PART 2: Vanderhoofven reflections on venture capital evolution in the region
As the millennium approached, Grady Vanderhoofven had tested his concepts about starting companies and now faced the challenges of keeping them local without a robust regional venture capital fund.
“I got to go mingle with entrepreneurs at Technology 2020,” he said, something that further convinced him that someone needed to find a solution to the challenge. It was also a time of change with UT-Battelle, LLC, assuming the management contract for Oak Ridge National Laboratory (ORNL).
“In my 10 years (at ORNL), I had five different sets of technology transfer managers,” Vanderhoofven said. “It was just like a revolving door” with each new manager having a different philosophy and a resulting new lead for the licensing division.
The Directors of Technology Transfer included Bill Carpenter, Warren Siemens, Bill Martin, Dean Waters and, when UT-Battelle took over in April 2000, Jan Haerer.
Vanderhoofven made a strategic career move in June 2001 when he took entrepreneurial leave from ORNL and moved to Technology 2020. It was a three-year opportunity that was supported by Haerer and the then head of licensing, Louise Dunlap.
When Vanderhoofven arrived at Technology 2020, one area venture fund – Venture Alliance – had already failed, and a second effort – TennesSeed – had just completed its $10 million initial fund raising.
“It was trying to get an SBIC license to be able to access $20 million of federally-guaranteed capital on top of the $10 million,” Vanderhoofven said. SBIC stands for Small Business Investment Company, a program administered by the U.S. Small Business Administration (SBA).
Securing the license was critical to the TennesSeed business plan. Vanderhoofven was not leading the effort to secure the license – a new individual hired solely for that effort was. Nevertheless, Vanderhoofven saw SBA approval as critically important to his goal of bringing seed stage funding to those who wanted to commercialize technologies from ORNL, the University of Tennessee and other intellectual property generators.
“In a way, it (TennesSeed) and Walden Technology Source were actually predecessors to Venture Incite (VI),” Vanderhoofven said. Walden Technology Source was a virtual incubation start-up established at about the same time as TennesSeed solely to start companies based on ORNL technologies. VI, established in 2011, is an initiative led by Nashville-based Solidus in conjunction with the recently renamed Tech 20/20 and focused on commercializing inventions from the Oak Ridge and Knoxville regions.
“I felt like I had walked into the middle of a challenging situation,” he said in describing the first months of his entrepreneurial leave adventure. Securing the SBIC license was challenging for a variety of reasons, but it became even more difficult after the dot.com bubble burst in 2001.
“SBA had temporarily closed down on approving new SBICs,” Vanderhoofven said, explaining that Technology 2020 pushed on but it was an uphill struggle.
By the middle of 2003, Vanderhoofven said it was obvious that the SBIC license was not going to be approved by SBA, and efforts were ended. The micro loan program and other lending activities at Technology 2020 Finance Corporation were assigned to Southeast Community Capital, which later became Pathway Lending, run by Clint Gwin.
As far as the equity financing activity of TennesSeed, it was closed. “Suddenly my job had evaporated,” Vanderhoofven said.
Fortunately, Technology 2020 was working with an organization called Kentucky Highlands Investment Corporation (KHIC) to capitalize on another federal program that would bring much needed capital to the region. This initiative, called the New Markets Venture Capital (NMVC) Program, was designed by Congress to spur revitalization efforts in low-income and impoverished communities by providing tax credit incentives to investors for equity investments in certified Community Development Entities (CDE). The CDE, in turn, makes equity investments in low-income communities.
Both KHIC and Technology 2020 included many of the eligible communities in their service areas, so the partnership seemed to make sense. The effort also required SBA approval, but this time SBA approved the investment strategy and management team, and the resulting Southern Appalachian Fund was established in October 2003.
NEXT IN THE SERIES: Vanderhoofven’s efforts in helping establish and manage two venture funds.