What, quite simply, does the Norris Institute do?
The institute provides seed funding, investing directly into startups with funds donated to St. Thomas by William C. Norris, former CEO and chairman of Control Data Corp. It is usually the first outside investor, after some capital is put in by the founders, family and friends.
Unlike most venture capital funds that try to invest all of their capital within a year or two and distribute returns to investors as soon as possible, the Norris Institute seed fund is set up to draw down $250,000 each year from the $2.3 million Norris gift that is invested as part of the UST endowment. I seek out and screen startup companies to find good candidates that meet Bill Norris’ criteria of being a new Minnesota company with innovative technology that addresses important unmet societal needs.
How much do you invest annually?
Each year we can invest $25,000 to $100,000 in each of four or five new companies, and we often make additional investments if the company makes progress but is too risky for others to invest. For each investment, the University of St. Thomas receives equity, which is privately held stock that cannot be sold until the company has an “exit” event, such as being acquired by another company or issuing an IPO. The institute’s returns are deposited back into the seed-fund account and are immediately available for reinvestment, so some years we have been able to invest as much as $600,000. Since 2001, the institute has invested $3.75 million in 40 companies.
Is part of your work connecting entrepreneurs with investors?
After we invest, or occasionally as part of our seed investment process, we help the entrepreneur find other investors. I often make introductions and help our portfolio companies prepare their pitches to groups such as the Minnesota Angel Network and the Gopher Angels; however, these later investors usually want to see that the company has filed for intellectual property protection, and developed and tested its product with potential customers. ... They sometimes won’t invest until the company is making sales and proving its revenue model. That is why the seed funds are so critical – because they help the company pay for all these things that must be accomplished before others will invest.
For example, with ReconRobotics, the Norris Institute’s $100,000 investment in 2006 convinced the prototype manufacturer to invest $100,000 and advance another $150,000 for inventory. Those commitments of capital and manufacturing helped Alan Bignall (profiled in the spring 2013 issue of B.) successfully pitch other investors and raise the first round of $750,000. The Norris Institute also invested $50,000 in the second round of financing in 2007 and $60,000 in a current round.
With Xollai, which ReconRobotics acquired in 2012, Mike Ryan in the Small Business Development Center and I helped the recent graduates of the St. Thomas School of Engineering organize the company, and the institute was the first investor in 2009. Our $75,000 enabled the company to qualify for a $50,000 grant from the State of Minnesota Office of Science and Technology, and our subsequent $50,000 investment in 2010 leveraged another state grant of $30,000. We invested a total of $200,000 in Xollai before it was acquired by ReconRobotics.
Why and how was the Norris Institute founded?
The William C. Norris Institute was founded in 1988 when Norbert Berg, vice chairman of Control Data Corp., presented a proposal to the board of directors to transfer the corporation’s Innovation Fund to a nonprofit institute to be directed by Bill Norris on his retirement after 29 years. The $10 million endowment enabled the institute to fund innovative research and technology in education and public services, and to support collaborative efforts to assist small businesses, especially those in underdeveloped areas. Norris supplemented the endowment with his own funds from 1993 to 1999, and he worked daily at the office into his early 90s until his health declined.
In 2001, Norris, Berg and the other directors of the Norris Institute voted to transfer the institute to the University of St. Thomas business school, with $2.3 million remaining from Norris’ donations to be used for a technology seed investment fund. The institute’s president, Tony Potami, and I, its vice president, transferred to St. Thomas to direct the investment fund. Potami died in 2004 and Norris died in 2006. I became director in 2003 and remain the sole staff person.
Why was the institute transferred to UST?
Norris chose the University of St. Thomas because of its strong entrepreneurship program. He wanted the seed fund to be an educational asset as well as a financial asset for entrepreneurs and other students. The institute engages students in researching investment opportunities as well as assisting portfolio companies, which provide case studies for entrepreneurship courses.
How, specifically, do you engage business students?
Undergraduate students can meet with founders of our portfolio companies to learn about their startup challenges, and several founders are regular speakers in classes and to the Entrepreneurship Society. Also, several entrepreneurship undergraduates come to me each year for feedback on the business plans they are working on for class or the Fowler Business Concept Challenge.
MBA students also can get feedback from me and company founders on their business ideas. Members of the Full-Time UST MBA Venture Capital and Private Equity Club have several opportunities each semester to hear investor pitches from companies the institute is considering, and to participate directly in due diligence research on the investment opportunity and present their findings to the Norris Institute Advisory Board. They also assist me in making an investment recommendation to Chris Puto, dean of the Opus College of Business, and Mark Vangsgard, the university’s CFO, who have the final say on whether or not we invest. Each year, one second-year Full-time UST MBA candidate is selected to serve as a graduate assistant to the Norris Institute.
Can you describe the process a prospective portfolio company goes through to be considered by the institute?
I first review a summary of the company and its investment needs to determine two things: Does it meet our criteria as a new Minnesota technology company with innovative technology that addresses important unmet needs? And, would the $25,000 to $100,000 that the institute could invest be sufficient to enable the company to make enough progress to make commercial success likely and entice others to invest? I also determine if any of the founders or management team have connections to St. Thomas, e.g., alumnus, faculty member, student, board member. If there is a St. Thomas connection, and if the company meets the other criteria, it receives preference.
If I decide positively on these two factors, I meet with the founders and gather more information. I present a summary to the VC/PE Club and to Norris Institute Advisory Board members, asking for feedback and assistance with final due-diligence research. If an MBA candidate or team is interested in helping me research the company, we usually meet several times with the founders to ask questions and challenge some of their assumptions and business strategy. We also may consult with UST faculty if they have expertise in the company’s industry. We then prepare a final recommendation. The company might also be invited to present at an advisory board meeting. Sometimes we will continue to follow a company for several months if they are promising but have not done enough bootstrapping (self-funded technology and business development) to prove the concept of their technology and business strategy.
After making the investment, I join the advisory board of the company, and sometimes sit as an observer at board of directors meetings if the Norris Institute is a major investor. As I learn more about the company’s needs, I often help them recruit other advisers and board members with the necessary expertise. If I am happy with the company’s progress and they need additional capital, I might recommend additional investments, up to a total of about $200,000 in any one company.
How does the work of the institute mirror the economy? In other words, do you see more or fewer proposals during peaks and valleys in the economy?
Minnesota is such a hotbed of entrepreneurship that in my experience there has always been a strong flow of good startups seeking capital. Every year since coming to St. Thomas in 2001, the institute has accepted between 40 and 60 submissions for investment. That flow has increased in the past two years with our sponsorship and participation in the Minnesota Angel Network, which connects entrepreneurs and investors.
The biggest impact of peaks and valleys in the economy is the effect on investments by angel investors. After the tech bubble of the early 2000s and the more recent real estate bubble, there were drastic declines in the availability of early-stage capital. Another factor that has decreased angel investing is the drastic drop in the number of private companies going public through an IPO. Now that it is harder and costs more to go public than it did in the past, the most common exit for private companies is to be acquired by a larger company. But that often takes longer and may not be as lucrative for early investors as an IPO would be; therefore, angel investors are tending to want companies to be past the seed stage, with revenue and a proven market strategy. That is why the Norris Institute seed fund is so valuable: to help get startups through economic downturns and to a point where angel investors will take them seriously.
What advice would you – or do you – provide to those interested in launching and developing a business?
Don’t try to do it alone. No one I’ve ever met has all the skills and experience necessary to launch a technology company. Build a team of co-founders who complement your skills, experience and network. Investors will examine this team as probably the most significant factor in their decision to invest, not just for their experience but also for whether you seem to enjoy working together.
Break down your technology development and go-to-market strategies into the smallest milestones possible, and achieve as many of these as you can through bootstrapping before you seek outside investors. Your achievements should reduce the risks of failure and support the share value at which investors are willing to participate. If you aren’t able to achieve many milestones without outside investment, expect to give up a large percentage of your company to investors.
Know that the startup and growth process will be difficult and most likely take far longer than you think. Based on revenue projections I’ve reviewed for the 40 companies in which the Norris Institute has invested, none of them met their first-year sales projection until their third year or later, so think about if and how you and your co-founders will not just survive that period but manage to have fun doing so.
Read more from B. Magazine.