Private Equity Solutions

VC Debt Fund Characteristics:

• Venture or Angel backed
• Emerging growth market
• Intellectual property
• Min. of 9-months of liquidity
• Experienced management team
• Strong business model
• Path to profitability
• Viable exit strategy

Source: Madison Development Corp.The Venture Debt Fund is a new loan program for technology-based businesses in Dane County that supplements MDC's existing business loan and assistance programs.

The new fund demonstrates that MDC is positioning itself to respond to the need of technology-based businesses, says MDC President, Frank Staniszewski.

The fund is designed to provide debt financing to emerging growth companies and to help fill the funding gap for local high-growth businesses. The fund is targeted to companies that need to move beyond the prototype stage, have a product or service that produces revenue, and need working capital or equipment to increase production and sales.

The fund is a response by MDC and our partners to the local scarcity of venture capital, which many observers complain about, says Staniszewski. While it is difficult for local government and traditional financial institutions to get comfortable with becoming equity investors, the Venture Debt model is a creative approach to meet the need for equity-like capital at a risk level that is tolerable. By replacing some of the equity in a company's total capitalization with a comparable debt source, in effect, we are increasing the venture capital pool for local companies, Staniszewski adds.

The debt is structured on the company's ability to reach cash-flow breakeven and beyond with its' existing liquidity or the company's ability to raise additional equity capital. The fund is designed for revenue-stage companies to compliment equity sources of capital and provide access to capital at a fixed -rate, with minimal requirements for the founders to give up ownership or control.

The Venture Debt Fund provides loans at rates ranging from Prime plus 2% to Prime plus 8% depending on the level of investment risk. According to MDC, the fund will also take warrants or conversion rights for a small percentage of the face value of the loans that could range from 0 to 10%. These terms provide flexible and predictable costs of capital to early growth companies, without giving up significant dilution of equity or control, says Staniszewski.

The MDC Venture Debt Fund is capitalized by a total of $2,200,000. According to MDC, the city of Madison pledged $400,000, through its Community Development Block Grant (CDBG) Program; the City of Fitchburg committed $200,000, along with MG&E, who made the largest pledge of $500,000. The additional $1.1 million was pledged in amounts ranging from $50-300,000 from contributors that include Johnson Bank, Anchor Bank, Associated Bank, State Bank of Cross Plains, Capitol Bank, Middleton Community Bank, and Oak Bank, as well as a start-up grant from Bank One.

An advisory board has been formed to provide scientific and investment guidance to the funds managers.

Partnership to technology transfer

MDC is also taking a creative approach to technology transfer and commercialization. The Center for Advanced Technology & Innovation (CATI) and announced a partnership designed in March to increase private- industry technology transfer in the Madison area.

CATI has developed a technology transfer initiative designed to commercialize via donations from private industry, non-core or underutilized patents.

According to Staniszewski, the partnership with CATI offers additional economic development tools in Dane County. "We felt this initiative would complement those technology transfer efforts occurring at the University through the Wisconsin Alumni Research Foundation.""This relationship takes advantage of our respectable strengths, while not having to duplicate efforts. Why develop a whole new program in this area, bleeding valuable resources, when it already exists through CATI," Staniszewski said.

MDC is also the entry contact for Dane County businesses and local communities interested in the State of Wisconsin Technology Zone Tax Credits.

Our new CATI partnership, along with our loan programs and the Tech Zone tax credits, gives MDC a suite of complementary tools to provide assistance to technology and knowledge-based businesses, Staniszewski added.

For information of the Venture Debt Fund and other programs, contact Frank Staniszewski at (608) 256-2799, ext. 12 or by e-mailing him at fstan@mdcorp.org.

Private, backed venture funds and business angel networks invested á45.7 million in small firms during this period, compared to á42.6 million in the year to the end of August 2005. The medical sector again proved to be the most popular for small business investment, while companies in London gained the highest number of deals. However, Modwenna Rees Mogg, managing director of Venture Index, "Regional investment levels are becoming exciting and we continue to see regional pockets come through that are not traditionally associated with venture investment, such as the West Country."

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