Pete Birkeland

Is that true? We talk with Pete Birkeland, CFO at RAIN Source Capital, the largest network of Angel Investment Funds in US. 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.

Hosts: Steve Borsch, Tim Elliott & Graeme Thickins (Phil Wilson is off this week).
Music by The Varatones and their song, “Surf Blaster” from Music Alley.

Discussed During the Show:

• Apple’s “Antennagate” press conference video; RIM’s (Blackberry) response
• Rainsource Rainmakers Conference, September 23-24 with early bird discount good until the end of July and this year is open to everyone
• On the podcast our guest Pete Birkland mentioned:
  • Crowdpitch and Funding Universe;
  • Jon Coudron and his startup MinuteBids;
  • Lisa Foote and her startup MixMobi;
  • Matt Bauer and his startup PedalBrain;
  • Minnesota Department of Employment and Economic Development (DEED) releases the signup forms for startups & individuals to get certified (which then leads to angels being able to take the 25% Angel Tax Credit)
  • Also mentioned other venture capital models like TechStars and YCombinator
  • New York VC Fred Wilson.
• Social Media Breakfast Minneapolis/St. Paul (SMBMSP) “Small Business Gets Social” next Friday, July 23, 2010

Download or listen to the show

Minnov8 Gang 85: Are Angels Crying? 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:

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

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.

And that was just the schmoozing part! 

There were lots of live demos going on in the theater adjoining, if you could squeeze yourself in there:

1. ArtsApp – like Monster.com for artists to submit multimedia (Dejen Tesfagiorgis)
2. ReliaCloud – a cloud computing platform that allows people to build scalable computing infrastructure on demand (Jason Baker, VISI)
3. Pedal Brain – advanced cycle computer based on the iPhone platform combined with web-based data analysis (Matt Bauer)
4. MinuteBids – an online bidding platform that makes it easy for property managers/owners to request and get bids for their property maintenance needs from top rated service providers (Jon Coudron)
5. Pedair – a many-to-many market place for people who love bikes (Andrew Korf)
6. MobileRealtyApps.com – Custom branded MLS home search apps for realtors on iPhone and Android (Aaron Kardell)
7. MileMarker - helps organizations capture ideas and prioritize them, making it easier to understand what to work on first (Bill Galfano)
8. Live Information Manager for Business – connects employees of an organization to their data and each other from anywhere in the world, all from within a single workspace (Roger Peters)
9. Mobile Roots – customized iPhone applications for campaigns (Lynn Smith)
10. WebSlide – provides you and your clients with a private, secure, easy-to-use system for uploading, sharing, and collaborating on designs without ever leaving your browser (Paul Armstrong)

Kudos to Luke Francl, Ben Edwards, and their team of volunteers for pulling off another great Minnedemo!  And a shout-out and huge thanks to the sponsors this time:

• TECHdotMN
• ipHouse
• W3i
• Livefront
• Split Rock Partners
• New Counsel

MN Tech Rocks – Last Night Was Proof is a post from: Minnov8 and published under a Creative Commons license.

Nyman, along with serial entrepreneur John Montague, are off on a new adventure — certain to make a big impact on the startup climate here in Minnesota — called “40 Ventures” and he tells us all about their innovative model of a fund for startups.

Today’s hosts: Steve Borsch, Tim Elliott, Graeme Thickins and Phil Wilson.

Discussed During the Show Notes:

• Go2Web20
• YCombinator
• TechStars
• New York Times article on venture capital study

Minnov8 Gang Podcast – Episode 37 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.

We were absolutely delighted this week to have three very special guests who joined the Gang for a discussion about ‘net and web innovation in Minnesota:

- Katharine Grayson: Staff Writer for the Twin Cities Business Journal. Katharine covers the internet and web technology beat for the paper, but she’s also expanded into other technologies (e.g., MSP solar array funding, biotech) giving her unique perspectives.

- Julio Ojeda-Zapata: Reporter for the St. Paul Pioneer Press, blogger, and author (his new book, “Twitter Means Business: How Microblogging Can Help or Hurt Your Company” will be on bookshelves soon). Julio can be reached at jojeda@pioneerpress.com. Get more of his perspective on personal tech at twincities.com/techtestdrive and yourtechweblog.com. You can also follow him at twitter.com/jojeda.

- Jon Gordon: Future Tense, a show which you’ve undoubtedly heard broadcast during Minnesota Public Radio’s Morning Edition program. The show is both produced and hosted by Jon Gordon, a Minnesota Public Radio reporter based in Silicon Valley. Follow Jon at twitter.com/jongordon.

Show Notes:

+ Julio’s post on Minnesota Public Radio’s new, free iPhone app (get it here) done by Codemorphic

+ Discussion on broadband where Minnesota’s Ultra High Speed Broadband task force came up (latest minutes are here in this PDF) and Jon mentioned a show he’d done (here) and his interview with a cybersecurity firm called Packet Clearing House.

+ As you listen, you may notice at times the audio is a bit “hot” and I apologize for that — there’s a bit more distortion than normal and I couldn’t minimize it enough in post-production. We tried a new, high quality ‘bridge’ recording platform (HiDefConferencing) — instead of using a single Gang-member hosted Skype conference call — and while it allowed our guests to easily call in with a combination of Skype, landlines or mobile phones, it was more challenging to control levels. I’ll have it figured out by next time.

Minnov8 Gang Podcast – Episode 7 is a post from: Minnov8 and published under a Creative Commons license.

They come to talk shop, learn, share tips, listen to presentations on the latest tech developments and tools, share war stories, listen to startup pitches, and (of course) take notes, blog, and Twitter about all the proceedings on the laptops and smart phones they never seem to have far from their sides.

The nice thing is, especially for the many self-employed among them, is that it’s all free — breakfast, lunch, a closing reception, even a free event t-shirt, and, best of all, more wi-fi bandwidth they they can possibly consume in one day — all courtesy of a bevy of sponsors that covet the attention of this highly influential and hard-to-reach group. The sponsors for this year’s event include VC firm Split Rock Partners, ipHouse, Swarmcast, SierraBravo, FindLaw, and the U of M’s Software Engineering Center (which is a special venue sponsor).

The original organizers of Minnebar — and its companion events called Minnedemo, which are evening gatherings that happen the other three quarters of the year — include three Twin Cities developer/entrepreneurs by the names of Dan Grigsby, Ben Edwards, and Luke Francl. (Edwards and Francl planned the ’08 edition of Minnebar.) The April ’07 event, held in St. Paul, had the distinction of being the largest Barcamp ever held in the U.S. to that date.

Something For Everybody

Sessions at this year’s events — all suggested by and conducted by the attendees themselves, many of them forming into panels, include such topics as these:

• The 7 Deadly Sins of Startup Marketing

• Scaling High-Traffic Web Sites

• Blogging for Benjamins: How To Turn Your Topical Blog Into Cash

• Communication For Geeks: How to Influence Your Boss, Your Customers, and Your Team

• From Programming to Profit: Skills To Pay The Bills

• Merb 1.0: Ruby on Rails that Scales

• The Mathematical Foundations of Music

• Enterprise Information Mashups: Web 2.0 + SOA + Data Visualization

• Distributed Teamwork: Managing Virtual Development Teams

• And much more…

A Soapbox for Pitching New Ideas

Minnebar even has a “Lightning Talks” session that gives anyone the opportunity to sign up to give a five-minute demo or presentation, whether it be a new technical idea or business concept, or perhaps you’re an existing startup that wants to update the attendees on your latest progress or product introductions. Anyone who wants to sign up for a Lightning Talk pitch may simply to go to the event wiki site, specifically to the Minnebar Sessions page, and look for the email link to apply. Or, to sign up for a full session (which can be 15-30 minutes or more), have your session title and description ready, then hit Edit Page and enter that information. Just be aware that time is running short, as the organizers will need to cut things off soon to publish the full schedule for Saturday’s event.

To simply sign up to attend (pre-registration is not necessary, but certainly recommended), just go to that same Minnebar wiki page, click on Edit Page at the top, and enter your name and company name or link at the bottom.

I’ll be at the event, along with the entire Minnov8 team of contributors, reporting on all the action. Watch our blogs or Twitter pages (as identified in the bios in the “About Minnov8″ tab at the top), if you can’t make it. For example, I’ll be posting at www.twitter.com/graemethickins throughout the day. But nothing beats being there in person! This is one fun, high-energy event, and really a must-attend if you’re involved in any way in Minnesota’s Internet or software industry. So, we hope to see you there!

UPDATE (5/5/08):  Forgot to mention!  Minnebar’s organizers have also mentioned there may be a “pre-event mixer” either this Thursday or Friday.  Keep watching the Minnebar site for details on where and when…

‘Minnebar’ Becoming Top Event for State’s Internet/Software Developers and Entrepreneurs is a post from: Minnov8 and published under a Creative Commons license.

The capital needs of early-stage companies used to be served well by VC funds, but the aforementioned gap has been growing ever wider in recent years as most VCs have moved toward later-stage deals. Since the beginning of time, individual angel investors have been a factor in helping young companies with their capital needs. But never before have they had to step up as an organized force to address such a big problem as we now face in our country, and right here in Minnesota.

The good news for all you entrepreneurs out there is that angels remain your best friends, because they’ve been banding together increasingly in groups to better fuel the capital needs of emerging companies.

So, why is this such an important issue? “If we’re not investing enough as a society in growth capital, we won’t grow jobs,” says Pete Birkeland (pictured here), CFO of St. Paul-based RAIN Source Capital. And his firm, the biggest little Minnesota investment firm you’ve never heard of, is doing much to innovate the process. Other members of RAIN’s management team are listed here.

Get this: RAIN Source is now the largest network of managed angel funds in the country, coming a long way in recent years in case you haven’t been watching. “We’re on the cutting edge,” said Birkeland. RAIN Source now numbers 24 funds in its network (including three licensees), across Minnesota, Iowa, North Dakota, South Dakota, Montana, and Idaho. And it already has its expansion sights clearly set on Oregon, Washington, and Florida.

The company’s RAIN Funds® are made up of angel investors interested in supporting growing companies. It helps organize these angel groups, providing part of of the capital for their funds, as well as legal templates, a process for due diligence, management support, access to deal flow, and other resources. The individual funds share expertise, deals, and experience between and among the other funds (angel groups) across RAIN Source Capital’s multi-state network. These groups range in size from seven to 61 members, with each pooling from $500,000 to $2 million in their own fund. The RAIN Source network currently has more than $25 million invested in 43 companies across its entire multi-state presence. At current count, RAIN has $17 million in available capital. And, since members can make side investments in any of RAIN’s deals, it estimates that at least another $17 million is available for investment.

RAIN Source supports and advises its RAIN funds, each of which makes its own investment decisions, typically by majority with quorum, and seeks to make a return of 25 to 50 percent. Local investors pledge an aggregate minimum of $500,000 to start a fund, at which point RAIN Source invests an additional 10 percent, up to $100,000, and assists with legal formation. RAIN Source furnishes deal structure templates tailored for individual RAIN funds, performs initial screening of business plans, administers a business plan database, and shares best practices across the network.

A typical investment by RAIN Source is in the range of $400K to $1 million, with each fund participating in the deal contributing $150-200K. The process for the firm to evaluate an investment opportunity and close on funding currently averages 90-120

days. Birkeland said RAIN Source has 15 deals in the due diligence pipeline at the present time.

The Minnesota Stats

So, what specifically is RAIN Source doing in Minnesota, its home state? Since inception, its angel groups have funded no less than 42 Minnesota-based companies. That’s counting from 1998, when the organization was formed (first calling itself Min Corp., later adopting the name RAIN Source Capital). Of that number, 17 are still independent firms, while 12 have been acquired.

In 2006, RAIN Source funded only two Minnesota-based companies. But in 2007, that number jumped to five. When I asked what the projection was for the number of Minnesota deals it will fund in 2008 (meaning initial investments), Birkeland said six to eight.

Within the state of Minnesota, RAIN now has 12 angel groups, or individual RAIN Funds. Birkeland expects the firm will add one or two new funds in the state this year. A full list of all the RAIN funds may be viewed here.

Of its more than 400 individual angels members, approximately 225 are in Minnesota. Funds are closed to new members once fundraising is completed. (Members, of course, must be accredited investors.) But, once a fund is fully invested, the members may choose to start a new fund.

Is There a Role for Government?

The history of RAIN Source Capital has been an evolution. It first operated inside Minnesota Technology Inc. (MTI), which is a state government-funded entity. When more funding was needed in 1998, RAIN’s founders, Steve Mercil and Joan Wurzer, spun the company out to become Min Corp. So, the RAIN people know something about state government involvement in funding early-stage businesses.

An article by Thomas Lee in our own Star-Tribune a few days ago looked at a current attempt to get our state government involved directly in helping fund new startups: Proposal Would Invest Pension Funds in Start-ups. It speaks of another in a long-standing string of attempts to get the Minnesota State Board of Investment to dedicate just a small portion of its funds to funding promising startups. As the article implies, don’t hold your breath.

RAIN’s Birkeland thinks he has at least part of the solution. “Look at the Oklahoma model of using contingent tax credits to create a statewide ‘fund of funds’ in a state,” he said. “The company that did that in Oklahoma is Cimarron Capital. Their approach creates a pool of capital that is managed by a third party. The state is on the hook if the returns of the ‘fund of funds’ are below the tax credits, but Oklahoma has not lost money on this program in eight years.”

He continued: “Someone should track venture activity and state economic growth. I think such an analysis would show that states with lively business growth and private investing are better protected from downturns than those relying on large businesses that are global in scale.”

So, is Minnesota a leader or a laggard in angel investing? “I think we’re in a second tier after Silicon Valley, Southern California, and Boston,” said Birkeland. “I’d put us on par with Seattle, Atlanta, and Austin. Our medical device industry will keep us near the top of angel investing.”

Raising Minnesota

And what can be done to advance angel investing in Minnesota? “We need that state ‘fund of funds’ program.” Birkeland reiterated. “That would help create a greater VC presence, and some of those funds should be used to set up a statewide ‘angel capital network” with both angel funds and a central fund to invest side-by-side. The goal should be to get deals through to the levels where national investors can then come to town and invest.” That would of course include large VC funds, which now do only a minimal amount of investing in our state — certainly in early-stage deals. Again, Birkeland said our state’s leaders “should look to Oklahoma as a key example of how to develop this statewide model through the use of tax credits.”

RAIN Source Capital has some relationships with VC firms, “but we’re not currently on their radar screens for deal flow,” Birkeland said. “We do have good relationships with the local brokerage firms, such as Feltl and Athelon. We just closed a deal that a local investment bank led, and our funds and members were significant investors.”

But related to that point is an interesting, recent development with a Minnesota angle. David Spreng, Managing General Partner of Crescendo Ventures, is the new NVCA liaison to angel groups. (That’s the National Venture Capital Association.) David, who’s based in Palo Alto, is from Minnesota, still visits here often, and is quick to point out his firm’s continuing interest in investing in Minnesota. (Full disclosure: Crescendo has been a client of mine.) So, Minnesota’s impact as a center for angel investing may be getting even more attention nationally in the coming year. For more on David’s take on the improving relationship of angels and VCs, check out this article he co-authored in the current issue of the Venture Capital Journal: Angels and VCs Find Common Ground.

For a further look at the topic of driving growth through angel investing, here’s a just-published report from the National Governors Association, Center for Best Practices: State Strategies to Promote Angel Investment for Economic Growth. RAIN Source is cited in the report, as are current efforts by various states. One can only assume Governor Tim Pawlenty will be giving this one a good read.

The Role of Technology in the Process

One way RAIN Source is helping to contribute to a standardization in the process of angel investing, which national investors certainly expect, is its adoption of a software platform that is specifically designed for angel group management. More than 200 angel groups nationally now use this software to manage their deal flow and facilitate effective collaborate among their members. That software is from AngelSoft, a firm based in New York City. It recently announced that RAIN Source had adopted its platform for its entire multi-state network of funds. The way the process works for companies that successfully pitch RAIN Source is this: the startup is given access to a private, secure portion of the AngelSoft web site, where it enters key information about its company and uploads its business plan — all of which is immediately available, on a confidential basis, to the members of the specific angel group or groups to which it was given access.

The Innovation Continues

RAIN Source’s impressive expansion proves that angel investors can indeed be found and organized in small towns and rural areas. By the way, RAIN originally stood for Rural Angel Investor Networks, but the company began substituting “Regional” for “Rural” when it found itself establishing more of its angel groups in metro areas, including the Twin Cities.

Minnesota can indeed be proud that it’s home to a firm that is leading the charge to have angel investing carry more of the load in financing promising young startups to drive economic growth, both here in our state and across the country.

Innovation in Early-Stage Investing? You Bet! And MN Firm Is Major Player is a post from: Minnov8 and published under a Creative Commons license.