Ray Quintana, General Partner, Cottonwood Technology Fund
And Dr. Steven Walsh, Distinguished Professor and holder of Regents Professor at the University of New Mexico, Institute Professor for Entrepreneurial Renewal of Industry at the University of Twente MANCEF Board Member
The venture capital industry has not performed as well lately as in past years. Further, early stage venture capital firms, who in the past have outperformed traditional stage venture firms, are having even more issues. The problems have become so acute that we see a pursuit of new funding sources. ‘Crowd funding’ sources, for example, are seriously being considered for early stage funding as discussed in a high tech entrepreneurship book currently being developed by Kirchhoff, Linton and Walsh. Yet crowd funding, a topic for an upcoming commercialisation corner, has inherent problems in attracting follow-on funds. Follow-on funding is much more often than not required of early stage startups based on emerging technology bases like Nanotechnology and Micro Electro Mechanical Systems (MEMS). The attraction of follow-on funding is becoming a difficult requirement to attain for all venture capital firms but especially early stage funds. This causes concern for viability of the industry and exceptional entrepreneurs to recognise that funding is not a single event but rather a process where the type or ‘colour’ of money you obtain can either hinder or accelerate future equity and debt funding needs. No longer can an entrepreneur raise feel comfortable in obtaining their initial funding trusting in the venture capital system to provide the firms needed resource flow. New models are needed to meet the requirement.
One early stage fund, Cottonwood Technology Fund, has been successful through the formalization of a competence based venture funding model. They no longer just use their connections through an informal process but formally attract exit partners as they select the firms they fund. They, as well, assist firms by developing partnerships and getting their client firms through typical difficult areas such as ‘the hype cycle’, ‘the valley of death,’ and finally to ‘cross the chasm.’ Figure 1 below provides one of their competency-based processes that has worked exceptionally well for both the fund and their portfolio companies.
Here, Cottonwood the funding group, and Ascendant Global Technologies, the strategic and corporate development group, help firms through competency development. This insures that there is downstream funding interest with large firms with an interest that these small startups succeed and they can proceed with a second round of funding or exit the firm. This has proven to be an exceptional strategy for their firms and themselves. The first fund performance is currently at 50%+ internal rate of return with almost three times valuation increase on invested capital in 24 months and almost 10 times increase in enterprise value. More importantly they have found a new method to obtain follow-on funding. The Cottonwood Fund has delivered over 10 times its initial investment or leveraged 10 times their invested capital with syndication and follow-on funding.
Cottonwood Technology Fund is focused on seed stage sponsorship of break through science based innovation. They focus on opportunities which need approximately $1-2 million to deliver working prototypes or samples to first customers. They further only embrace a firm where they can recruit a key manager. These key managers are the keys to raising the A round and typically are commercial development managers or similar people at potential market channel firms. They have an investment thesis focused on ‘seed, support, and succeed.’ During the seed phase they make a significant commitment early to give runway needed to reach important milestones. They enable recruitment of experienced management to partner with the ideas/entrepreneurs when required. They support their firms by serving on the boards, providing guidance, recruiting additional capital, finding potential strategic partners and obtaining key management. They succeed when their clients succeed. They ensure that the entrepreneurial opportunity is not only good but a good competence fit to the entrepreneurial team and the Fund.
The first fund has used a competence based approach to move from cumulative initial valuations across their seven companies of under $30M to a current collective enterprise value of $300M by focusing on helping their clients succeed. Since the fund is competence based, it connects on the basic technology level rather than having a specific industry focus. The fund is pan-industrial by nature and has built emerging category leaders across several markets.
Authors:
Ray Quintana
Ray is a general partner of Cottonwood Technology Fund. He is an investment professional with 20 years of experience in global technology assessment, corporate venturing and venture capital investment. He was a prior partner and principle investor with Ascendant Global Technology & Total Media Ventures. He has been a senior strategy & corporate development manager for global technology companies, such as Texas Instruments and Robert Bosch Corporation. He focuses on competency driven global corporate strategy development; corporate venturing, global mergers & acquisitions of companies and enabling technology, expansion of global footprint, expansion of product lines and development of new products and product portfolios. He received his MBA from the University of Michigan Ross School of Business and has served as CGMS Fellow. Cottonwood is focused on supporting science based innovation with disruptive potential. Portfolio companies include Skorpios Technologies Inc., TriLumina Corp., Respira Therapeutics, Inc., FibeRio Technology Corp. and Incitor, Inc.
Dr. Steven Walsh
Steve is a distinguished professor and holds the Regents Professorship at UNM’s Anderson School of Management. Further, he is the Institute Professor for Entrepreneurial Renewal of Industry at the University of Twente. He has many business service awards including the lifetime achievement award for commercialization of Micro and Nano technology firms from MANCEF. He has also been named as a Tech All Star from the State of New Mexico Economic Development Department and has been recognized by Albuquerque the Magazine as a leader in service to the economic community. He is a serial entrepreneur that has helped attract millions of dollars in venture capital to these firms.