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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. w 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. 2 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 3 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. 4 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 5 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. 7 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. 8 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. Lq 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