance resources to reduce the
administration costs of these these regional venture funds unds. Finally, the proposal
advocates the use of experienced risk capital managers, thereby adding an "organizing
force" to attract capital and additional support of new ventures through their links to
management assistance.
Wellspring Workgroup on Venture Capital
December 1990 Report, Page- 6
Finally, while there has been recognition in the Legislature in the past of the need for
stimulating greater investment in rural Minnesota, previous -programs have not directly
addressed the critical shortage of "seed capital" througout the State.
Recommendations
The Workgroup after ten months of meetings involving 22 participants, made the
following recommendations:
1. That public elomic development funds be used to leverage private
capital to establish a number seed/venture capital funds.
2. That these Funds should be in part regionally focused to make more capital
available to new companies and small businesses outside the seven county
Metropolitan area.
3. That these Funds should involve local community participation in the form
of a modest level of matching investment.
4. That the State's contribution of venture funds be used as a match of private
and community investment capital following the general concept of the
Federal Government's SBIC program.
5. That $6 million in public match dollars be made available for use in up to 5
regional funds over the next three years.
6. That private investors in these specially chartered, Funds be elgible for
Minnesota Tax Credits of 16% per year for three years on both their
investments in the regional seed/venture capital funds and in direct
investments made in qualifying small businesses.
7. That State tax credits of up to $500,000 in 1991 and $1.5 million per year
thereafter be made available for private investors in connection with this
program .
Fund Prospectus
Attached is a "hypothetical" prospectus of the kind of regional seed/venture capital fiend
envisioned by the workgroup. It provides more detail on the broad recommendations
cited above.
WellVC.D31
. Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional Seed/ Venture Capital Fund
October 31, 1990, Page -1
PROSPECTUS
REGIONAL SMALL BUSINESS
SEED/VENTURE CAPITAL FUND
Summary of the Offering
The securities offered here are common stock in the Regional Seed/Venture Capital Fund
(The Fund). The Fund is a Minnesota Small Business Seed Capital Corporation qualified
to participate in Minnesota's Capital Leveraging Program which matches private and
community investments made in certain qualifing seed capital funds.
Up to $2,000,000 is offered in 100 share units of $5,000 to certain qualified investors.
Investors are required to purchase a minimum of three Q) units ($15,000). The offering
is contingent upon a minimum subscription of $300,000. See certain restriction on
eligible investors.
Z.
The Fund's Investment Policy
The Fund shall make investments in selected companies showing both prospects for
above average profitability and meeting very specific requirements described further in
this Offering Memorandum. These investments shall fall within the class of investments
frequently described as "seed capital" or "venture capital".
The selected investments will primarily be in companies which are in a very early stage
of development and growth. These investments shall be equity or equity -like and -there
will most likely not be any market for investment securities held by the Fund for several
years, if ever.
These investments shall entail a high degree of risk since often both products and
managements of the Fund's portfolio companies may be unproven. : r
The purpose of the Fund is to make profitable investments in (1) very eary stage-
companies
tagecompanies and (2) in businesses that are less likely to reach the large size needed now to
attract traditional venture or public investment capital. This niche in the investment
spectrum is generally not pursued by traditional venture capital funds which are seeking
opportunities that have a strong potential of being candidates for public stock offerings.
Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional Seed/,Venture Capital Fund
October 31, 1990, Page- 2
The Fund's portfolio companies will most likely reach a mature size of under $15 million
and some may even be smaller.
Despite the smaller size potential of the opportunities to be considered by or sound,the , the
Fund Managers shall base their investment decisions upon the prospects
profitable businesses.
The Managers of the Fund shall where prudent and practical plan to require repayment
provisions in the agreements governing the Fund's investments. These repayment
provisions shall be triggered when companies reach a certain stage of size and
profitability. These provisions shall both recover the initial investment plus additional
gains appropriate to the nature and time period of the investment. These repayments
depend upon the investee companies achieving and sustaining profitable operations.
It is anticipated that the Fund will recover its investments over a period of years primarily
from these repayment provisions. There may be exceptions where portfolio companies
are purchased by other firms, where the companies are able to secure financing to
l together with an appropriate capital gain, or
accelerate the repayment of invested capita
where the Fund's interest in a company can be sold to other investors.
Fund Manager
The Fund will be managed by an experienced venture capital investment management
firm.
The Fund Manager shall have fiduciary responsibility for the Fund and make all
investment decisions. A regional advisory committee shall be formed to insure
involvement with communities in the region.
The Fund Manager will be compensated by (1) a small administrative fee of two (2)
percent per annum of the aggregate, committed capital including the Leverage Funds plus
(2) an incentive fee (carried interest) of twenty (20) percent of the net capital appreciation
of the Fund's assets. The incentive fee shall be paid at the time capital and capital gain
disbursements are made to the Fund's investors.
f
The Fund Managers will be assisted by qualified, community based, non-profit business
assistance centers operating in the region. These organizations do initial screening, of
companies seeking seed capital, provide assistance with business plans and serve as local
liaison with the Fund's portfolio companies.
It is not generally economical to manage a seed capital fund of less than $5 million.
However, because this Fund is one of several managed by the Fund Manager
administrative costs are spread over a larger base. Also the support provided by the
business assistance centers absorbs some of the costs associated with maldng smaller
seed capital investments.
Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional Seed/ Venture Capital Fund
October 31, 1990, Page- 3
Restrictions on Investments
In order for The Fund to qualify as a Minnesota Small Business Seed Capital
Corporation, it must restrict its business to investments that meet certain conditions.
These conditions are also required in order for The Fund to qualify for Minnesota's
Capital Leveraging Program.
1. Regional Business Employment
In order for the Fund to qualify for leveraging funds it must consider companies
that have a principal part of their operations located in the region. The test for this
requirement is that at least fifty (50)0 of their employees (excluding sales and
support personnel located to serve customers elsewhere in the country) during the
companies first three years shall be located within the region.
2. Nature of Business
The business of the prospective investee companies shall be either a
manufacturing or technology based service business whose ultimate primary
market is outside the immediate locale of its business location in the region. The
objective of this requirement is to exclude all retail and wholesale businesses
essentially limited to the community in which the business is located.
Technology based services are defined as services in which a significant
component of the service is based upon technology , expertise and related
equipment and facilities. An example would be a testing laboratory in which
specialized equipment and facilities are essential to the service provided.
3. Seed Capital Investments
At least two thirds (66 2/3%) of the Fund's capital shall be invested in Seed
Capital Investments. These are defined as investments in the earliest stage where
development of a prototype product is still necessary and where market
acceptance of the product may still be uncertain.
It is anticipated that the Fund Managers shall make a number of small "seed,
investments" out of which larger follow-on investments shall be made in those
that are most promising. The Fund's success will depend upon the ability of its'
portfolio companies to obtain additional capital.
r .
The Fund Managers may take the initiative in some cases and start the
commercialization of product technology while recruitment of a management
team is still underway. This option is intended to give the Fund the greatest
flexibility of finding and locating attractive investments within the region.
Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional -Seed/ Venture Capital Fund
October 31, 1990, Page -'4
Minnesota's Capital Leveraging Program
1. Qualified Minnesota Small Business Seed Capital Fund
The Fund has been qualified as a Minnesota Small Business Seed Capital
Company ("MSBSC") and as such is eligible for two {2) rounds of leveraging
funds. The initial match may be called down upon certifying that the Fund has
secured the initial, minimum requirement of $300,000 in private investment
capital from individuals or companies.
2. Community Agency Investments
A minimum investment from at least one local community organization is
required in order for the Fund to obtain the MSBSC designation. This minimum
investment�is $300,000. These community monies may be from non-profit,
community based organizations, local units of government or other public
sources. The total of the community based investment in the Fund and the private
investment in the Fund will be matched by Minnesota's Capitol Leveraging
Program.
The Fund has obtained a $300,000, commitment from a community based
organization in the region.
The following table shows the total funds expected to result after taking into
account the two rounds of matching public funds for two cases. The first column
shows the total fund size if only the minimum Offering amount is raised and the
second in the event this Offering raises $500,000 of private capital.
Commutation of Fund Size
From This Offering
$300,000
300.000
$500,000
300.000
Community Funds
$600,000
$800,000
Total Base
Public Funds
First round
$600,000
$800,000
Second round
600.000
�
$1,_00,000
-0.000
80
$1,600,000
Total Public
Total Fund Capital
$1,800,000
$2,400,400
3. Annual Reporting Requirements
The Fund is required to make certain annual reports as to the nature of its
investments and its investment performance. Provided the Fund's investments
Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional Seed/ Venture Capital Fund
October 31, 1990, Page- 5
Minnesota Capital Leveraging Program, the Fund shall be eligible for a second
round of leverage monies. The Fund is elgible to request a commitment for the
second round at such time as the Fund has invested 75% of its then available
capital. The Fund shall be elgible for the second round for a period of four years
commencing from the date of the first draw down of leverage dollars.
4. Capital Leverage Program and Community Investment Shares
The Capital Leveraging Program and participating community based
organizations will receive Class B common shares in the Fund to beheld by their
designee. These shares participated in distributions of capital gains up to a
maximum of eight (8) percent per annum enhancing the return available to the
private investors.
These Class B leveraging shares have a subordinated liquidation preference. In
the event the Fund experiences losses, the capital invested by pn_vate investors
will be returned first, and then to the extent possible the community and Capital
Leveraging Programs capital will be returned.
Minnesota Seed Capital Tax Credits
Investors purchasing shares in The Fund shall be eligible for a Minnesota Tax Credit on
the amount of direct cash investment made in the Fund. This Seed Capital Tax Credit is
also available for private investments made directly in qualified Minnesota companies.
The total tax credit is spread over three years and amounts to an annual credit of sixteen
(16%) percent of the dollars invested. This credit will reduce dollar for dollar the
investor's Minnesota State Tax liability. The amount of this credit shall also reduce the
investor's tax basis for these investments.
For example, a $10,000 investment in the Fund or a qualified company results in three
annual credits of $1600 each to be applied against the person's Minnesota tax liability.
The first credit is applied in the year in which the investment is made. The second and
third credits are applied against total taxable income in the two subsequent years.
The State has a ceiling on the amount of these tax credits available in each year. For 1991
the ceiling amount is $500,000. For subsequent years the ceiling is $1.5 million.
Upon completion of this Offering, The Fund shall obtain a certificate for each investor
authorizing them to claim this special Tax Credit. The Fund has already obtained a
commitment insuring the Seed Capital Tax Credit is available.
Because of the State's ceiling on available tax credits, Companies seeking to offer them
to private investors must obtain an investment commitment and then apply for a
certificate evidencing the actual tax credit that the investor will receive.
Final: Wellspring Taskforce on Venture Capital
Prospectus for Regional Seed/ Venture Capital Fund
October 31, 1990, Page- 6
Comments
This "example" is not a complete Offering Memorandum. It's purpose is to convey a
0
sense of how the proposed Minnesota Capital Leveraging Program, regional
Seed/Venture Capital Funds and the Minnesota Seed Capital Tax Credits are intended to
work.
WellPros.D' ) 1
V