Like a lot of incubators, Rocky Mountain Innosphere in Colorado had a hard time helping its companies land funding.
Unlike a lot of incubators, Innosphere has found a solution — it built its own funding network. Now the nonprofit tech incubator, which has offices in Fort Collins and Golden, is offering up its model as one others can follow.
VC funding in Colorado last year reached its lowest level in nearly a decade, according to the National Venture Capital Association. Since 2004, the amount of VC dollars under management in Colorado has declined 70 percent, said Innosphere CEO Mike Freeman.
“Combine that with new banking regulations that made it harder for small companies to access the debt markets and obviously skittish individual and angel investors and you really have a train wreck for startups,” he said.
It got so bad in 2010 that Innosphere began questioning its future. Rather than rely on the depleted VC network, it decided to build its own capital network in cooperation with state and federal agencies, angels, institutional investors and VC funds.
Innosphere’s network, parts of which are still under construction, provides equity investments, loans and grants for companies at every stage of growth, from seed money to late-round VC. Of course, not every startup needs or qualifies for every stage, but Freeman said the network can cover virtually all funding needs.
“It’s highly unusual,” Freeman said. “I think we’ve got a lot of this worked out where this is a highly replicable model.”
Fort Collins software firm DH2i, an Innosphere alumnus, got a $36,000 loan through the network last year, capital that helped it turn the corner.
“It was crucial,” said CEO Don Boxley. “That was probably the low point for the company. We were doing well, but we just didn’t have the cash flow coming in to keep it together.”
Here’s how the Innosphere capital network operates:
- Seed Funding — Innosphere recommends high-potential startups to an outside investor who puts up $500K a year. The typical investment is $30K to $50K in exchange for equity. For entrepreneurs who have maxed out their credit cards and personal finances and already tapped friends and family funding.
- Debt Pool — Innosphere partners with local banks to provide early stage loans of up to $75K to startups through the Colorado Enterprise Fund, a nonprofit micro-lender. For companies that need a shot of capital to fulfill an early order or buy equipment. This is where DH2i turned.
- Angel Funding — Innosphere has relationships with angel groups and independent angels whose average investment is $250K. For companies not yet ready for VC money.
- Advanced Industries — Colorado’s Advanced Industries Accelerator Program offers three stages of grants totaling up to $1 million. For companies that need additional investment before they can produce revenue.
- Early Venture — An Innosphere fund for companies that are ready to take off, but aren’t pursuing outside venture capital at the moment. It would provide investments of $250K to $500K in exchange for equity. Innosphere hopes to have it in place this year.
- Catalyst Fund — Innosphere and the Colorado Enterprise Fund partnered to create a $20 million Community Development Venture Capital Fund, called the Colorado Catalyst Fund, which provides equity capital to businesses in underinvested markets with the goal of job creation. For companies seeking Series A funding.
- Bridge Venture — Innosphere is working with the state to create a Small Business Investment Company fund. Half the investment capital would be from institutional investors and half from the Small Business Administration. For companies that need bridge capital to get to the point where they can attract serious VC.
- Venture Funds — At this stage, companies that need it should be able to attract traditional venture capital, whether in-state or out of state.
- Late Venture — The Colorado Public Employees’ Retirement Association invests in later-stage companies, similar to private equity investments.