SSTI Conference Brief: Building a fund that matches your region

One of the hottest topics at SSTI’s 2017 Annual Conference centered on helping communities build the investment system necessary for local entrepreneurs and startups to thrive. Led by several panels of experts, the conversations led to sharing many great ideas, thoughtful solutions, and tough realities. This week, we conclude our series of stories on how TBED organizations can help communities ensure a vibrant investment system.  In our first installment, we discussed the necessity of creating a strong deal flow to stimulate the growth and success of the system. The second installment focuses on effective strategies and ideas for building your organization’s investment team. This final installment will cover developing a fund that matches your region.

“It doesn’t make sense to launch a fund focused on a very specific technology area, if you do not have the critical mass to support deal flow for that technology.” – Conference speaker

One of the themes highlighted during the 2017 conference was the need to match your fund with the strengths of your region. This is achieved through two basic recommendations:

• First, know your regions strengths and weaknesses; and,
• Second, don’t chase the newest, hottest industry just because it’s the hot new industry.

While some communities may be able to launch specialized funds, multiple speakers highlighted that the majority of communities should focus their investment funds on being able to support the potential startups in their community. One speaker recommended that funds can have focus investment areas based on key regional strengths/industries (e.g., biotech, plastics, or IT), but should be able to venture outside of those industries for the right company with both economic and/or investment potential. Sometimes this means looking beyond the tech sectors, especially in rural areas. In one region, the investment team reviewed businesses that could be considered lifestyle companies – businesses set up and run by its founders primarily with the aim of sustaining a particular level of income and not high growth. Since the region is rural, they need to be creative in what they consider to be a good investment deal that will create economic growth.

While donors and others key stakeholders might push the organization to establish a fund in the newest, hottest industry; organizations must consider if that industry will have both the economic and investment potential to supply the fund with good deals. Additionally, one speaker provided the practical advice to support social impact by establishing a sidecar fund for companies that make a social impact. While the company may receive backing from the larger fund, the sidecar fund (supported by key stakeholders) will provide companies the opportunity to receive the extra capital needed to achieve their social mission while launching a viable company.

Another speaker highlighted the recent history of many communities launching “clean energy funds.” In the early 2010s, many regions and states launched these funds without having access to viable companies ready for investment. This created small returns (if that) and poor performance of the companies.

The speaker and others recommend that a community takes multiple steps before establishing a specialized fund including:

• Target technologies that build upon the strengths of your anchor institutions (e.g., universities, medical centers, and key industries);
• Focus investment on businesses that provide a good match for the organization’s network of service providers, partner organizations and mentors;
• Partner with leaders of key industries to help identify technology areas that provide the most potential for investment and economic growth; and,
• Do not invest in technology areas where the team lacks the expertise to properly evaluate the deal/support through provision of services. 

All regions have unique strengths and weaknesses; the key for the fund manager is to invest in technologies that align with those areas. While targeted funds may make sense in some regions, the general consensus was that flexibility was the key to a good regional fund.