There are a couple of common analogies for startups wooing potential investors, said entrepreneur Brian Razzaque — it’s like herding cats, or getting one lemming to lead the others. Most investors are wary of bankrolling an unproven company without someone else’s seal of approval.
That’s why the backing of the Maryland Technology Development Corp. was so valuable for Razzaque’s social media marketing company SocialToaster when it sought to raise capital in 2013. After a complicated vetting process, which involved estimating the company’s value and negotiating a contract, the quasi-public agency invested some money in SocialToaster. In turn, the company was able to more easily sign on several other investors, raising $1.3 million in all.
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To help other startups get past similar obstacles to growth, the agency better known as TEDCO is making some changes to one of its key investment funds. They include offering companies that already received TEDCO support an additional layer of investment and expanding access to its programs beyond just startups with ties to business incubators or local universities.
As TEDCO moves to absorb another prominent state economic development tool, the Maryland Venture Fund, this fall, its executive director said he hopes the changes will strengthen a strategy that already has shown success.
“We feel like that’s one of the real values we can add to the financing ecosystem — being the first person to make a commitment to say we believe in you and we’re willing to put money behind it,” said Rob Rosenbaum, who’s overseen TEDCO since 2010. “That’s a big milestone for a company to achieve.”
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For at least a decade, TEDCO’s Technology Commercialization Fund has offered up to a $100,000 investment to entrepreneurs working to turn a promising software system or scientific discovery into a viable business. The agency recently launched a similar fund targeting cybersecurity startups, announcing its first three investments in March. Companies receive the money in up to four increments based on hitting certain milestones, like creating a product or gaining a beta-testing customer, Rosenbaum said.
But for many companies, it still can be a stretch to go from successfully commercializing a technology to attracting investment from venture capital firms, foundations or other so-called institutional investors.
Razzaque, whose company helps companies identify “superfans” on Twitter and other social media, called the process of nailing down an initial investor and negotiating a deal “the hardest part” of the process. After that, it’s easier to get others to sign on the dotted line, he said.
To address those challenges, TEDCO is adding a second round of investment from both funds, offering up to another $125,000. But that money is contingent on the companies attracting other private investment at the same time.
It’s a strategy that has worked for TEDCO since its creation in 1998. TEDCO estimates that companies its funds have invested $26 million in to date have attracted $670 million in other funding. The Maryland Venture Fund, which invests in more mature companies, uses a similar strategy. TEDCO is absorbing that fund from the Department of Business and Economic Development after the Augustine Commission recommended that the state’s disparate efforts to support business investment be consolidated.
The strategy also helps further fill in an investment gap startups often find themselves in, between collecting relatively small amounts of money from family, friends and angel investors, and the larger sums venture capital firms can supply.
“This region has long been challenged by [few] early-stage funding avenues,” said Mike Binko, CEO of Startup Maryland, an entrepreneurship advocacy group. “TEDCO is one of the rare organizations that fills a very important gap.”
But, he added, “there’s only so much [TEDCO] can do every fiscal year.”
Rosenbaum said TEDCO has a $1.7 million budget for its Technology Commercialization Fund, plus about $1 million for the cybersecurity fund. Much of the budgets, including the money for the extra $125,000 investments, comes from returns on past TEDCO investments.
“We have a lot of singles and doubles,” Rosenbaum said of the returns. “We don’t care about creating the next Google, but if we can create 20 nice, solid little companies, we’re happy.”
TEDCO also is seeking to cast a wider net in choosing those companies. Because it emphasizes technology transfer, when entrepreneurs turn promising lab science or an idea for a new technology into a profitable business, the agency previously required its investments be tied to business incubators or universities.
But Rosenbaum said TEDCO officials felt that left out economic activity sprouting “in somebody’s basement, garage or dorm room.”
“To borrow a phrase from the governor and secretary, we’re trying to make sure we’re open for business in our part of the economic development world,” he said.
While the broadened scope could mean more competition for TEDCO’s money, it is still good news for startups and for incubators, said Jennifer Mayer, CEO of Betamore, an incubator, co-working space and technology community organization in Federal Hill.
The ability to get TEDCO funding or other perks of incubator membership was not likely the deciding factor for many entrepreneurs when considering whether to join one, she said. But given TEDCO’s popularity among tech startups, the change in eligibility requirements does affect incubators, she said.
“It’s just putting pressure on incubators to do their jobs really well,” Mayer said. “If I’m an entrepreneur, that’s what I want.”
TEDCO’s support is already a valued asset in the local entrepreneurial community, so expansion of its activities is being welcomed. Many in the tech community noted with pleasure that Gov. Larry Hogan’s first speech after his surprise election in November was to entrepreneurs at TEDCO’s Entrepreneur Expo.
“It’s one of the reasons we stayed in this region,” Razzaque said of TEDCO’s backing of SocialToaster, which considered moving to Silicon Valley or elsewhere. “We were able to do the fundraising we needed right in our own backyard.”