Schafer: Advice is great, but start-up companies also need cash

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: June 29, 2013 - 4:11 PM
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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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The founders of Project Skyway, the first true technology accelerator for start-up companies in the Twin Cities, have acted like the best entrepreneurs they hoped to nurture: They paid attention to what the market was telling them and then rebooted.

So while Project Skyway is no more, there is a new seed-capital investor in Minneapolis called the Skyway Fund opening for business this weekend as its website goes live.

“What we learned is that we can make 10 times the difference by making early-stage investments,” said Skyway co-founder Casey Allen. “All of the evidence tells me that we [in the Twin Cities] are not ready for an accelerator.”

An accelerator is meant to provide help, and it’s well worth paying attention to what Allen is saying. No amount of smart and well-intended advice really works, he’s arguing, without enough available local capital to turn the most promising new ventures into real businesses.

Allen and his partner Cem Erdem, the founder and chief executive of Augusoft Inc., didn’t understand that when they began discussing accelerators in 2010. Erdem had long aspired to launch one, and in Allen’s account of their first conversations, both of them easily recalled their own rookie mistakes.

It’s how Project Skyway got its name, because Erdem once thought dropping fliers for his business in the Minneapolis skyway system was a fantastic idea. It was only by actually trying out the strategy that he quickly found out it wasn’t.

An accelerator program is designed to help entrepreneurs avoid the most-common blunders and quickly get the company to the point that it begins to look attractive to investors. The concept may seem a bit like a fad, but tech accelerators such as the well-known Y Combinator in Silicon Valley have helped launch successful companies like Reddit and Dropbox.

In exchange for equity in the start-up, the accelerator provides some wolf-from-the-door money, usually $20,000, and lots of help in an intensive, working-side-by-side environment. The entrepreneurs get mentors, other expert advisers and feedback from their peers at other start-ups. They get their strategic plans massaged and product plans tweaked, and may even get asked to rename their companies.

An accelerator also helps in getting funding, of course, from refining the pitch to coaching on terms and valuation. And at the end of perhaps a three-month program the graduates are introduced to a roomful of investors.

That’s where it broke down for Project Skyway.

Allen said a graduating class should be met by “dozens” of “truly active” private investors, the kind of investors who may put money into five or more promising start-ups each year.

“I can count on half of one hand the number of investors here who do that,” he said.

As the Project Skyway founders discussed seating their third class, their conversation turned to being part of the solution to that problem.

The Skyway Fund initially will be the capital of Allen and Erdem, looking to put between $25,000 and $75,000 into five to 10 software start-ups per year. Allen said his focus is exclusively Minnesota and only on ventures that will sell to businesses, not to consumers. As he put it, “Don’t fight it. Go with it. Business-to-business works here.”

Investment candidates need to have some revenue, too, never mind that he’s calling their effort a “seed” fund, which generally means the first outside investment in a new company. How is an entrepreneur supposed to build a product and start selling it without spending any money?

“My insistence on post revenue is what I call the hustle test,” he said. “It sounds tough, but it’s not. The CEO has to be both able and willing to sell. I don’t care if they have $100 a month in recurring revenue, that’s enough for me. The company that has a fully built product and no revenue is entirely unimpressive to me.”

In looking back, Allen said, they don’t consider Project Skyway anything other than a success, as four the 10 companies that went through the program are still alive.

But news of Project Skyway’s end may be disappointing for entrepreneurs looking for a Twin Cities tech accelerator experience. They may look elsewhere, as there are plenty of options in other cities.

The co-founders of a Twin Cities e-commerce start-up called Cympel just moved to Omaha to join the first class of an accelerator that’s getting underway there after July 4th.

Cympel may never generate a dime of payroll taxes in any jurisdiction, and co-founder and CEO Jesse Hultgren said they plan to spend the summer in Omaha and then move back home. But it’s still not great news for Minnesota innovation that anyone leaves for greener grass in Omaha.

Ernest Grumbles, a co-founder of the advocacy and innovation collaborative called MOJO Minnesota, noted that there are several incubators and other programs in Minnesota that serve some of the function that Project Skyway did, and more are in the works. But he called a technology accelerator “an essential tool for the community, both generally and in this time and place.”

So you’d think he’d be sorry to see Project Skyway go away. He would be, too — were it not for Allen’s and Erdem’s new investment focus.

“That in itself is a positive development,” Grumbles said. “We did not have a tech seed fund, and now we do.”

 

lee.schafer@startribune.com

612-673-4302

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