Catalyst Programs

Several overlapping catalyst programs are necessary to accelerate the formation and rapid growth of new businesses, which is a major objective of the Phoenix Project:

• The Entrepreneur in Residence Program
• The Catalyst Seed Fund
• The Catalyst Early Stage Capital Fund
• The Business Generator
• A-Teams
• Synergistic Development

These programs will most likely operate independently of the Phoenix Project, but are literally the catalysts that can turn a good idea into a national success story.

The first three initiatives will add to the region's funding pie, focusing on opportunities that are too early in development to attract the attention of large-scale funds. These startups frequently have difficulty attracting adequate funding locally, not because they don't have good ideas, but because they are startups. By definition, startups would be unlikely to qualify for bank financing or to interest a local, later-stage fund looking for a guaranteed return on each investment. Other investors may lack the expertise and connections that can expedite a startup's growth into globally competitive markets or the time to provide hands-on guidance.

The second three initiatives provide access for this expertise. Existing Spokane-area programs, such as Connect Northwest, EWU's Center for Entrepreneurial Activities, Gonzaga's Hogan Entrepreneurial Leadership Program, WSU's Center for Entrepreneurial Studies, and Whitworth's School of Global Commerce and Management, add to the pool of expertise.

Funding Programs

If our regional economy is to grow at a reasonable rate, we must provide our startups with the support and guidance necessary for them to prosper in highly competitive markets. They should not have to waste valuable development time raising cash in small increments over many years, as is nearly always the case here. Bootstrapping may work in some cases, but usually leads to scrawny, undercapitalized, and uncompetitive startups that either starve to death or fail to thrive. Expectations that companies can succeed with initial funding of $50,000 are unrealistic in a world where competitors receive seed funding in the millions and just one electrical engineering or computer science expert can command $100,000 in annual salary and benefits.

While it is not necessarily difficult for a startup to find $50,000 in investment capital locally, it is extremely difficult to find more than that, unless a company has an extensive track record, at which point a local late-stage venture fund may be interested in the company. But how do we get companies to the point at which a later-stage fund would be interested in investing? We need to nurture high-potential startups with as much as $5 million each to allow them to grow to the point where they can attract interest from larger funds.

Some suggest that because venture funds in Silicon Valley, Seattle, Boston, and other areas have raised billions of dollars, there's no need for local venture capital. Money will simply flow to companies with good ideas. This is wishful thinking: barely half a dozen companies in the region have received significant venture funding in the last ten years. Experience shows that co-location of companies with capital is far more likely to produce positive results. Chong-Moon Lee, William F. Miller, et al. put it very succinctly in their book, The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship: "an important requisite of the region's success is a venture capital industry that understands high-tech and knows how to structure deals and portfolios so that successes more than make up for failures. Venture capitalists and angel investors often do much more than simply supply funds for new firms, however. These backers, many of whom have experience in running high-tech firms, often coach founders who lack important kinds of know-how and need advice."

The venture industry, venture capitalists, angels, and mentors are not flying in from a thousand miles away to offer their money and advice—they're right there in Silicon Valley. For our economy to grow, we need to develop our own indigenous venture capital industry. Peter Drucker reinforces this point of view. He sees capital formation as critical to innovation and economic growth: "Innovation in Schumpeter's famous phrase is also 'creative destruction.' It makes obsolete yesterday's capital equipment and capital investment. The more an economy progresses, the more capital formation it will therefore need. …Thus, capital formation and productivity are needed to maintain the wealth-producing capacity of the economy and, above all, to maintain today's jobs and to create tomorrow's jobs."

The Phoenix Project can be home to a three-stage funding process designed expressly to speed startups to their maximum ramp. In this alternative to the less-effective status quo, a business at each stage of early growth will have support available as soon as they are ready to enter the next stage of development. (This process is based on a proven model, explained briefly below, and in detail in “Harvesting the Secrets of Silicon Valley,” in the Case Studies section of this proposal.)

The Entrepreneur in Residence Program

The Catalyst Seed Fund

The Catalyst Early Stage Capital Fund

Business Generator

Few if any venture capital funds have been more successful than Kleiner Perkins. One difference is that KPCB has never waited around for great investment opportunities to come their way. They seek out opportunities, and if they don't find them, they create them.

Shortly after joining KPCB in 1976, for example, partner Brook Byers was encouraged by Eugene Kleiner to take a leave of absence to found Hybritech, which went public in 1981 and was bought by Lilly for $400 million in 1986. Vinod Khosla, co-founder of Sun Microsystems and now a partner at KPCB, has developed several companies from scratch through the fund.

KPCB started small, with an initial $8.5 million fund, but that has led to companies like Amazon.com and Google that collectively employ 300,000 people, with annual sales over $100 billion, and a public market value of more than $160 billion. In other words, KPCB-funded companies employ 50 percent more people than are employed in all of Spokane County. For comparison, Avista is by many measures the Spokane region's largest company, public or private. KPCB has generated companies with employment equivalent to 150 Avistas, revenues equivalent to 90 Avistas, and market capitalization equivalent to 180 Avistas. All this from one venture fund. In just 30 years.

Likewise in Spokane, Avista itself has created several successful startups, including Itron, which spawned Itronix and Servatron; Avista Labs (now ReliOn); and Avista Advantage. Clearly the business generator model can work locally. It just hasn't been tried outside of Avista.

The A-Team

The startups need high-level help to have high-level success, but they don't necessarily need someone to stick around for the long haul. The executives on the A-Teams are willing to commit six to twelve months to getting a new business up and running, and then take a break or move on to a new startup as new hires take their place.

Shared Services

In addition, while a startup's founders should be free to focus on its core mission, someone has to distribute the paychecks, organize routine training sessions, and manage employee benefits. Someone has to order office supplies, keep the coffee fresh, call the copier repair technician, and so on.

The Catalyst program will provide shared facilities and handle non-core requirements like these with full-time employees and outsourcing, allowing startup management to spend their valuable time on the most important needs of their businesses. One means to accomplish part of this goal is to team with the Allied Industries group, which already provides many of these services to area businesses.

Synergies

For example, five separate businesses could collaborate to further Spokane's growth as a media center. A Magic Lantern-style theater could be built in the massive east wing of the building (which would also hold the international market and dining area), attracting movie lovers to the project. Next door, a video store would offer the same movie lovers every video ever produced, because upstairs, in the startup space, a Netflix-like business would be renting all those titles to movie lovers around the country via the Internet. Spokane would be the only city in the world to have a video store where you could select and take home any of 100,000 titles, while everyone else has to wait for their selections to arrive in the mail. This selection would be impossible without the Netflix-type startup, while the local availability of titles would not be possible without the video store. As the Netflix-type startup develops its order-processing and fulfillment capabilities, another startup could be developing and testing technologies for on-line delivery of digital content, using gigabit access to the regional NoaNet through the building's basement GigaPoP. The same technology could be used right now for a startup focused on digital delivery of music, which makes up only 6 percent of the music market and has vast room for growth, even with a large number of competitors. Other supporting businesses that might grow in this media-business fermentation include a recording studio, digital-video and digital-audio editing suites, a sound stage, and local PR, advertising, and production companies that could use these services.

Another example of synergy would be a thin-client computer company, developing low-cost systems designed to be used in corporate or educational networks. The keyboard and mouse could be manufactured by locally-headquartered Key Tronic. The motherboard could be initially manufactured by a local contract manufacturer, and in volume by overseas plants affiliated with local representatives such as MERI. Assembly could be completed in a new, local factory. Packaging could be provided by Sonderen Packaging. This is the Dell model, which has been notably helpful to the economy of Austin, Texas.