Start-ups to be sold after 5-7 years to yield a profit
The new nonprofit technology transfer outfit in southeastern Wisconsin is seeking private investment in the futures of tech companies through two for-profit divisions.
Techstar, a nonprofit dedicated to turning research from area universities into for-profit businesses, received $1.5 million from the state – far short of its initial request for $6 million. To close the gap, a spin-off called Techstar Early Ventures, LLC, will seek investors interested in an equity position in tech start-ups the entity nurtures through the initial stages of development. TS Early Ventures will provide strategic planning, marketing and management services to start-ups in exchange for an equity position in each new corporation.
An additional spin-off, TS Ventures Fund, LP, would seek capital investors for the purpose of making cash investments in start-ups working with Techstar and TS Early Ventures.
Operating expenses of the nonprofit foundation will initially be drawn from private investment in TS Early Ventures but, in time, Techstar itself will seek grants and donations to fund its efforts in the areas of grant writing, networking and promotion of entrepreneurship. Initial expenses drawn from money invested in TS Early Ventures will include the lease for the group’s 3,200 square feet of office space and the salaries of executive director Lane Brostrom and program director Judi Murphy – as well as the fees of newly-recruited managing partners.
Managing partners include:
"I am a special limited partner working part-time," Rusinow said of his role with TS Early Ventures. "I will retain my role as managing director of Silicon Pastures."
Rusinow said that, like him, the other partners are drawing a fee for being a part of the Techstar mission, but may also be receiving an equity stake as part of their compensation.
Fees paid to those managing partners are worthwhile as, according to Brostrom, 85% of the appeal a company may have to venture capitalists is contingent on the quality of the management team.
Built to flip
Because of the profit stake TS Early Ventures and private investors will take in client companies, the goal of the organization will be to build companies that can be sold within a predictable timeline.
"We are banking on our ability to successfully see companies through the acquisition process," Brostrom said.
Ideally, according to Brostrom, firms working with TS Early Ventures would be sold within seven years – which would constitute a liquidity event for investors.
According to Rusinow, investors are looking at the Techstar spin-offs as a sort of high-tech entrepreneurial mutual fund.
"There has been interest on the part of several angel investors in the region to participate in early-stage start-ups without having to assess each individual company," Rusinow said. "TS Early Ventures as well as TS Venture Fund provides an opportunity for a private equity investor to get diversified quickly."
Sidebar – Epet leverages scanning technology
By Charles Rathmann
SBT Reporter
One client of TS Early Ventures – the for-profit Techstar spin-off – hopes to generate imaging technology that will help identify tumors in the human body – and explosives in airline luggage.
Epet, LLC, is the brainchild of William Gregory, dean of the College of Engineering and Applied Science at the University of Wisconsin-Milwaukee. Gregory brought to UW-Milwaukee three patents on ideas generated through research at the University of Virginia. Techstar executive director Lane Brostrom said attracting Gregory to the area was a major coup.
"This was part of UW-Milwaukee’s push to recruit entrepreneurial faculty members," Brostrom said.
The technology Gregory is researching is known as electrical impedance tomography. Various materials conduct and store electricity in specific ways. By combining a device like an MRI that creates a three-dimensional picture of an object with new technology that can identify molecular make-up of objects based on how they handle electric current, tumors could be identified without a biopsy.
Apart from diagnostic imaging, the technology could also be used to screen luggage in airports, according to Brostrom.
"Both markets are absolutely hot for development and technology grants," Brostrom said. "Cancer tissue is highly different from normal tissue."
Likewise, explosives conduct and store energy differently than other materials normally found in carry-on or checked luggage.
"There have been a number of attempts to take a picture using the electrical methods that were not super successful," Gregory said. "But now there is a great hope that we could build a machine that would allow you to look at a picture that is not just a shadow of the organ but will examine properties of the tissue."
The key to success will be the technology’s ability to merge a variety of information on how a material handles electricity with a graphical representation of an object. Researchers will need to measure conductivity – the ability of matter to transmit electricity – as well as the dielectric constant – a measurement of how slowly or quickly current travels through an object and how much is dissipated in the process.
"We look at conductivity – the ability to transport charge," Gregory said. "But we also look at the dielectric constant, which also takes into consideration the ability to store a charge. You can get a handle on either one, but it is best to use both. If you look at just one frequency signature – some (readings on disparate materials) would overlap. But when you look at the dielectric constant as well as conductivity, oftentimes they don’t overlap."
Gregory is UW-Milwaukee’s representative to Techstar – and serves on Techstar’s board, so it is no surprise he enlisted the organization to help him commercialize his research.
More research
The next step for EPET will be … more research.
Before emigrating to Wisconsin, Gregory’s research was funded by a $30,000 grant from the CAMCARE Health Education Research Institute in Charleston, W.Va. Gregory’s work also benefited from $160,000 from the West Virginia Association Research Foundation.
Here in the Badger state, EPET is up for funding through the Small Business Innovation Research (SBIR) program. SBIR grants are offered by 10 different federal agencies. To help Wisconsin firms compete for these federal dollars, Techstar helped secure funding for a new grant-writing position with the Wisconsin Department of Commerce. SBIR Program Specialist Laura Baranowski helps firms in Wisconsin assemble successful applications for the grants, and is working with EPET on applications for funds from the Department of Transportation and the National Institutes of Health (NIH).
Baranowski said that the application process could be long, but that NIH in particular was working to compress its timeline.
"You submit, and about four months later you get your score," Baranowski said. "You can usually tell from that score whether you will be funded. Two months later, you get told if you are funded or not for sure, and a month later you get your money. The pluses are you get to keep your intellectual property rights. You don’t have to give any equity away."
Baranowski also said that SBIR grants are considered a stamp of approval by investors.
"SBIRs give validation to your technology and that’s something that venture capitalists look for," Baranowski said.
Gregory said that given the successful completion of research, EPET could in fact be ready for sale within the five- to seven-year timeline favored by TS Early Ventures.
"The plan would be to do all of these experiments – prove the principle and get the design done for that machine," Gregory said. "If we were to be successful in the first phase by getting these SBIRs, that would be about a year from now. The second phase would require another two years. We have done a Gantt chart and worked out the various tasks. So it would be three years before we had a box that was capable of being tested in a hospital or doctor’s office."
Gregory implied that while he was confident in the success of EPET, investors in tech start-ups realize that there is risk – which is part of the appeal of investing in a group of companies through TS Early Ventures and TS Ventures Fund.
"We have signed an agreement with TS Early Ventures. They are providing services, providing personnel for grant writing, finding strategic partners, getting us postured so we can be in the appropriate place at the appropriate time," Gregory said. "There is language in the agreement with Early Ventures that gives them some of the equity of the company. That is a pretty enlightened way to do things. The people who put the bucks in know that not all of these will be successful. But that is the idea of the pooling aspect. It allows you to examine some of these things in a realistic way."
April 12, 2002 Small Business Times, Milwaukee
