By Allan Maurer, Tech Journal South

HERNDON, VA—Virginia decided to take a pro-active approach to filling the seed-stage capital gap that keeps many promising new tech ventures from launching. In late 2003, the state created the CIT Gap funds, which has already helped 19 startups in Virginia crank their engines.
This year in July, the Virginia Center for Innovative Technology’s Growth Acceleration Program (GAP) launched the BioLife Fund, with an initial investment of $250,000 from Johnson & Johnson, a sum GAP matched.

The fund will provide Virginia’s entrepreneurs with guidance and financing to position their company for rapid growth and downstream private equity financing including the potential for additional Johnson & Johnson investment. The fund focuses on new life science companies resulting from tech transfer collaborations with Virginia universities and federal laboratories.

Late last year it launched the VA South TAP pilot fund, which targets seed-stage technology companies in Southside and Southwest Virginia. Tom Weithman, managing director of the CIT GAP funds, tells TechJournal South, “There are some interesting technologies and great people there, but not enough investment dollars.”

500 firms evaluated
CIT has typically invested about $1 million to $1.5 million a year. The $1.9 million GAP I fund is fully invested in an array of seed-stage companies, all of which are still up and running. The current multi-year fund has $9 million to invest.

“We occupy a unique space for early stage investments,” says Weithman. “We’re comfortable being the first money in and the only money in. It’s a contrast with other models.”

The GAP team evaluated more than 500 companies in making its 19 investments, and the due diligence it performs before pumping money into a fledgling tech firm helps make the company more attractive to other investors. “We do a very rigorous process tantamount to a Series A due diligence at the seed level,” Weithman says. “It’s a wonderful primer to early stage companies and first time entrepreneurs on the investment process.”

Five firms land Series A funding
“We act as a catalyst,” Weithman says. “We’ve been able to leverage private capital into those investments at 10 to 1, either investors going in with us or downstage from angel investors or early stage venture funds.”

Five of GAP I’s portfolio companies have gone on to Series A investments and one, 4FrontSecurity, which developed a software as a service platform for distributed risk and compliance management, exited through acquisition by Symantec in February.

Other GAP I portfolio companies include Airak, Bent Systems, Eye Development, Global Cell Solutions, PluraPage, LT Technologies, Mpowerplayer, NBE Technologies, Paxfire,
RollStream, South49 Solutions, Square Loop, Tau Therapeutics, Vertical, and Visure.

GAP invests using a convertible instrument and offers terms and conditions that both entrepreneurs and downstream investors find reasonable, Weithman says. He notes the organization expects to realize enough returns on its investments to sustain and grow the funds.

Many of the companies CIT GAP funds invest in are spinouts from Virginia universities or companies. “We’re not a tech transfer organization per se, but we do walk the halls of the universities to find tech,” Weithman adds.

Like the best venture funds, the CIT GAP team and advisory board provide various types of development help to the companies it funds, including helping get them in front of other investors. “We do offer to get these folks in front of several investment funds at once, an opportunity difficult to replicate through serial meetings.”

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