Problems hit tech accelerator

  • Article by: WENDY LEE , Star Tribune
  • Updated: November 16, 2011 - 11:03 PM

Amid complaints from first-year participants, Project Skyway's creator says a slow investment climate limited what he could accomplish.

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Cem Erdem of Project Skyway, right, helped Alex Reilly polish his presentation for his company, CribFrog, a social networking site for apartment tenants.

Photo: Glen Stubbe, Star Tribune

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About a year ago, a group of Twin Cities entrepreneurs launched Project Skyway, an initiative aimed at helping local start-ups find funding, grow and be more competitive.

But of the eight budding tech firms accepted into its inaugural program in August, only half remained at the end. And the companies that stayed threatened to leave because the program failed to meet their expectations.

"I don't think they necessarily had all their ducks in a row, in the beginning, and quite honestly, through the middle and through the end," said participant Scott Lombard, CEO of Cor2 Technology, a secure online document storage business. "I don't think that they completely understood the level of development that the companies needed."

Cor2 Technology was among the companies that remained with the program, which finished its first class at the end of October.

Participants complained that the program failed to connect them with investors, didn't provide them with enough mentoring and wanted too big of a stake in each of the start-up companies compared with what they were getting.

Project Skyway's founders concede that they have made mistakes, but they also say their hands were tied because the investment community was reluctant to give money in a tough economy.

"It won't be successful unless our community believes in entrepreneurs and helps them succeed," said Project Skyway co-founder Cem Erdem, who also runs his own tech company, Augusoft, in Golden Valley.

"Unless we have that kind of support, it's not going to be successful. Entrepreneurs do not succeed in a vacuum. That's why people flock to Silicon Valley, because there's that community there."

Of the companies that stuck with Project Skyway, only one, Naiku, received funding from outside investors. But Naiku, which recently received $320,000 in funding for its online testing platform, was already established when it started the program, with thousands of users and experienced management.

Erdem said Project Skyway was meant to be a tech accelerator, with the intention of taking start-ups to the next level. He named it Project Skyway because when he was a young entrepreneur, he marketed Internet services by passing out postcards in the Minneapolis skyway.

Erdem says he's the only one funding the program, providing seed capital of $6,000 per company founder. In return, the companies give up equity in their firms, which goes to Erdem's tech business.

That has been a major point of contention with participants, who said the program wanted too much of a stake in their firms in the beginning. Equity started at 9 percent, but two months into the program, the companies demanded that Project Skyway lower its equity stake or they would leave the program.

"It was the right thing to do, and [Erdem] handled it with class," Cor2 Technology's Lombard said.

Erdem says he has financially committed himself to 10 cycles of Project Skyway.

"If I did this to make money, I would do something else," Erdem said. "When I was a struggling entrepreneur, I couldn't find any help. I didn't know where to go or what to ask."

But the program ran into problems almost from the start.

Right after Project Skyway chose the companies for its the program, two quit. A third company, VanquishAP, left because it disagreed with Project Skyway's vision for the company.

A fourth company moved to New York.

Five companies remained, but that's only because one of VanquishAP's founders left the firm and started his own business, CribFrog, a social network, which joined Project Skyway.

Halfway through the program, the remaining businesses were growing impatient with the lack of funding and the high equity stake.

Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, said he thinks the 9 percent equity is "a bit pricey," although entrepreneurs should factor in the other services Project Skyway is offering, like work space and manpower for projects.

Recently, the five remaining companies presented at Project Skyway's Demo Day, a crucial event that let them present their products and services to investors. But some participants said investor turnout was disappointing.

Project Skyway said 100 people were invited, but only 55 showed. About 30 of those were investors.

Despite the program's growing pains, Project Skyway participant Nitch, a tech firm, said the program helped propel the company. It raised a round of financing from friends and family, but declined to disclose the amount.

"If Project Skyway wasn't there, we would have been around. We would have made progress, but not as much," said CEO Michael Noble. "It gave us focus."

For its part, Project Skyway said on its blog that it has learned its lesson.

"Looking back, we acknowledge that we have come up short in some areas," the blog said. "Some entrepreneurs in the program are happy and have gotten lots of value. Some less so. So we are fixing, tweaking and making things right."

Co-founder Casey Allen added that the next program coming in January "will be much more streamlined and well-planned."

Wendy Lee • 612-673-1712

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