Hosts: Steve Borsch, Tim Elliott and Graeme Thickins (Phil Wilson is off this week)
Music: Nony Zero & their song “Surfin’ the Blast Wave” via the podsafe Music Alley.

Minnov8 Gang 101 – Is Tech a Bubble? is a post from: Minnov8 and published under a Creative Commons license.

This is great sport, people!  We can’t beat Wisconsin in college football for seven years straight, but, oh yeah, we got those cheeseheads when it comes to the game of innovation!  Or do we?  (And, Gopher fans, I won’t even bring up South Dakota.  Shees.)

“Innovation?  Jobs?  Has Minnesota lost it?  Not for one day in October we haven’t,” says The Collaborative in one of its promos.  “2010 marks our second full year of the worldwide recessionary malaise.  Our state’s economy is also not what anyone is calling ‘robust’.  Our unemployment rate is higher than it’s been in decades.  On the plus side, we’re still one of the brightest economies in the nation,” the pitch goes on to say.

“The positive gap between our jobless rate as compared to the nation is at its highest in 30 years… Yet we also hear many reports of our state losing its way in innovation.”

Can you sense the drama, people?  I’m nervously doing finger and hand exercises right now, in great anticipation of the nuances I may be able to capture on my Macbook or iPad (decisions, decisions) as I contemplate the live-blogging nirvana that awaits me Thursday.  It has me breathing heavy.

“Last year, in the throes of the recession, 54 companies gave presentations, 400+ investors and entrepreneurs came, shared, and discussed growth in tough times,” said Dan Carr, CEO of The Collaborative, in his announcement of this year’s event.  “It actually felt optimistic! These companies also go on to create jobs.  Lots of them.  Minnesota is 8th in the nation in venture backed employment: 365,000 jobs.”  (No word on how many of those people may have been laid off in recent times because those ventures couldn’t raise enough money.)

Carr continues:  “This year’s ‘homecoming’ promises another day-long celebration of ‘doing’ more than ‘hand wringing’.  It’s true that some of our greatest companies rise from difficult times.  Our annual conference has a knack for bringing together Minnesota’s best ‘Up & Comers’.”

The 2010 version of the conference will begin with a look at the current state of venture investing, by way of an opening address from John Taylor of the National Venture Capital Association.  That will be followed by 18 Presenting Companies giving seven-minute presentations, plus somewhere between 20 and 30 more startups in the “Entrepreneurial Showcase” giving one-minute introductions.  (I’ll be particularly interested to see if any of those entrepreneurs can make a impact in that minuscule amount of time.  I’ve heard several of the new 90-second “Alpha Pitches” at the last few DEMO conferences in California, most of which fail to impress, and they have 50% more time.)

Notable in the 2010 presenter group, says The Collaborative, is the mix of industries and stages… “reflecting Minnesota’s variety and also our strengths: Medtech (Inspire Medical Systems, Galil Medical, and InterValve) … Cleantech (EarthClean, tenKsolar and Packet Power) … Technology (Alvenda and Swift Knowledge) … and mouth guard maker Bite Tech … and more.”  (I don’t know about you, but I beam with pride when I tell people about Minnesota’s rich tradition in mouth protection.)

But wait, there’s more!  Panels and workshops during the day (speakers and panelists) will address these topics:

• Financing Innovation circa 2010:  Angel, Venture Capital, and Private Equity
• Medtech in 2010:  Innovating with New Science, Products, and Markets amid FDA and Reimbursement Challenges
• Next Generation Technology:  Minnesota’s Unique Advantages and Opportunities
• Financing in a Challenging Economy
• Exit Strategies
• Intellectual Property and Financing
• Going Public
• Planning Your Long-Term Financing Strategy

You can still register for the event.  And (pssst) I hear the “MHTA” might even have a $100-off discount code.

Some 350 or more are expected at the confab, Carr tells me.  Sure, I know most of them already — but the thought that some in the group may be potential new social media friends for me makes me almost giddy.  And, doggone it, I don’t even have to drive to Wisconsin or South Dakota to meet them.  (This conference has been attracting more and more out-of-state attendees in recent years, which is commendable.)

The Twitter hashtag for the event is #mnconf.  I wonder how many of the blue suits might be tweeting.  Not holding my breath on that, but maybe I’ll set my live-blog software to display all the tweets attendees are blurting out during the event.  It’s time we loosened up this venerable conference a bit — thank God Twitter happened, huh?

Watch for our post with the link to my live blog here on Minnov8, which we’ll have up by late Wednesday.

In Its 24th Year, Venture Conference Asks If Minnesota Has ‘Lost It’ is a post from: Minnov8 and published under a Creative Commons license.

Ironic that it was raining like mad all day? Yep. My key takeaway? There is A LOT of very interesting and exciting investment and entrepreneurial activity going on in Minnesota! There were well over 200 people in attendance, substantially more than last year and a great turnout.

Opened by Steve Mercil, CEO of RAIN Source® Capital (the largest network of Angel Investment Funds in US), and keynoted by Richard Sudek, an angel investor, former entrepreneur and academic, there was ample opportunity to connect with local and regional startups at tabletops in the lobby. I happened to run in to Lief Larson of Workface (who was showing BusinessCard2 with some new and interesting value added capabilities); Aaron Weber (co-founder of W3i) and his to-be-launched startup Inveni on Tuesday out at Techcrunch Disrupt (and it is HOT so go watch the video); Lisa Foote with MixMobi who has garnered key investments already for their mobile platform; and Jerry Grabowski of Redliner (see Minnov8′s story here) among others.

Two panels rounded out the day: one on Angel Investing in 2010 & Beyond and the second Funding Universe’s Crowd Pitch…a company showcase where six startups pitch their business plans followed by screening sessions and voting on whether they’re worthy of investment. Crowdsourcing at its best (the winner won’t be announced for another hour or so).

Graeme Thickins pulled aside Pete Birkeland, CFO at RAIN Source Capital to chat about the event. Pete is part of a team that manages 23 funds in 6 six states with $40 million under management and is a guy who has worked in this area for 10 years on both the entrepreneurial and investor side.

Making Rain in Bloomington is a post from: Minnov8 and published under a Creative Commons license.

Though I’m a glass-is-more-than-half-full kind of guy and am constantly seeking out silver linings, opportunities and the positive, I wouldn’t be a good risk manager if part of that seeking didn’t acknowledge input that pointed out the downsides and the negative so I could modify our business strategies.

Suster starts off talking about the “funding frenzy” occurring in 2010 and later in the article discusses why this concerns him. He points out that the US economy has structural employment issues, consumer’s “piggy banks” (i.e., their houses) are empty, the appetite for government stimulus has waned, and what he sees as an end-of-year stock market sell-off will negatively affect VCs and angel investors.

His argument is that 2011 is likely to be bleak and that this year’s initial funding rounds, while fabulous due to that funding frenzy, could leave entrepreneurs in a “funding gap” as VC money dries up.

If you have time, read the entire article of if not, this post was originally published in a shorter format in the Wall Street Journal online.  Either way, read it.

Risks for Investors and Entrepreneurs is a post from: Minnov8 and published under a Creative Commons license.

How true is the perception that Minnesota lacks funding and risk-taking venture capitalists? If you read these three things below, you’ll see that it’s highly likely perception is reality.

• Having Eric Caron (@ecaron) point out this thread to me at Hacker News which was sparked by someone submitting this tech.mn article for discussion. While commenters have usernames vs. real ones and there is a lot of anecdotal discussion in the thread, it’s a troubling read since this is how many startups feel about being here in Minnesota

• Next I fired up my iPad RSS reader in order to skim the top tech sites I read at breakfast each morning. I immediately was presented with an incredibly contrarian-to-Minnesota-VC-funding-experience in an article on the tech site GigaOM entitled, “Seed Stage Investments Jump Sharply in Q2 2010.” It begins with this: “If there were any doubts that the entrepreneurial activity is hitting new highs, then the new data from the National Venture Capital Association puts them to rest –venture capitalists invested $6.5 billion in 906 deals during the second quarter of 2010, thanks to a renewed interest in seed and early stage companies along with new found enthusiasm for clean technology-oriented startups. This is in sharp contrast to a slowdown in the new money flowing into venture funds themselves.“

• In a pretty clear sign that everyone’s perception is reality came when I popped open StarTribune.com’s business section this morning and this article leapt out at me, “Venture capital still scarce in Minnesota.” It led with this: “Venture capital investments in emerging Minnesota companies perked up a bit in the second quarter but remained on track for the weakest year in 15 years of record-keeping, according to data being released Friday.“

The passing of the Angel Tax Credit will go a long way to tap in to the seed stage momentum GigaOM reported on this morning. Read Why Now? MN Legislature Passes Bill w/Angel Investment Tax Credit and Angel-backed Startups 30-50% More Likely To Be Successful to learn more about seed stage investing in Minnesota…

…but then tell us what else needs to be done? Make your voice heard in the comments!

Is Perception the Reality with MN Venture Funding? is a post from: Minnov8 and published under a Creative Commons license.

On July 31, 1790, the first U.S. patent was issued to Samuel Hopkins for an improvement "in the making of Pot ash and Pearl ash by a new Apparatus and Process" and signed by then President George Washington.

Let’s say you’ve founded a startup and think you have a completely original idea no one has thought of before with new approaches to the way an old process works. You might then think all you have to do is patent that process and you can achieve the protection patenting is all about: excluding others from copying you.

Oh, if it were only so simple. The world of patents has become incredibly complex and is a minefield just waiting for a startup to get traction selling their offering before the unaware entrepreneur takes a step, hears a click, and thinks “Oh-oh” just before the “patent landmine” blows up. This is especially true in the area of method (i.e., process) patents but there’s hope.

Ernest Grumbles III

Ernest Grumbles III, an intellectual property attorney with Merchant & Gould and co-founder of MOJO MN, has one of the best posts I’ve read yet at StarTribune on the current state of method patents (and it’s obvious why you need somebody like him to ensure your idea is capable of being patented or even worthy of protection). As Ernest points out, method patents are neither good nor bad and are granted based on the merits of the claim and its level of abstraction. If you have a method idea you’re already moving forward on (or are about to) then you owe it to yourself, and your current and future investors, to make certain you are protected and that you wrap that idea in a way that minimizes abstraction and ensures you’re granted that patent!

That said, calls for patent reform are growing louder by the week and many of us who see some patents as ways to extort money from entrepreneurs and innovators or stifle innovation, hope the U.S. Patent & Trademark Office moves faster on reform.

Until there are significantly more precedents set in the area of method patents, people like Ernest will have no shortage of work and startups no end of concern over whether a method idea is too abstract to be patented or likely infringing on some obscure patent already granted.

Method Patents: Good or Bad? is a post from: Minnov8 and published under a Creative Commons license.

From the executive summary:

What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund.

Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance.

Key concepts include:

• Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group.
• Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent.
• Investment success is highly predicated by the interest level of angels during the entrepreneur’s initial presentation and by the angels’ subsequent due diligence.
• Access to capital per se may not be the most important value-added that angel groups bring. Some of the “softer” features, such as angels’ mentoring or business contacts, may help new ventures the most.

I came across this post from the excellent blog of David B. Lerner, a guy who describes himself as, “a Serial Entrepreneur, Director of Columbia University Venture Lab/Spin-Offs Program, Angel Investor, and Golfer-in-Exile” but who is, most importantly, someone who tracks this space and has this series on angel investing if you’d like to know more.

Angel-backed Startups 30-50% More Likely To Be Successful is a post from: Minnov8 and published under a Creative Commons license.

Sponsored by Rep. Ann Lenczewski (DFL-Bloomington) and Sen. Tom Bakk (DFL-Cook), HF2695/SF2568 includes a small business investment tax credit — the so-called “angel investor” credit — and several others.

While we applaud and are delighted by the passage of this historic tax credit to kickstart Minnesota innovation, why did this get passed in a time when Minnesota is struggling mightily with balancing our state budget? Is this more about competing with Wisconsin for startups, or a true effort to create a climate that is a catalyst for innovation in Minnesota?

NPR’s Bob Collins take on it might shed some light when he points out how VitalMedix’ CEO talked to the StarTribune about the need for an angel tax credit, took investment predicated on moving his operations to Wisconsin, and has now filed for bankruptcy:

An “Angel investment” tax credit rewards investment in companies with tax breaks. Investing in a start-up company, especially in the high-tech world, is risky. The angel investor credit provides a cushion for the investor, its proponents argue.

Wisconsin has such a program. Minnesota doesn’t.

While Collins didn’t come right out and say that this bill is a reaction to Wisconsin luring startups away from Minnesota–especially when it comes to a sector, medical devices, many proudly boast that within which Minnesota enjoys a dominant position–but there is evidence that this Wisconsin competition is precisely why this modest angel investment tax credit was included in this bill at this time rather than true leadership in startup investment incentives.

If you read through this report Tax Incentives and Venture Capital Financing (PDF) you’ll see the evidence (Wisconsin, Wisconsin, Wisconsin). This is a report prepared by MN House Research staff at the request of the chair of the Committee on Taxes to provide the committee members with background information as they evaluate whether to provide incentives (either tax incentives or direct spending incentives financed with cutbacks in other tax incentives) for venture capital investments in Minnesota businesses.  It summarizes the arguments for venture capital incentives, describes incentives provided in Wisconsin, and then provides three types of information:

• A compilation of data on the amount of venture capital financing in Minnesota from 1995 to 2009, and comparison of Minnesota with Wisconsin, the region, and the rest of the nation. This data is taken from what appears to be the only comprehensive, publicly available, nationwide source of information on venture capital finances by state, The MoneyTreeTM Report prepared by PricewaterhouseCoopers and the National Venture Capital Association.

• A discussion of the investment incentives provided in Wisconsin, based on the Wisconsin and Minnesota experience as reflected in the MoneyTreeTM Report data.

• A discussion of the advantages and disadvantages of using tax incentives versus a direct spending approach (e.g., matching grants instead of tax credits) to encourage one narrow form of venture capital investment in Minnesota, angel investment.

This report is just a presentation of the data and it appears that, while a great first step, more must be done to place Minnesota in a national and globally competitive state as well as one that fosters innovation in multiple sectors of our diverse Minnesota economy.

Why Now? MN Legislature Passes Bill w/Angel Investment Tax Credit is a post from: Minnov8 and published under a Creative Commons license.

MinneSpark is an initiative from the team that brings you MinneDemo and MinneBar

What could you do with $1,000 for your best idea? Could you turn it into a scalable business? Let’s find out!

MinneSpark will award 1 to n grants of $1,000 to Minnesota-based teams who demonstrate to their trustees the ability to take that money and turn it into something real. This is about doing more with less, and building a profitable business from day one.

Winners will get some help along the way in the form of mentoring from the trustees and services from sponsors.

Applications are due by April 30, 2010. Winner(s) will be announced at MinneBar on May 22, 2010. Find the FAQ, application and more here.

MinneSpark Has $1,000 (Potentially) For You is a post from: Minnov8 and published under a Creative Commons license.

Minnesota faces a crisis of competitiveness in attracting high-tech industries, and needs a comprehensive science and technology initiative to remedy the problem. A 16 member committee of experts from the public, academic and private sectors have been assembled to assess the challenge and make recommendations to the legislature, and on February 16th, Co-Chairman Dan Mallin (@danmallin, partner in Magnet360 and co-founder of the Minnesota Cup) presented the findings of the committee to the state legislature.

The full report is available on the DEED (Department of Employment and Economic Development) website here. Watch these videos in two parts and listen to the end for the recommendations the committee makes around incentives for investors to accelerate funding for startups and growth of companies in Minnesota:

http://www.youtube.com/watch?v=xxQ_-dLcKFg

http://www.youtube.com/watch?v=0DDzQJXW6Kw

Dan Mallin Presents MN Science & Tech Committee Findings is a post from: Minnov8 and published under a Creative Commons license.

Members of the largest multi-state network of angel investor groups in the country will gather in Minneapolis for the 6th Annual RAIN Makers Conference on September 23-24 at the new Hilton in Bloomington. Sponsored by St. Paul-based Rain Source Capital, this event has been held in other cities throughout the Upper Midwest in previous years. In addition to members of the RAIN funds network of angels, this is the first year that members of the Angel Capital Association are also being invited. RAIN Source Capital is partnering with the ACA, which is dubbing the event a regional meeting for their organization, to encourage networking and sharing of best practices in investing and syndication.

RAIN Source Capital anticipates more than 100 angel investors representing its 23 funds across six states will be in attendance, along with investors of other angel investment organizations. The company told me they expect a larger representation from the Twin Cities this year, of course, since the event is being held here. Any active or would-be angels (accredited investors) are welcome to register for the event, and RAIN said entrepreneurs may also register, although they will not be allowed to attend the second-day (Thursday) morning sessions.

Minnov8 is a media partner for the RAIN Makers Conference.  Steve Borsch and myself will each be attending portions of the event, and we’ll have a table where we plan to do some audio and video interviews during breaks.  (I’m returning from DEMOfall in San Diego late the night of the 23rd, and will attend RAIN Makers the morning of the 24th.)

The first day of the event will feature sessions devoted to trends in angel investing, due diligence tools and techniques, corporate governance/board service, valuation and deal terms, and patent landscaping, followed by a reception. One the second day, there will be a session in the morning devoted to four companies making presentations, chosen from among RAIN Source’s portfolio companies. The presenting firms have each received an investment from at least one RAIN fund (angel network), but are now being syndicated to the rest of the fund network for additional financing.  Those companies are:

• Inovus Solar (Boise, ID) — This company has pioneered the next generation of outdoor street and area lighting that reduces dependence on the grid, power bills, maintenance bills, and CO2 pollutants. Its SmartPole™ and Visia™ LED retrofit product lines come from the minds of people who helped build companies like Hewlett-Packard, Microsoft. and CH2M Hill.

• Ntractive (Grand Forks, ND) — Ntractive launched the latest release of its product, Elements CRM 2.0, on July 21st, 2009. The release of Elements CRM 2.0 has garnered significant attention and recognition from Apple and the Mac market, including the honor of being named an Apple “Staff Pick.” Elements CRM is a Customer Relationship Management solution built on a new “hybrid” platform, which is part desktop and part cloud. Elements CRM is currently available on the Mac and iPhone.

• Pranah Storage Technologies (Stillwater and Mendota Heights, MN) — Pranah designs and manufactures scale-out unified storage systems for the SMB market, in the under $50K market segment, the fastest growing part of the data storage industry. Its hardware and software systems are purpose-built for data storage, designed and built domestically, delivering simple, scalable, and flexible network storage. The efficient design behind the Pranah product makes it the most complete network storage system available in a 1U footprint.

• Recon Robotics (Edina, MN) — The company launched the Recon Scout® throwable reconnaissance robot in the local, county, and state police/SWAT market. Building on that successful start, it continues to design, develop, manufacture, distribute, and support miniature robotic systems. The company’s robots are specifically designed to provide real-time information in hazardous or restricted space areas, for military, police, and commercial markets worldwide. It has now sold more than 500 of its Recon Scout family of robots, has recently won a large military order, and has distributors in 28 countries.

After these companies present, in what’s being called a “Syndication Showcase,” attendees will divide into four breakout groups to discuss due diligence and investment recommendations relating to each of those firms.  The afternoon of day two will feature panels focusing on the topic of exits, including M&A, the current market, and analysis of some of the RAIN Funds network syndicated investments and their exit potential.

Cosponsors for this year’s RAIN Makers Conference include the Blandin Foundation, Cimarron Capital Partners, Development Capital Networks, MN Deptartment of Employment & Economic Development, Oak Ridge Financial, Deloitte, Sage Group, ESD Group, Quazar Capital, Ethicon/J&J, Gray Plant Mooty, Granite Equity, Sofia Angel Fund, and South Metro Investors.

More About RAIN Source Capital

RAIN Source is a multi-state network of investment funds that are made up of angel investors who are interested in supporting growing companies. The company helps bring together like-minded angel investors to form individual RAIN funds, and then provides these funds with a process for due diligence, legal templates, management support, access to deal flow, and other resources. RAIN funds share expertise, deals, and experience between and among RAIN Source Capital’s multi-state network to support growing companies throughout the area. RAIN Source Capital works with angel investors in Minnesota, Iowa, North Dakota, South Dakota, Montana, Idaho, Washington, Oregon, and other areas, where it expects to form additional RAIN funds in the next year. There are currently 23 RAIN funds located in:

• Minnesota – based in Alexandria, Grand Rapids, Worthington, Willmar, Montevideo, St. Cloud, Mankato, Northfield, and Minneapolis.

• Iowa - based in Cedar Falls, Mason City, and Rock Rapids.

• North Dakota – based in Grand Forks, Fargo, and Bismark.

• South Dakota – based in Sioux Falls, Brookings, and Sisseton.

• Idaho – based in Boise.

• Montana – based in Kalispell.

RAIN funds range in size from seven to 61 members, who have pooled anywhere from $500,000 to $2 million in each fund. Each fund determines what industry(ies) it will focus on, and the type and level of financing to provide, based on the interests and expertise of its members. Each group or fund uses the proven RAIN fund model, with support from RAIN Source Capital’s headquarters staff, for identifying potential deals, performing due diligence, making investment decisions, and monitoring those investments.  The RAIN fund network currently has more than $33 million invested in 55 companies.

To register for the upcoming event, go to the RAIN Makers Conference page.  Or, for more information, please call Dawn Lundquist at RAIN Source Capital at 651-632-2140, or email her at dlundquist (at) rainsourcecapital (dot) com.

‘RAIN Makers’ Event to Attract Angel Investors from Far and Wide is a post from: Minnov8 and published under a Creative Commons license.

“Seed funding is the earliest stage of venture funding.  It pays your expenses while you’re getting started. Some companies may need no more than seed funding. Others will go through several rounds.  There is no right answer; how much funding you need depends on the kind of company you start.  At Y Combinator, our goal is to get you through the first phase. This usually means: get you to the point where you’ve built something impressive enough to raise money on a larger scale.  Then we introduce you to later stage investors or occasionally even acquirers.” (More on Y Combinator’s About page.)

YC’s application process is well explained on their site, a process FanChatter went through earlier this year, before their selection in mid-April.  After sitting on this story for some time, waiting for the TechCrunch post to break first (which is the normal way YC companies get announced), what follows is the result of a phone and email interview I did over the past few days with FanChatter founders Marty Wetherall and Luke Francl, who remain in Silicon Valley through August. (The third founder, Norm Orstad, was not available.)

Minnov8: Tell us about how you came to apply for the Y Combinator program. Why did you think a MN startup would stand a chance, and why did you decide to do it this year?

Luke: It was pretty much my idea, but it was basically for the hell of it. I figured “why not?” We made a pact that if we got in, we would do YC for sure, no matter what. Being from Minnesota didn’t figure into my decision at all; YC doesn’t really discriminate based on geography. As for the timing, it didn’t occur to me to apply sooner. I think that worked out for us, as YC expanded somewhat for the Summer 2009 class, due to the $2M investment they had raised. [That was primarily from Sequoia Capital.]

Marty: I’d always heard about Y Combinator as this program where only the best and brightest startups were allowed.  It just sounded cool like that, even though I wasn’t very knowledgeable at the time about Paul Graham or Hacker News.  All I knew was that FanChatter needed something big to happen, so we went for it.

Minnov8: Give us the quick story on the process — starting from when you applied, to when you were invited to make the trip to Mountain View to pitch, and then how you were chosen as a finalist.

Luke: The application is straightforward. The most challenging part is the video. We spent more than two hours working on a one-minute video. The first inkling we had that we might get selected was when Paul emailed me to say our video didn’t work. Crap! But that showed they were interested.  April 6th was nerve wracking as we waited to hear if we’d gotten an interview. Finally, at 7:30 that night, we got the email that they wanted to meet with us. We picked a time and flew out the morning of the interview.  Afterward, you have to wait around until YC calls you that evening. We got called about four hours after our interview.  YC has standard terms which everyone knows in advance, so you pretty much just have to say “yes” or “no.”

Marty: Couple things.  First, I’m a film and TV guy with well-known Super Bowl spots on my list of credits, and this video was the simplest thing I’ve ever done.  That’s because I didn’t have the brain space to make it into anything more than dudes talking into a web cam — but we must have said something right because they told us it was good!  Second, there’s a photo on our blog of Luke getting the call that we were in.  It was a great moment.  It felt like FanChatter had arrived. [Here's that photo of Luke taking the call from YC's Paul Graham, shot by Marty.]

Minnov8: The amount of seed capital each Y Combinator startup gets is not huge, but give us your take on the other benefits of being selected.

Luke: Yeah, the money is not really the main benefit of Y Combinator for a company like ours. I think if you were fresh out of college and used to living on ramen, $15,000 or $20,000 would go a long way, but we all have mortgages. On the flip side, we already have customers and so we can afford to take a little time and try to make this work. For the company, we get an incredible inside view of how Silicon Valley works, and a chance to pitch to the best angels in the Valley on Demo Day. For me personally, I knew I couldn’t turn down this adventure, even though I’m giving up income and living apart from my wife for the summer.

Marty: Definitely a once in a lifetime opportunity.  I’ve lived and worked in LA and felt how the film industry runs that town.  Colors everything about it.  It feels like that in Silicon Valley, but it’s tech.  In coffee shops, what you overhear is tech talk.  Startups, angels, and VC.  It’s been fun to experience this.

Minnov8: Once you were accepted into the program around mid-April, how were you able to keep it such a secret — and why did you have to?

Luke: Keeping this under wraps has been incredibly difficult, because we wanted to shout it from the rooftops. But we were advised not to blog about being accepted to Y Combinator, because then it wouldn’t be news when we launched, meaning we’d have a difficult time getting covered by tech blogs. This was a tough row to hoe for us because we’ve been around for a while. I kind of wish we’d announced it sooner — we could have easily been the first YC launch of the summer, but that honor went to our friends at Bump.

Marty: Once we knew we couldn’t talk about it until we launched, we decided we’d use a new piece of business for our coming- out party.  We got that with the debut of our new ChatterBox feature on the homepage of the Minnesota Timberwolves.

Minnov8: Tell us what the process was like to apply and, then, once selected as a semi-finalist, get up in front of the four judges to pitch FanChatter.

Luke: We spent a lot of time crafting the application. Every time I looked at the instructions, it seemed like there was some facet I’d missed, and I tried to hew very closely to the instructions, especially around answer length. I also paid close attention to the basics, like spelling and grammar, so there wouldn’t be any excuses to put our application aside. Paul and his partners look at hundreds of applications, so I didn’t want to give them a reason to pass ours by.

Waiting around at the YC office for the interview was the hardest part. I’d read horror stories about how you’d be able to get out two sentences and then Paul was just going to savage your idea. So, I practiced our demo, and Marty practiced our two sentences. There were a few other people waiting around so I showed them the demo, and I got to see theirs.

Once we got into the interview my nervousness was lifted right away. Paul was excited to see our demo. Paul, Jessica, Trevor, and Robert came around to the other side of the table and crowded around my laptop. [There's more about the four YC partners on YC's People page.] Then Paul sort of riffed on things we could do — I think he came up with about two years’ worth of work in about 10 minutes — while Jessica tried to bring things to a close so they could stay on time.

Marty: It’s true.  Luke kept grilling me the whole trip out here. “What are you going to do?” over and over. Not in terms of the interview, but in terms of the company.  So, we were ready.  The interview was easy once we got in there.  It’s definitely the closest I’ll ever get to feeling like a contestant on American Idol.

Minnov8: Being chosen as a winner required you to move to the Valley for the summer.  How did you, Luke, and Norm handle that, with respect to your “other” lives, and how long are you out there?

Marty: My wife and two-year-old daughter came out here with me, which has been both good and challenging. Startup life is round the clock, but we’ve made it work.  In many ways, it would have been easier as a young guy just out of college, as many of our YC classmates are.

Luke: I was already doing independent contract development work (hey, if this startup thing doesn’t work out, let me know if you need a good Rails developer!), so I finished up the contracts I was working on and that was about it.  My wife and I had planned to take a trip to Italy this summer (that was “Plan A”), so I had to pass that up. We’re out here until sometime in September, and then we’ll see after that.

Minnov8: Describe a typical day for you this summer in the Y Combinator program in Mountain View. Where do all these company founders work?  Are there events where you all get together?

Luke: For me, a typical day is programming, programming, programming. We have a quick stand-up meeting in the morning, and then I try to hack away at our products. I don’t see the other startup founders much, except on Tuesdays when we all get together for the YC dinner. That’s the social highlight of the week.  Almost everyone works out of their apartments, though I know of one group that’s living out of their office!

Marty: Our apartment is in Mountain View, just a few blocks from YC’s offices. Those Tuesday dinners at Y Combinator really define the program.  That’s where we meet and listen to amazing speakers from the startup world, including successful YC alums.  It’s interesting to check in with the other founders in our class to see what they’ve accomplished since the previous week.  I think it pushes all of us to keep up the momentum.  [Here's a photo of Luke and Marty, center, at one of the Tuesday night meetings, from a Flickr set by "socialmoth" - a YC alum named Paul McKellar.]

Minnov8: We’ve heard the mantra Y Combinator puts forth for its companies is to “Make something people want.”  What did FanChatter, which is not a brand-new startup, propose to “make”?  Did you essentially propose to improve your offering for consumers in order to be selected?  If so, how are you coming with that new work?  And when will new features be available to your existing users?

Luke: I think an increasing number of companies coming into YC already have products or working demos. They liked that we had customers — that was very attractive. We sort of pitched it as, “Look how far we’ve come working on this in our spare time. Imagine what we could do if we did this full time.” We’ve been rolling out new features to our existing customers all summer, as well as creating the new ChatterBox product. Paul’s been very helpful in helping us figure out the “big picture” of where we should be going: making more revenue for our clients (and getting a piece of that).

Marty: In our case, we’re making something that sports teams and other businesses who have fans want.  More engagement so they can make more money.  I’ve always believed that content sharing is the path to engagement, so that’s what we’re doing with Scoreboard Photo Sharing and the ChatterBox — and that’s just the beginning.

Minnov8: So, what is yet to happen in the Y Combinator summer program, as you’re now about two months into it — and what does the future hold for FanChatter?

Luke: “Demo Day” is what it all leads up to. [That's in late August at YC's offices, attended by many VCs and angels.] After that, we’ll see. We’re working on becoming ramen profitable, but also looking to raise some angel money.

Marty: Who knows?  Hopefully we’re on to something and fan engagement can carry us beyond sports and into music and TV and anywhere fans come together around a common interest.  There’s so much potential for interesting things to happen, and that’s where we want to be.

We at Minnov8 certainly wish the founders of FanChatter all the best as they go forward. And we love the fact that they just happen to be doing great things for our sports teams here in the Twin Cities!  For more, see the news release the company did on August 4. The TechCrunch story that broke August 1 is here: YC-Funded FanChatter Takes Social Media To The Ball Game. And another good story followed that on MediaPost’s Online Media Daily.

If you’re a startup thinking of taking a run at applying for the Winter 2010 Y Combinator program, there are some great tips on YC’s site, and a FAQ page provides even more insight into how you might be able to take advantage of this excellent program.

What’s your take?  Will you apply?  If not, why not?  What are your picks for other promising startups here in Minnesota who should apply?  Tell us in the comments.

FanChatter Goes to the Valley, Tapped by ‘American Idol’ for Startups: Y Combinator is a post from: Minnov8 and published under a Creative Commons license.

As a sidenote, I worked for a company called Clothier-Herold Co in the early 1980′s on the side of the firm that represented this little company called “Apple Computer.” The other side of the rep business sold Visicorp (Visicalc, etc.), Microsoft (which, upon going public, I thought would never make it) and a bunch of PC-oriented lines of product. In addition, our firm represented Open Systems, though none of us ever met Ann at the time.

A strategy consultant for prestigious clients such as IBM, Microsoft, Price Waterhouse, and numerous start-ups, Ann has co-authored the book Object-Oriented Software and has written articles for numerous publications. Ann received a BA in mathematics and in business administration from the College of St. Catherine, and an MA in education and international economics from the University of St. Thomas (Minnesota), which also subsequently awarded her an honorary Doctorate of Laws. She currently serves as a director of Voltage Security, Krillion, Mulesource and Star Analytics, a member of the Board of Trustees of St. Thomas www.stthomas.edu, and co-chair of SD Forum www.sdforum.org.

In this Idea Projects video, Ann talks about cloud computing and how by moving technology from location-based servers to a virtual environment, with expanded if not universal access, the opportunities for innovation increase exponentially. As a software funder she sees a trend towards 100% presence on any device at any time.

http://www.youtube.com/watch?v=ip3kgMKvyIw

VC Ann Winblad on Cloud Computing is a post from: Minnov8 and published under a Creative Commons license.

In addition, if you’re an investor with any money left in your 200.5k (i.e., half of a 401k) and could stomach some internet investing, then viewing opinions and recommendations on where to invest is key.

In both cases, an analysis of the potential of various sectors of an internet economy — by one of the world’s leading financial institutions, JPMorgan — is reason enough to spend the time necessary go through their “Nothing But Net” report.

Highlights of areas covered within it include:

• US Sector Outlook
• Ad Networks on the Rise
• eCommerce Outlook
• The Mobile Market
• Social Networks Primer
• Cloud Computing Outlook
• Internet for Social Good

…and much more.

The paper is embedded after the jump along with a download link.

Download PDF here.

JPMorgan Internet Investment Guide is a post from: Minnov8 and published under a Creative Commons license.

The Minnesota Department of Commerce just released this 2008 Investor Fraud Traps listing (in alphabetical order) and offer it as a warning:

Deficient Disclosure: The recent investigations by state securities regulators related to auction-rate securities (ARS) have reinforced that investors should remain cautious when pitched complex investment products accompanied by deficient disclosures or when advised to concentrate their investments too heavily in one investment product. It is best to avoid investment pitches that would lead you to put all of your eggs in one basket, especially if it’s a basket you don’t fully understand.

Energy Scams: The substantial increase in energy costs has made scams related to energy more prevalent. State and provincial securities regulators are seeing not only shady oil and gas investments, but also scams that promise the development of new technologies to increase the efficiency of energy consumption or to extract energy from sources previously thought too expensive to develop.

Online Affinity Fraud: In a new twist on affinity and online investment fraud, Tyler said NASAA members are concerned that unscrupulous individuals are trying to use social networking websites to lure people to meetings that may promote fraudulent or unsuitable investment products. “Social networking websites create an environment ripe for affinity fraud,” Tyler said. “Fraudsters can take advantage of the fact people freely share information with both their real and ‘virtual’ friends by posting it to their profile,” Tyler said. “Communication tools provided by some social networking websites make it easy to advertise and promote investment scams to a wide audience for free.” Investors need to do their own research before making an investment and should not simply rely on ‘expert’ advice given at a seminar or meeting.

Prime Bank Schemes: Promises of receipt of astronomical profits from vehicles that execute “off-shore trades of foreign bank debentures” only available to very wealthy people and cloaked in secrecy are the securities equivalent of a purse snatch. They simply do not exist, and once money is handed over, it will never be recovered.

Private Securities Offerings: Con artists are turning increasingly to private securities offerings under Rule 506 Regulation D of the Securities Act of 1933 to attract investors without having to go through the full registration process. Although sometimes legitimate, these offerings are often associated with fraud. Also, proceed with caution when encouraged to invest in “general partnership” or “limited liability companies.” Speculative deals often are packaged as such in an attempt to evade the consumer protection requirements of state and federal securities laws.

Promissory Notes: For sophisticated or corporate investors, promissory notes can be a good investment, providing a reasonable reward for those who are willing to accept the risk. However, promissory notes that are marketed broadly to the general public often turn out to be scams. Promissory notes are sold as instruments that guarantee above-market, fixed interest rates, while safeguarding their principal. When interest rates are low, investors may be enticed by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention or capability of ever delivering the returns promised by the sales person; leaving the note worth less than the paper on which it is printed.

Pump and Dump Schemes: E-mail and fax spam, phony press releases and telemarketing drives are the tools of fraudsters who “pump” up the value of low priced securities traded on the “pink” sheets which are then “dumped” on naïve investors who purchase the stock at inflated prices. The balloon breaks when the promoters no longer maintain the myth that there is value in the shares and investors are left holding worthless stock certificates.

Real Estate Investment Schemes: As the housing market continues to reel from the subprime lending crisis, schemes promising large returns from various types of real estate-related investments also are increasing. Some real estate alternatives may actually be worthless real estate investments that promoters are trying to dump off to unsuspecting retail investors. State and provincial securities regulators also note that “reverse mortgages” pose several risks: they may not be appropriate for a given investor; if the homeowner chooses the option of accepting the funds all at once in a lump sum it may create a sudden supply of cash that may be diverted into other bad investments; and they enable promoters to gain access to a senior citizen’s entire financial profile. Such disclosure of other assets can lead to yet more scams—and losses.

Sale and Leaseback Contracts: Seeking to avoid protections afforded under federal and state securities laws, investments in equipment or animals are proposed to investors with the promise of a high returns and a guaranteed future repurchase of the product at full invested price. While these investments are touted as safe, the buyback features are unfunded and illusory.

Unsuitable Sales: State and provincial securities regualtors continue to see the sale of complex hybrid financial products, such as variable and equity-indexed annuities, to investors for whom they are not suitable—typically seniors. These products frequently contain features so complicated that even licensed financial professionals are not adequately trained to understand them.

To read the North American Securities Administrators Association press releases about each category (which contain deeper explanations and more info), look at their “Top Investor Traps” page from which the MN Dept of Commerce alert was derived.

2008 Investor Fraud Traps is a post from: Minnov8 and published under a Creative Commons license.

A source inside the company described the recent moves as “the usual restructuring.” I was told that all VC-related activities are now under Rick Rommel, SVP-Emerging Business. Rommel reports to Kal Patel, whose title is EVP-Emerging Business. Also within Patel’s organization, I learned, is a second SVP-Emerging Business, Neil McPhail. My source tells me McPhail’s responsibilities are “less direct VC-related, although there is some overlap.” His main responsibilities relate to the stores and to the company’s “growth accelerator” initiative.

Yet another group within Best Buy is one that deals directly with the company’s own VC funding investments. That function has been headed for some time by Kuk Yi (first name pronounced “cook”), and is a part of the Finance function, specifically the Treasurer’s office. Yi also has a “dotted line” reporting relationship to Patel, I was told.

Late in March of 2008, a story broke via the blogosphere that Best Buy was forming a new VC fund of its own — actually two funds — which I later learned was an initiative headed by Kuk Yi, and it was seeking to hire Principals and Associates for those VC funds (as many as four positions). Here’s a blog post I did about the blog buzz and speculation going on at that time. The local Business Journal weekly broke the story in the Twin Cities media on March 28, picking up on the earliest blog reports.

No Action Since March?
The most surprising thing I learned from my sources recently is that no one has yet been hired for any of these positions. So, the question remains: just what is Best Buy doing in regard to formalizing its own venture investing function? And what changes, if any, can be expected in the liaison activity with the VC community at large, based on Nyman’s departure?

One thing is certain: Marti Nyman leaves Best Buy with a wealth of relationships with scores of VCs, including many of the most successful ones in Silicon Valley, where he spent much of his time. While assessing his next move, Nyman is doing business development consulting with a Twin Cities-based technology startup that had previously raised $5 million in venture capital and, he says, is on the verge of achieving significant adoption of its technology.

Best Buy Shakes Up VC Liaison Group is a post from: Minnov8 and published under a Creative Commons license.

Scott Litman, cofounder of the event, told me the competition this year was the toughest ever, and that many plans that might have made the cut in previous years didn’t. He also told me that, unfortunately, many entrants may have had great business concepts, but they were not understandable — the submissions were either poorly written, or riddled with so many acronyms and buzzwords that the judges flat-out did not know what the heck the submitter was talking about. (So, take heart, rejectees. You may be great at selling your ideas verbally — now work on the written word.)

Here’s how the Minnesota Cup site states its mission: “We’re looking for the next great entrepreneurial success story in our state. This competition is for all entrepreneurs, whether your breakthrough idea is high tech or no tech, whether you are just putting your ideas into a business plan or if you’ve been out building your venture.” Well, I wonder if it’s possible that any who entered, and especially the chosen semifinalists, could really be “no tech” in this day and age? That would be hard to imagine. And, in looking over the list, there’s nary a one that would seem not to rely on technology in their businesses. (Although some without a website certainly have the aura of no-tech at this point, perhaps awaiting prize money to build? And what’s with all the student semifinalists being listed with no websites?) As for the lack of a requirement that the business be new, i.e., that older startups can also apply, I know at least two on the list are four to five years old and still chasing $50k. Ah, hope springs eternal. Here’s the full list:

Minnesota Cup 2008 Semifinalists (Team Leader – Entry Name)

Delmar Dehn, Achievance, Inc.
Gerardo Ruiz, An Effortless Shift to Solar
Steve Sahl, Barrier1 Network Security Appliance
Rick Diamond, Breathe Laser Therapy
Kelly Lucente, Bye Bye Monster
Tim Eaton, Canoeing.com: The Ultimate Guide
Christine Horton, CoreSpine Technologies
Amy Noble Seitz, Exhibits Development Group
Robert Carr, Fruchi – the Vital Energy of Fruit
Craig Mack, Glowskin Active Illumination Systems
Deborah Brister, Hope Fish Company
John Bjelland, Infobionics: a Cellular Database Management System
Amy Lyon, Izzy Bell Advanced Baby Monitor
Elli Ansari, Klodas Foods: Fibre and Beyond
Alex Huff, loudclick.net – build websites together
John Dinnusson, Medical Device for Osteoarthritis using EMT2
Dawne Brown White, Molar Express Minnesota
William Solboe, Music Mayhem Online Gaming Network
Sue Kruskopf, MyWonderfulLife.com
John Freund, Nabbit
Shawn Rankin, Perfect Fit Health
Robert Ziebol, Pursuit Medical LLC
Joseph McEriane, Putting the care back into Healthcare
Slade Smith, Quick Mold Test
Jessica Netter, Rear Window Media Recoups Consumer Fuel Costs
David Struyk, Somnatek – Innovative Snoring Solutions
Julian Reytel, SuddenDeals.com
Jon Norris, The Future of Location-based Marketing
Adam Sellke, Tunebloom – let music grow
Tom Roering, Wilcraft
Matt Bartel, YouRankIt.com

Okay, let’s see, we have medical devices and healthcare (no surprise here in MN) … food (hey, everybody eats, right?) … death (but no taxes) … music (is there a more disrupted business out there?) … radio (see music) … local news media (did I mention disruption?) … babies (oh, cute) … snoring, mold, fish, canoing, energy savings. Oh, and marketing and IT, too. How’s that for a lineup, friends?

Minnesota Cup 2007 Student Semi-Finalists:
-Kyle Henderson, HowThree – The Next Generation of How-to
-Eric Severson, Power-2-Go: Next-Generation Laptop Power Supply
-Brian Limborg, Sirkl
-Shyam Sivaramakrishnan, Wireless respiratory carbon dioxide sensors
-Jonathan Pearce, Zipnosis

The Judges

So, who was it that culled down this list of 840 applicants to 30? A “review board of local business leaders” is how it’s stated, though the group also includes several sponsors, association and government types, and the two founders of the event. It also includes some investors in startups, angel and otherwise, who get a free, early look at a firehose of deal flow. These individuals will select the five finalists of the Minnesota Cup after reviewing the second-stage plans submitted by the 30 semifinalists — though the exact way they do that is not explained. (A simple up or down vote by each judge on each company?) This “review board” will choose the winner from among the five finalists after listening to them present their plans orally. Review board members are:
-Dave Cleveland – Cofounder, Riverside Bank
-Leslie Frecon – CEO, LFE Capital
-Art Fry – 3M Corporate Scientist (Retired), Inventor of Post-It Notes
-Skip Gage – Chairman and CEO, Gage Marketing Group
-Morris Goodwin – President and Chief Operations Officer, The Hogan Company
-Michael Gorman – Managing Director, Split Rock Partners
-Sima Griffith – Founder, Aethlon Capital
-Fred Haberman – President, Haberman & Associates
-Gary Holmes – President and Owner, CSM Corporation
-Joel Lebewitz – Partner, Lurie Besikof Lapidus & Company, LLP
-Brad Lehrman – Managing General Partner, Portage Equity Investments II, LP,and Partner, law firm of Lommen Abdo PA
-Joy Lindsay – President and Cofounder, StarTec Investments, LLC
-Scott Litman – Cofounder, Minnesota Cup, and Managing Director, SDWA Ventures LLC
-Dan Mallin – Cofounder, Minnesota Cup, and Managing Director, SDWA Ventures LLC
-Dan McElroy – Commissioner of the Minnesota Department of Employment and Economic Development (DEED)
-Shawn McIntee – Partner, Maslon
-Mike Moore – Director, William C. Norris Institute.
-Jay Novak – Editor/Publisher, Twin Cities Business
-Debra Paterson – Regional President, Metro MN Community Banking Wells Fargo & Company
-Doug Ramler – Principal Co-Chair, Entrepreneurial Services Group, Gray Plant Mooty Law Firm
-Sam Richter – Chief Executive of SBR Worldwide and SVP/Chief Marketing Officer at ActiFi
-Thom Sandberg – Founder, The Kenyon Consortium
-Dale Wahlstrom – CEO, The BioBusiness Alliance of Minnesota
-Jessica Zeaske – Associate Director, Venture Center, University of Minnesota
-Student Judge: John Stavig – Director, Carlson School of Management, Entrepreneurial Studies

The Next Steps

The semifinalists now have about one month to work on their semifinal entries, which are due by midnight on July 25. The review period for these semifinal entries is three weeks. The Minnesota Cup finalists will be announced on August 20, after which the finalists have two weeks to prepare for their oral presentations to the review board. The Minnesota Cup Awards Event will be held at the University of Minnesota’s McNamara Alumni Center on the evening of Thursday, September 11th. Yes, that date. Wonderful, if I want catch it, I’ll have to fly back that day after covering both the DEMOfall and TechCrunch50 conferences in California, back-to-back. So, it will be interesting comparing our state’s latest crop of promising startups to those from elsewhere in the country.

Watch for coverage of some of the MN Cup semifinalists on Minnov8 in coming weeks and months.

Thirty Semifinalists Named in ‘Minnesota Cup’ Business Plan Competition is a post from: Minnov8 and published under a Creative Commons license.