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Gov. Deval Patrick announced the formation of a business plan competition for entrepreneurs, called the MassChallenge Venture Funds Competition, Wednesday at the IT Collaborative Workshop at the Microsoft New England Research and Development Center in Cambridge.
MassChallenge’s three founders, all recent business school graduates, aim to raise $25 million for about 25 to 30 yearly prizewinners, by connecting each with mentors and venture investors willing to invest $500,000 to $1.5 million. They hope to replicate pre-seed-stage competitions, which typically offer smaller prizes, at a higher tier of fundraising and company launch. The competition will cost about $1 million per year to run, they said.
The goal of the Venture Funds Competition is to launch new, innovative businesses in Massachusetts. As part of the competition rules, winners must establish their startup headquarters in Massachusetts and create a minimum of five jobs in the state. Additionally, one outside investor must agree to match state investment funds.
The competition will be financed through public and private funds and features six category tracks: health care and life sciences; IT, software and gaming; clean technology and energy; Social development and nonprofit; open category, seed stage; and open category, expansion stage. Winners of the competition will receive about $50,000 in cash to support business launch, with further seed money available, contingent on outside matching investment funds.
Three entrepreneurs — John Harthorne, Akhil Nigam and David Constantine — developed and launched the fund competition concept as part of the nonprofit entity MassChallenge. Harthorne, the CEO of MassChallenge, organized the MIT $100K Business Plan Competition while a student at the Sloan School of Management in 2006. He then won the 2007 MIT $100K Competition with Robopsy, a disposable robotic diagnosis device startup he co-founded with Nevan Hanumara and Conor Walsh. Harthorne also directed the 10th annual MIT Global Startup Workshop in Norway. He’s co-founded MassChallenge with Nigam, president, and Constantine, chief strategy officer.
The nascent venture has raised $325,000 and needs $25,000 more for the initial marketing push, the founders say. Following that, they hope to identify 25 to 30 companies a year that are each worthy of about $1.5 million in equity investment. Some may even be graduates of smaller competitions like the MIT $100K and Boston- and Denver-based incubator Techstars, Harthorne said.
“We would like to catalyze the $1.5 million investment,” he said.
MassChallenge would seek to find mentors for young startups to bring them to the point where they are ready for venture investment on that scale, said Nigam.
In addition to operating funds, MassChallenge is seeking venture capital firms who may be interested in investing through the program. Harthorne said his proposition to VC’s is: “If I could filter through 3,000 ideas and find the 30 best by using the expertise of your (venture capital) peers, would you want to play in that pool?”
Flybridge Capital Partners partner Michael Greeley is one VC who is interested in the opportunity.
“It bolsters the front end of the funnel,” he said. “You’re just going to get more higher-quality companies coming into our funnels.”
The three MassChallenge founders, who began seeking funds four weeks ago, got their first yes from the state government’s quasi-public Massachusetts Technology Collaborative’s John Adams Innovation Institute fund, which contributed a $100,000 planning grant. Investments quickly followed from Microsoft Corp. (Nasdaq: MSFT), the Ewing Marion Kauffman Foundation and angel investor Gururaj “Desh” Deshpande.
“We want to show our interest,” said Gov. Deval Patrick, who announced the state’s participation in the new program at the IT Sector Dialogue conference today in Cambridge. “We’re going to do what we can to continue to support this industry,” Patrick said.
The John Adams institute has stopped making larger grants in the $500,000 range, like those recently provided to technology transfer programs at UMass Lowell and the Woods Hole Oceanographic Institute, said director Patrick Larkin. The institute cannot make more grants of that size without an additional appropriation by the state legislature, he said.
The board of advisers for MassChallenge includes Deshpande, the Sycamore Networks co-founder and chairman; Greg Bialecki, Massachusetts Secretary of Housing and Economic Development; Ken Morse, MIT Entrepreneurship Center managing director; Rich Kivel, MIT Enterprise Forum chairman and president; and Joe Hadzima, MIT Enterprise Forum director and former chairman.
The Massachusetts Technology Transfer Center has also said its programs may be at risk without additional state funding.
Economic Development Secretary Greg Bialecki said the state government is studying how to make better long-term commitments to such efforts. “It seems to me if we’re serious like we say we are we’ve got to put them on a sustainable source of funding,” he said.
Programs like the John Adams Innovation Institute should be at the top of the list for that kind of funding, he said, pointing to the speed with which the institute opted to back MassChallenge. “They are the most opportunistic of any quasi-public group I have seen,” Bialecki said.
Today’s conference was intended to spark dialogue over a study released today by the University of Massachusetts Donahue Institute, showing trends and priorities among the state’s technology business community. However, that news was quickly overwhelmed by the governor’s announcement.
In a survey published this morning, the Donahue Institute found 70.8 percent of Massachusetts technology businesses say reducing the cost of doing business in the state is a high priority. Only 40.3 percent cited public-private partnerships as a priority.
In response to the results, Patrick defended state corporate tax policy, saying Massachusetts’ corporate tax rate falls in the lower half of those nationwide.
“Most businesses aren’t making their decisions on tax policy alone,” Patrick said. Education, talent and the venture economy as a whole are sometimes more important, he said. “What we can do in government is try to make the conditions that encourage that kind of growth here.”
MassChallenge’s three founders, all recent business school graduates, aim to raise $25 million for about 25 to 30 yearly prizewinners, by connecting each with mentors and venture investors willing to invest $500,000 to $1.5 million. They hope to replicate pre-seed-stage competitions, which typically offer smaller prizes, at a higher tier of fundraising and company launch. The competition will cost about $1 million per year to run, they said.
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