SEED FUND PROJECT SUMMARY FORM

The VITEC2 Capital Seed Fund

Introduction

At the seed stage (or pre-commercialization stage) individuals seek financing primarily to complete product development, develop a working prototype, evaluate market potential, protect intellectual property, develop business plans, and build management teams.  The VITEC2 Capital Seed Fund will provide risk capital to startup firms established in the VITEC2 Technology Business Accelerator.

Definitions

Seed Capital Investment is defined as—Financing provided to research, assess and develop an initial concept elaborated by a company that may be in the process of being set up or may have been in business for a short time but has not sold its products commercially.

Entrepreneurship is defined as—Individuals who blend innovation with sound business practices to commercialize new products and services that result in high-growth firms.

Seed Fund Objective

The VITEC2 Capital Seed Funds has the principal objective of assisting in the formation, development and growth of highly innovative new companies in the communications and information technology sector, who are located at VITEC2 incubator facility and who need equity capital to help commercialize their new products or services.

Industry Focus and Size of Seed Fund

The Fund’s focus will be start-up firms in the Communications and Information Technology (C&IT) industry and located in the VITEC2 technology business accelerator in Mayagüez.  The Seed Fund will have $1 million to invest in viable C&IT related companies, up to a maximum of $100,000 per company.

Form of Equity Investment in Startup Ventures

The Seed Fund’s equity investment in C&IT related start-up firms would take the following form:

Straight Equity Investment Class of Stock. By investing in common stock, the Seed Fund achieves equal, dividend rights and liquidation rights with other common stockholders (voting rights would not be exercised). As an early-stage financial investor, the Seed Fund should plan to obtain a preference over any distribution common stockholders, whether by dividend, special distribution or distribution in liquidation. This goal can be achieved using preferred stock or debt instruments (such as debentures) convertible into stock. Such “stock” can be made convertible into common stock upon the occurrence of an initial public offering or other “upside” event.

Investment Policies and Terms

• The Seed Fund is not a grant giving body.
• The Fund will invest in growth-oriented companies that have a definitive
  competitive edge in technology, are at an early stage of development, and will produce an attractive return. The Fund's equity stake in start-up companies will be approximately 5%.
• Seed funding may not exceed $100,000 per company during a two-year period.
• Start-up companies must demonstrate a firm commitment of matching funds (1:1) in cash.  Matching funds can include Federal, other research grants, and private equity.  Letters of matching commitment from the company and its collaborators must accompany the application and will form part of the contract.
• Total investment in any one company cannot exceed 10% of the seed fund.
• The Seed Fund will not have Board positions in invested companies; VITEC2 may have Board positions in tenant companies.
• If a new company results from work financed with seed funds, it will be treated as equity investment in the name of the VITEC2 Capital Seed Fund.
• If an operating company is not established, but the investment generates
  license/royalty income, the Fund will receive a pre-agreed to percentage of
  proceeds until its investment (plus a generally accepted profit for similar
   market investments) is recouped.
• Any financial agreement or contract must approved/signed by the Seed Fund’s Manager.
• Firms interested in applying for Seed Capital funding must be recommended and endorsed by VITEC2 management. 

Eligibility Requirements

Eligibility requirements for a seed fund investment include:

• The company must be a start-up and operate in the communications and information technology sector.
• The firm must demonstrate existing matching funds or capability to provide matching funds within one year of investment approval. Future disbursements will be contingent on having provided the matching funds.
• Special consideration will be given to firms that have obtained Small Business Innovation Research (SBIR/STTR) grant awards.
• The company must demonstrate that its activities will result in innovative technology that can be patented or have a strong proprietary position.
• The company’s business plan must credible and demonstrate that it has the necessary technology, management expertise and financial resources to execute its business plan during the incubation period at VITEC2.
• The business should have job creation and export potential.
• Research on the business must indicate its commercial viability and capacity to generate income within three years of funding.
• The company must demonstrate an ability to attract licensing deals and/or third party equity funding within three years.

Use of Funds

Seed Fund investment proceeds can be used by the company solely for the purchase of services related to the development and commercialization of its products and that are provided by, or made available through, VITEC2. These include:

• Payment of rent at VITEC2

• Payment of utilities at VITEC2 facilities
• Professional support services offered by VITEC2 or subcontracted by them. These expenditures will cover costs related to:
• Technical feasibility studies
• Commercial feasibility studies
• Prototype development
• Protection of intellectual property
• Business planning
• Entrepreneurship training

Funds cannot be used to purchase equipment/furniture or pay managerial salaries.

Other uses of funds, not stated above, must have written approval by the Seed Fund Manager; and will be granted only in rare exceptions.

VITEC2 will help the companies in the Seed Fund Portfolio become "investment ready" by providing advice through its network of expert contacts, such as advice on company strategy, links to other sources of capital, and introductions to other technologies companies.  VITEC2 can also take an equity position in the venture.

Application and Approval Process

The application process is competitive and includes an initial screening, a technical evaluation, a commercial evaluation, recommendation by VITEC2 management, and a presentation to the Seed Fund Manager.

Before a final investment decision is made, the Seed Fund Manager or other designated person will undertake due diligence to satisfy the Fund's decision makers that the investment is sound. The representations and warranties of the company will be assessed regarding its:

• Financial status
• Sales or market projections
• Intellectual property—(patents held or applied for)
• Ownership of the ideas and IP
• Ownership of other property and assets
• The track record of the team
• Competitor approaches and technology.
• Required government approvals
• Absence of litigation
• Return on investment and exit strategy

No disbursements will be made unless the firm meets the tenancy requirements established by VITEC2 and has been accepted as a VITEC2 tenant.  Evidence of matching funds commitments will also be required.

Return of Capital and Exit Strategies

Decisions for recouping initial seed investment and exit strategy will be made and negotiated by the Seed Fund Manager on a case-by-case basis. The six principal ways of realizing a return on investment include:

• Share of up-front license fees paid to company
• Share of royalty income on licensed products
• Dividend income
• Redemption of equity based on a pre-defined schedule
• Sale of owned stock to company at a pre-determined price
• Company merges, is acquired, or completes an IPO.

Progress Reports

Funded companies will be required to provide quarterly reports giving details of technical and commercial progress, as well as copies of financial statements.