Here’s a twist on incubator seed fund investments. The Center for Innovation at the University of North Dakota in Grand Forks, N.D., developed a program to educate students about the nuances of angel and venture investing by setting up a venture fund – the Dakota Venture Group – and letting students manage everything from investment decisions to annual reporting. As a result, the students learn private equity investing through experience; the region’s start-up companies gain access to vital seed-stage capital; and the innovation economy of North Dakota grows its entrepreneur and investor base.
In 2006, the Center for Innovation Foundation created a dedicated fund with a $400,000 gift on behalf of the Dakota Foundation, a nonprofit organization fostering social entrepreneurship in North Dakota and New Mexico. Using an evergreen model, where all capital gains are reinvested, the fund provides early-stage seed funding ranging from $15,000 to $50,000 per company. DVG is expected to syndicate with other angel funds, so companies receive seed-stage funding from DVG and go to other investors for future rounds.
To date, DVG has invested in 11 companies, including two student ventures. According to Bruce Gjovig, entrepreneur coach and director of the Center for Innovation, multiples of those investments have returned to the fund.
DVG operates primarily on donated time. Students receive no class credit, and much of the advising comes from volunteer mentors. Auditors, accountants and legal personnel from the foundation also work with DVG to ensure the financial paperwork is correct, so some administrative cost is borne by CIF and sponsorships, but Gjovig says those costs are minimal.
Three of the 11 investment companies are resident incubator clients. Gjovig says students tend to interact with incubator companies more because they are on campus; however, opening the fund to nonincubated companies was deliberate. “We didn’t want to restrict students to investment only in incubator companies. It is their decision to make a good investment where they see the opportunity,” Gjovig says.
The fund is open to companies throughout the U.S., but the majority of deal flow comes from the upper Midwest. “We had one company specifically seek out our investment firm because they were seeking a young market,” Gjovig says. “They made a strategic decision to approach a young angel group.”
Undergraduate and graduate students typically participate in the program for one to three years. Each year, there are five managing directors and 20 to 30 members of the investment group. Since 2006, 70 students from various majors have participated.
Students perform due diligence, draw their own term sheets, follow up with companies and work to meet legal and reporting requirements. “Students make all the investment decisions and report four times a year to the foundation,” says Gjovig. “The new members learn the ropes from the experienced students.”
Gjovig says students appreciate the chance to learn equity investment, noting the knowledge and opportunity are priceless. “The personal and professional gratification from the program is a real enhancement of their skills,” he says.
Students undergo a vigorous application process, with typically one in four individuals accepted. The group meets weekly in addition to meetings with mentors or client companies. “Students are learning by doing,” says Gjovig. “It’s very hands-on. Young people are developing professional relationships and determining what opportunity is best for the situation.”
Lee Groeschl, a DVG alumnus and entrepreneurial services manager at the University of Iowa in Iowa City, Iowa, says DVG was the most beneficial experiential learning opportunity he had in college, and other alumni echo his sentiment.
“As an undergraduate business student, I didn’t learn about raising capital and capitalization strategies in class; I learned it as fund manager of the Dakota Venture Group,” says Andrew Christensen, DVG alumnus and analyst at Arthur Ventures in Fargo, N.D. “Most people begin angel investing or join a venture capital firm after a long successful career of buying and selling companies. I was able to enter and gain exposure at age 20.”
The program offers benefits for the university and the community at large, including capital for region’s entrepreneurs, a rich learning environment for students and an experienced entrepreneur base for the future. “We look for a triple bottom line: return on investment for the fund, support for entrepreneurs and enhanced learning opportunities for students,” Gjovig says.—Bridget Lair
Keywords: venture capital, angel investors/network, business financing, youth incubation, capital access
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