The founders of an Oregon City startup came to a startling realization last year: Their business model, automated financial advice, wouldn’t fly with securities regulators.
Their company, InvestorInMe, was out of the race before it even left the starting gate.
Co-founder Nathan Taggart said his team might have given up right then had they had not just been accepted into the nascent Portland Seed Fund, a publicly funded effort to help nurture the region’s startup community.
The fund’s managers and affiliated mentors helped Taggart’s team come up with a new concept and start over with a new company, LaunchSide, which helps brick-and-mortar companies develop an online presence.
They now employ seven in Tualatin, and Taggart said they’re building a stable, if modestly sized, business. He credits the seed fund with rescuing their entrepreneurial spirit.
“I think the fund is the reason we’re still here,” Taggart said.
The Portland Seed Fund is an experiment to see whether public dollars can spur follow-on private investment and whether small amounts of money — scattered across a couple dozen newborn businesses — can fertilize an enduring startup community.
At its halfway point, the initial, $3 million fund has now backed 17 companies in two groups. It announced its third class of startups last week, and plans a fourth early next year.
Each company starts off with a $25,000 investment and gets more later, based on its progress.
Seed fund managers are preparing to go back to their backers and seek more money — including additional public dollars — for a second, $5 million fund they hope to launch next year.
A year in, it’s too soon to judge the portfolio’s financial performance. Startup companies take years to mature, and it may not be clear for years what, if anything, they will return to their backers.
Early signs are, in some ways, encouraging: Every one of the 17 companies in the Seed Fund’s first two classes is still in business, and they’ve collectively raised nearly $16 million in addition to the $600,000 invested by the fund.
It’s more difficult, however, to assess how the fund is using public money. Because of its unusual structure — a mix of private investment and public money granted outright to the fund — the fund isn’t subject to state public records laws.
That means information the fund won’t disclose, including its management fee structure and the number of applicants it receives, is unknown.
The consensus among Portland startups and investors is that the funding environment has improved considerably over the past two years.
The Seed Fund’s managers say they’re part of the reason for that, and that it’s time to double down on Portland’s gamble.
“We’ve learned that the model really can work in Portland,” said Jim Huston, a former Intel Capital investment officer and one of the seed fund’s two managers. “Twenty-five thousand dollars can really make a real impact, combined with the credibility that comes with Portland Seed Fund, combined with the mentorship we bring.”
Mixing it up
The fund’s first 17 startups include a wide range of companies, from shoot-for-the-moon startups to small firms that aspire simply to build a strong business.
That’s by design, according to Angela Jackson, the fund’s other manager. She said they look for a mix of promising companies that bring different experiences and goals.
“They have to pass muster individually as an investment,” she said. “Then they have to pass muster with how they fit into our class: What they give, as well as what they get.”
Amber Case didn’t need the seed fund’s money for her Portland-based mobile technology startup. Venture capitalists were already circling when Geoloqi joined the fund last year.
But Case said she wanted to draw on the fund’s network of veteran entrepreneurs, and to demonstrate that it’s possible for promising companies to raise money from investors close to home.
“We thought if we take money from (Portland) investors and did well, then we could show that you can do well here,” Case said.
Startups — software companies, in particular — became an economic priority for the city under Portland Mayor Sam Adams, who viewed them as an opportunity to build a new business cluster in a high-paying industry.
But the city was building almost for scratch. Oregon technology endured a lost decade after the dot-com crash, a withering dry spell when few large technology companies emerged and entrepreneurs struggled to attract capital.
Portland’s startup scene has matured, Case said, and more investors inside and outside the state are willing to back Oregon companies. But Case was emphatic that the city’s support for the seed fund is crucial, as much for the message it sends as for the dollars involved.
“I think it’s really important for the city to be involved,” she said, “because it shows that they care.”
Though the seed fund has received a great deal of attention — it’s appeared in The Wall Street Journal and elsewhere –the initial $3 million stake isn’t a lot of money, even by the standards of early-stage investments.
The economics of small funds are difficult, according to Eric Rosenfeld, manager of the Oregon Angel Fund, which raises $3 million every year to invest in startups further along than those the seed fund targets. Its typical stake is between $400,000 and $600,000.
When you’re investing smaller amounts of money, Rosenfeld said, management fees will eat into your capital and you may not have enough money to chase really big opportunities.
Still, he said, the Portland Seed Fund is worth what the city and others are contributing to it.
“The seed fund is helping create visibility for Portland as a nice place to start a business,” he said. “The return on that investment, just from a marketing and PR perspective, I think is worth it.”
Evaluating the fund’s performance –beyond marketing and PR — is difficult.
Unlike the Oregon Angel Fund — which, like the seed fund, receives state lottery money through the Oregon Growth Account — the Portland Seed Fund won’t disclose its fee structure.
And unlike other Portland investment funds and incubators, including OAF and Wieden+Kennedy’s Portland Incubator Experiment, the seed fund will no longer say how many startups have applied to participate.
The seed fund’s managers say application information wouldn’t be useful in judging their fund’s appeal to startups, because they recruit many startups directly rather than hold open casting calls.
Altogether, seed fund managers say they plan to invest $2.3 million or $2.4 million of the $3 million they’ve raised.
That leaves $600,000 to $700,000 to pay the managers, an associate they’ve hired, and various legal and administrative expenses.
The managers, Huston and Jackson, also will collect a portion of whatever return the seed fund generates and they’ve said in the past that their share will be modest by industry standards.
The seed fund says it receives discounts on many professional services through sponsorships by the accounting firm Perkins & Co. and the law firm White Summers, which hosts the seed fund at its 24th-floor offices in the Fox Tower downtown.
The Portland Development Commission is “thrilled” with the Seed Fund’s performance, according to PDC manager Chris Harder. The PDC has not asked for information about the number of applicants, and he said the fee structure appears appropriate.
The incoming city council and new mayor will ultimately make the decision about whether Portland contributes financially in the second Seed Fund. Both mayoral candidates are supportive of the Seed Fund.
“It appears to me that the seed fund is a modest success so far,” said former city commissioner Charlie Hales.
Overall, Hales said that he wants to rethink the city’s approach to economic development and the PDC. But he said he wants to carry on with initiatives that are working, provided the city has close oversight.
“There are things the city has to do more cautiously because we’re spending public money,” he said.
Hales’ rival, state Rep. Jefferson Smith said the fund represents an opportunity to “build on what we’re good at,” and wants to see the fund continue to develop its mentor network and partnerships with Portland State University and other organizations.
And if the city continues to invest, Smith said he’ll want to build in a mechanism to “make sure we have confidence in the fiduciary decision-making.”
More on Third Round of Start-ups:
The Portland Seed Fund announced its third class of startups tonight, choosing seven Portland companies and one from Iceland to receive $25,000 apiece in seed investment to help them get started.
The Icelandic company, a mobile commerce specialist called Mobilitus, will move to Portland but retain an office in Iceland.
The city of Portland launched the seed fund last year with $800,000 in public funds, augmented with money from private investors, the city of Hillsboro and the state-sponsored Oregon Growth Account. The Seed Fund has raised $3 million altogether.
Seed fund managers say they have invested just over $600,000 in the 25 companies that made up the first two classes of the fund, including follow-on funding.
In addition to the new class, they plan to select one more next year and then seek additional funds for future classes.
The new roster of Seed Fund-backed startups is:
- Brandlive: “Visually engaging product communication for social commerce and remote collaboration.”
- bubL: “Location-based social platform introducing mobile users to relevant people, advertising, commerce, and information nearby within their personal ‘bubble.'”
- CoCollage: Social media combined with electronic signs.
- InGrid Solutions: “Streamlines the day-to-day business processes of construction trade contractors.”
- Mobilitus: Mobile commerce
- Tellagence: Brand networking and analysis.
- Vadio: Video distributed via radio stations.
- Wikisway: Finding connections between people, places and things.