Did IDFA Fund A Dead Company?

Did IDFA fund a dead company?
March 20, 2002
By Jeff Meredith

CHICAGO - In one of his last public appearances as
president of the Illinois Coalition, Shaye Mandle said
he wished government would improve the amount of seed
stage capital available for local startups. Perry
Snyderman, vice chair of the Illinois Development
Finance Authority (IDFA), indicated that the pool of
available funds through the state's Technology Bridge
Development (TBD) fund was not even being completely
used.

"At the present time, I think there is more money than
there are qualified transactions being submitted on
the startup stage," said Snyderman.

But would a dead company be considered a 'qualified
transaction' by IDFA? That is the question posed by
the funding of WanderOn, formerly a B2B marketplace
for the bicycle industry. The company once had the
domain name WanderOn.com. That site is now registered
to Kelly Grable of Arlington, Virginia, and a quick
visit demonstrates that this is definitely not a B2B
marketplace for the bicycle industry.

What happened to WanderOn? Brett Singer, formerly
chief creative officer of the defunct company and now
a film director and producer with Chicago-based Sneaky
Kings Productions, shared some of the story with
i-Street in a January interview.

"After the bubble burst, we literally just ran out of
money. And then we got our Illinois Coalition money.
So it was kind of like we were dead and then all of a
sudden we got a couple hundred thousand dollars," said
Singer. "So that money has since been taken by the
primary investor."

Since the 1997 inception of the TDB, the Illinois
Coalition has funded close to 30 startups through its
financing arm, the Illinois Development Finance
Authority (IDFA). Entrepreneurs present their business
plans to the Coalition, which assembles an evaluation
team, and makes a recommendation to IDFA. IDFA can
make disbursements of up to $300,000 matching private
investors.

WanderOn received $300,000 on January 31, 2001, five
months after the Illinois Coalition made its funding
recommendation to IDFA on August 31, 2000. But in that
span of time, Singer indicated that WanderOn basically
became a non-entity.

"We started shooting [our movie] the second or third
week of November [of 2000], that was really the day
that we kind of officially declared WanderOn on hold,"
said Singer.

Singer recognized a lag time in receiving the money.
And in the volatile world of startups, a lot changed
between being approved and receiving IDFA money.

"From that day - 'It's congratulations you have it' -
to getting the money might have been six months. It
was a really long time," said Singer.

"No amount of money would've made it work at the
time," he added. "Had we raised $10 million, we
would've been a $10 million dead company."

Kristina Koch, general counsel for IDFA, said that
WanderOn executed legal documents when they received
funding and after a quarterly-ending report in April
2001, indicating that they were a going concern. "We
did not knowingly put money into a company that was
not operational."
=================================================
[March 2003, Crain's Chicago Business]

The Illinois Development Finance Authority (IDFA)
would be forced to stop investing directly in
start-ups under a bill introduced late last month in
the Illinois Senate by Sen. Barack Obama, D-Chicago.
Bill 1426 would repeal a 1983 statute that authorized
the Illinois Venture Investment Fund, which makes
investments of up to $300,000 in area seed-stage
businesses.

The IDFA has invested more than $14 million through
the fund, including money for the Technology
Development Bridge Fund, which is jointly administered
by the Illinois Coalition, a quasi-public technology
booster group.

"(The fund) has been a major, major tool for small
business. To see that go would be a big loss," said
coalition Executive Vice-president Thomas Thornton.
============================================
http://www.eprairie.com/news/viewnews.asp?newsletterID=4484

Through a bill endorsed by Illinois Sen. Barack Obama
(D-Chicago), the Illinois Venture Capital Association
(IVCA) seeks to eliminate direct venture investments
by state agencies such as the Illinois Development
Finance Authority (IDFA).

The IVCA, on the other hand, encourages state
investments in privately managed fund of funds –
presumably, the proposed Illinois Opportunity Fund – a
program backed by the governor that would incent
participating firms to make local investments. A fund
of funds is collection of money from other private
equity funds.

"The IVCA supports a professionally managed fund of
funds that will be invested in Illinois-based private
equity firms," said IVCA President Jim Downing, who
worked for IDFA prior to co-founding the IVCA in 2000.
"We do not support direct investing or co-investing by
the state."

A spokesperson for Sen. Obama told ePrairie that Bill
1426 would not pass as currently constructed. The
bill's intent, rather, is to "raise the profile" of
how the state manages the venture capital process.

One notorious case in point is a $300,000 investment
IDFA made in early 2001. WanderOn, which billed itself
as a business-to-business marketplace for the bicycle
industry, collected money from the IDFA several months
after the company essentially ceased to operate.
==================================================
May 2002
IDFA spinning the wheel of fortune
State funding for new ventures through the TDB leaves much to
be desired

By Jeff Meredith and Darcy Evon

In one of his last appearances as president of the Illinois Coalition
- appearing as a panelist for a Technology Executives Club symposium
held in late February - Shaye Mandle said he wished the State of
Illinois would improve the amount of seed stage capital available for
local startups.

Perry Snyderman, vice chair of the Illinois Development Finance
Authority (IDFA), then indicated that the pool of available funds -
$15 million - through the state's Technology Development Bridge (TDB)
fund was not even being completely used.

"At the present time, I think there is more money than there are
qualified transactions being submitted on the startup stage," said
Snyderman.

Apparently that means a dead company can be considered a qualified
recipient of state money. I-Street uncovered the fact that IDFA
invested $300,000 into WanderOn, a B2B portal for the bicycle
industry, months after it became a non-entity (see www.i-street.com
for extensive coverage). Former employees of WanderOn said that the
money went to the primary investor, Frank Silzer, from family-owned
JFM Enterprises. Silzer told I-Street that he intended to invest the
remaining money into a new entity on behalf of WanderOn.

When confronted with the issue, some of IDFA staff, including the
general counsel, said they would ask for a return of the money while
Patrick Rea, executive director of IDFA, seemed to support Silzer
investing the money into a new entity.

"The terms have changed. And effectively it is our view that if we
left it in there, it would be like a fund of funds investment," said
Rea. "My charter is to assist - in a modest way - in the development
of venture capital funds. I will try to convince my board to do fund
of funds investments."

Since the 1997 inception of the TDB, the Illinois Coalition has helped
connect nearly 30 startups with funding through its financing arm,
IDFA. Entrepreneurs present their business plans to the Illinois
Coalition, which assembles an evaluation team and makes a
recommendation to IDFA. IDFA can then make disbursements of up to
$300,000 matching private investors.

As for the lag time that exists between the IDFA board approving a
deal and a check being cut, a key factor in the WanderOn case in that
it was more than four months, Rea said he would like to reduce that
time to 31 days.

A state problem

IDFA claims it does not receive state funding and is a self-supporting
bond authority that has devoted $15 million of its reserves to funding
the TDB program. Rea notes, "We have never received DCCA (Department
of Commerce and Community Affairs) money. We received initial funding
in the early 1980s around a $5 million amount. Investments were made
in which we lost a good deal of it and made most of it back. What I
did was then take it from $5 million and committed the number to $15
million in order to be part and parcel of this program."

Surprisingly, materials handed out at the governor's mansion for the
state's annual tech day credited Governor George Ryan with providing
"an additional $15 million for the Technology Development Bridge
program to be invested in Illinois companies," when in fact some of
the money was pre-existing.

But beyond the distortions of state literature, Illinois is at a
severe disadvantage in the public venture capital game. Shaye Mandle,
now executive director of the East West Corporate Corridor Association
in DuPage County, clearly recognizes that. In an interview conducted
with I-Street in late April, Mandle said, "Most states that want to be
active in technology are outpacing Illinois. Illinois is really
lagging behind in terms of government-catalyzed venture capital."

As a contrast, Mandle mentions a program in Oklahoma where the state
government held out millions in tax credits as an incentive for large
institutional investors like banks and pension funds to make fund of
funds investments.

"That gatekeeper is investing in early stage funds, but the tax
credits are only triggered if big institutional investors lose their
shirts. That's one way for government to act without having to
actually commit its own money," said Mandle.

The Oklahoma Capital Investment Board - which raises capital from
institutional investors - holds $50 million in contingent tax credits.
According to a recent report from fedgazette, a publication of the
Federal Reserve Bank of Minneapolis, the board has invested $26
million in Oklahoma firms, producing an internal rate of return of 28
percent. The kicker? It has not yet issued any tax credits and the
program's generating revenue for the state. Wisconsin has a similar
program. In 1999, it set aside $50 million in tax credits - to be
spread out over 10 years - for insurance company investments in
capital companies providing venture capital to in-state businesses.
According to a National Governors Association Report, at least 18
states offer such investment tax incentives -- Illinois isn't sharing
in any of the successes.

"There's only one identifiable entity in the State of Illinois making
a difference in technology and that's the Illinois Coalition," said
Mandle, who noted that the state puts "a couple hundred thousands
dollars a year" into the Coalition and that its priority is "bringing
large federally-sponsored research and research facilities" to the
state. "Management of the TDB - while the Coalition probably commits
25 percent or more of its resources toward the activity - is still a
small part of what it does."

Management of the TDB is often criticized for being extremely
arbitrary. Mandle indicated that the broad base of Coalition
activities should allow for lower expectations for the TDB program.

"The Coalition has far exceeded what anybody ought to expect," said
Mandle. "The fact remains that if Illinois wants to get serious about
science and technology, it really needs to join forces with the
private sector, put an adequate pool of resources behind this
activity."

Entrepreneurs often argue that the state's maximum $300,000 investment
- matching another $300,000 from private investors - is simply not
enough to make a difference; it can't aid with additional staffing or
marketing one's product. Mandle said IDFA can do a follow-up round of
$100,000 and that there were discussions earlier in the year about
"perhaps doing a third round." Under statute, IDFA could more money
and "their determination over the last few years with the program has
been that the [$300,000] is a good number," he said.

"I think some of what you're hearing may be more because of the
current economy. What does 300 grand do? I would agree that 300 grand
only lets you do so much," said Mandle. "600 grand (IDFA plus private
investors) when the economy was flush and venture capital was active,
was a good number for them to go through a seed stage and then go out
and raise a million. One of the problem we have today is nobody's
doing those deals anymore. I don't think the question is so much 'Is
it worth doing $300,000?' It's 'Can $300,000 carry you to the next
round?' and we all know that today the timetable is significantly
longer. And that's really why I raised the [idea of a] third round
investment. In this current economy, it makes sense to put some more
money back into some of the companies to get through this."

Getting in the door

The state funding program is poorly understood by entrepreneurs and
most do not know how to approach it. A former executive at Ikadega, a
now-defunct startup that provided high bandwidth server technology,
never applied for seed stage capital through the state's TDB.

"We were told that it was a waste of time by VCs and that we would be
on Medicar before we would ever get the money," said a former
executive at the company. "I think it's sad that the State of Illinois
doesn't recognize the opportunities that exist with small startup
technology companies like Ikadega, and to help them. The State of
Illinois doesn't know that Ikadega exists and certainly will not know
of its demise. If you go to Massachusetts and you go to California,
it's a different ballgame. The State of Illinois doesn't get it."

Christine Mason, former chief marketing officer for the now defunct
MetalMaker.com, echoed similar sentiments: "We didn't apply for
funding from IDFA because I don't think we even knew it existed."

Of I-Street's top 50 emerging tech companies for 2001, only six
received matching funds from IDFA, although roughly 42 would qualify
and were in search of funding.

Even if entrepreneurs know about the program and have a qualified
investor, getting approval from the Illinois Coalition to receive
matching funds from IDFA can be downright tough, and some would argue
completely arbitrary. The Coalition uses panels of seven people;
presenting firms need to earn five votes to gain approval.

Seven people unless only six are available, that is. 2Xchange, a
Chicago software company specializing in web-based asset management
and redeployment technologies, presented to six panelists on a second
time around and had four in favor, two against; they did not receive
approval. In an ironic twist, co-founder Stephen Meade said that after
they were rejected the first time he served as a judge for another
venture (which did receive funding) to better understand the process.

When Meade served as a judge,he observed that his co-panelists did not
review business plans at home as expected. They instead flipped
through them upon entering the session, much like students taking an
open book test.

"We can never control how much work those people put into the project.
I think for the most part our volunteers take the process very
seriously. They ask to be a part of it, they're certainly given the
business plans and financials and everything they need with plenty of
time," said Mandle. "You can never control how much time they're going
to spend, but I think for the most part they do an exceptional job of
really getting to the meat of the business plan, coming prepared with
specific questions to ask."

Mandle said the Coalition has had alternate panelists from time to
time. There were different models, including "having a pool and not
telling anybody who's going to be there until the last moment so that
everybody did their preparation ... that was something that they
didn't like that much." Even if the Coalition passes a deal through
one of its panels, IDFA's board can still overrule - Mandle said
IDFA's board has tabled or chosen not to fund companies approved by
the Coalition.

"IDFA's concern with the Coalition is that the pool of capital that
they have to invest isn't invested so poorly that IDFA loses the long
term opportunity to continue to do it ... IDFA wants to make sure
we're putting the dollars into the best opportunities to succeed,"
said Mandle. "There is no perfect system for the way the project is
done. The Coalition and IDFA had hundreds of hours of meetings and
strategy sessions in the two and a half years that I was there about
how we can make things better. There's been a lot of improvement,
there are still things that need to get fixed. It's still
unfortunately the only game in town."

Companies that received funding from IDFA and the dates the money was
received by the company (Source: IDFA)
Accelchip - 11/1/01
ClearStack - 8/15/01
Deliver Station - 11/12/99
Distributed Bits - 10/20/97 and 4/5/99
Epigraph - 5/3/01
Forest One - 8/23/00
MortgageBankingCenter - 8/28/00 and 4/5/01
Neodesic - 3/24/98
NetZilient - 7/21/00
Neuronautics - 3/29/01
Open Channel Software - 5/22/00
Perceptual Robotics - 11/14/97 and 6/3/99
PreviewPort - 12/19/01
ProofSpace - 3/16/00
ShopTalk - 5/5/98
SmartSignal - 3/6/98 and 5/28/99
Stonewater Software - 12/15/00 and 8/24/01
Touchsensor Technologies - 11/3/97
UserActive - 1/23/01
Venture Capital Online - 12/2/98 and 5/24/99
VideoHomeTours - 9/15/99 and 4/10/00
WanderOn - 1/30/01

IDFA also made two fund investments, one into Peter Fox's
Champaign-Urban Venture Fund and Tom Churchwell's ARCH Development
Partners.