The Texas Technology Development Center (T3DC ) in San Antonio knows a thing or two about helping companies acquire venture financing. In fact, T3DC President and CEO Randy Goldsmith begins working with clients before they enter the incubator in an effort to determine which firms are investment-worthy.
Typically, he says, it’s a minimum four-month engagement, but it may extend upwards of one-and-a-half years, while T3DC conducts due diligence and helps the firm build its team. “My goal is to make it easy for entrepreneurs to find and attain venture funding,” Goldsmith says.
Companies that do receive funding are eligible to become resident clients of the incubator. T3DC takes a straight equity stake in its clients, but the incubator’s investment is conditional on the entrepreneur finding matching funds, either through personal funds or other private investment. “We started with a small investment fund using a convertible note. It allows me to be the first one in, working with young start-ups,” Goldsmith says. “Our maximum investment is $100,000, and we typically convert at our option when the first institutional investment comes in.”
Using tools he developed in 1994, Goldsmith assesses the entrepreneur, business plan and product to complete a preliminary evaluation of the venture (see Resources sidebar). The tools use five formulas to determine valuation; four are tied to pro formas and the fifth is based on risk. These formulas create a bracket range of a company’s value, from high to low. From there, T3DC hones in on other deals in the market to make a final value determination.
“The first thing we consider is: Is this a venture, or is this a product? We only deal with ventures,” he says. “A product is a license opportunity, and we direct those entrepreneurs to a group that can help them.”
Goldsmith says he then focuses on four key questions. What problem does the business solve? How powerful is the problem in the market? How good is the solution? Is there potential to be dominant in the market? “If the company’s product or solution meets these criteria, then we consider the next step – determining what role the entrepreneur will play – is it CEO or CTO?”
Since it opened in 2009, T3DC has built a reputation in the market for exceptionally strong due diligence. “Validation is a key word for us,” Goldsmith says. “Every assumption [about product/market/service] must be validated. I like to say we take a fictional idea and create a documentary, where every detail in the business plan and investor presentation can be explained and defended.”
Goldsmith describes T3DC as a network of networks, where they entrench entrepreneurs in a resource-rich environment of subject matter experts, attorneys, marketing professionals and funding people with experience in a specific arena. “It takes months before they’re ready to meet with investors,” he says.
Clients know T3DC is geared to venture investment, so entrepreneurs are not surprised when Goldsmith starts talking about ownership shares. “We help entrepreneurs determine if they are fundable; I’ve done them a service,” he says. “If they are not, I help them find other options besides venture funding.”
“This works anywhere – the model is used in Sweden, in the U.K., by some SBDCs [Small Business Development Centers] – even though they don’t do venture investment, they use the tools.” Goldsmith believes incubator managers need to understand the language of finance and develop connections to facilitate client investment financing. “The worst thing that can happen is an incubator works with an entrepreneur to build a business but does not have the connections or access to the capital they need.”—Bridget Lair
Keywords: Client services, Venture capital, Access to capital, Client services – general, Special-focus incubator
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Athens, OH 45701-1565