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Seed Capital: Jim Jaffe, CEO, National Association Of Seed And Venture Funds (Part 2)

Posted on Wednesday, Dec 8th 2010

By guest authors Irina Patterson and Candice Arnold

Jim: So, as I was saying, “the valley of death” [for a technology startup company] is the place between, roughly, the $100,000 that you can raise on your own and maybe the $2.5 million or $3 million, which is the level at which a venture capital firm is going to be interested in you.

It’s an enormous gap because among other things, people who used to be able to easily put together a brand new fund can’t do so.

The really big challenge in this industry is where is the money that can go into startup businesses? How do find it? What do you do to get it? Where are the investment opportunities?

Irina: What in your opinion is the solution?

Jim: The solution is, most likely, having government assistance in this area, where the government might put up money for a large fund, which would be matched by private investors or public investors.

But the challenge is that it used to be not too difficult to put a fund together. Now, even people who have money . . .  when an equity fund is put together, they usually have a partnership that lasts, I don’t know, eight to ten years, and the investment cycle is relatively long. You invest today and maybe you see something in five or six years.

The problem is that when people invested money a few years ago, there was an underlying assumption that banks would be able to provide additional financing. That has not turned out to be the case, given the financial difficulties and so forth.

As a result, what has happened is that equity groups who have a certain amount of money are finding that they themselves have to put more money into their portfolio companies versus getting it from banks.

So, what that means is all of a sudden, they are unable to invest in new deals because they have to protect their old ones.

That also is true, going forward, because the banks are not stepping up to lend lots of money. As a result, you have to have a big percentage of equity if you’re going to make all of this work as an investment.

Irina: Who are your members and partners?

Jim: There’re two categories. If you look on our website, you can see our members, where they are and what have you. This is about 175 organizations.

We also have partner organizations, which [consist of] people who have similar interests, like the National Business Incubator Association, the Angel Capital Association, Association of University Research Parks, and so on.

These are all organizations that we work with. We offer discounts to their members to come to our conference and vice versa. In parallel, what we do with these people is try to come up with some public policies that will be of interest to all of our groups.

Irina: What role do you think the government could play in seed capital formation?

Jim: We think that there’s an opportunity for the government to put up money for, maybe, a national seed fund, which would be accessible by many of the organizations that are members.

That’s one role of the government that we don’t know what’s going to happen with that, but that’s something that we are recommending.

The other role of the government has to do with things like angel tax credits and so on. Just the other day, I gave a speech to the SEC (Securities and Exchange Commission) in Washington, D.C. I was on a panel. The speech covers some of the public policy issues that we’re interested in as well.

Irina: Do you work with any specific agencies in the government?

Jim: Let me tell you about federal laboratory system, which is the largest research and development–funded activity in the world.

The U.S. government spends about $150 billion a year supporting research in federal laboratories. Federal laboratories are organizations that you have heard of but may not realize are part of this system. The National Institutes of Health is a federal laboratory, for example. Los Alamos is a federal laboratory.

Many agencies in the government have laboratories that do research for them. Agriculture has them, the Department of the Army has them, Homeland Security has them, and so on.

This segment is part 2 in the series : Seed Capital: Jim Jaffe, CEO, National Association Of Seed And Venture Funds
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