When “bridge fund” means, really, “venture capital fund”

The W Fund was originally referred to as the “Husky Bridge Investment Fund”.  Here is a typical story at Xconomy.  (Note that Linden Rhoads, the UW Vice Provost in charge of C4C and the W Fund, is also listed as an “Xconomist” who has agreed to serve on the Xconomy advisory boards–an insider at this organization–so stories at Xconomy on C4C are not entirely independent journalism.)   The Xconomy article describes a follow-up discussion following a talk at which Rhoads announced the Husky Bridge Investment Fund: “Rhoads didn’t have much to say about the mechanics of how the Husky fund is supposed to work, although it is influenced in part by the ‘Utah model,’ which involves students, Rhoads says.”

The Xconomy article continues with a description of a fund operating at UW, to which the Husky Bridge Investment Fund is compared:

The UW already has a fund that’s supposed to help startup ideas cross the infamous “funding gap,” where basic research grants tail off, yet angel and venture investors aren’t yet ready to tread. The UW has a Commercialization Gap Fund to serve a similar purpose, although those grants are worth just $50,000 for a year, plus another $50,000 worth of other services and resources. The Husky fund will seek to put more horsepower behind companies, by typically making investments of $250,000 to $500,000, Rhoads says.

The link in the Xconomy article merely links back to the article.  Here’s the current link.  The Commercialization Gap Fund is an internal fund of the University of Washington.  It is money provided to researchers to help them in “commercializing their projects”.   Again, we find here conflation between “commercialization of research” and “commercialization of results of research” as if these things are one and the same.   The money is not investment funding, and doesn’t go to companies, but to UW faculty.  It operates like a mini-business plan competition but for development activities within a UW project, rather than for starting a company.  The idea of the Commercialization Gap fund is not so much to close a “gap” but rather to do work at UW that leads to starting a company (and thereby create a gap between technology and a desired product that then needs to be closed–a typical problem faced by a solo/market approach, as distinguished from a networked/non-market approach to innovation).

At the same time that the Husky Bridge Investment Fund was announced, we also see the state legislature pass a law that’s remarkably similar in concept:  RCW 28B.10.631.

To support the formation of companies created around the technologies developed at state universities, the state universities are authorized to establish and administer bridge-funding programs for start-up companies using funds from the federal government and the private sector.

Just as “commercialization of research” is not defined in RCW 28B.10.630, so here, too, there is no indication what the legislature intends by “bridge-funding programs for start-up companies.”  One might for assistance turn to general usage for some guidance on what one might reasonably construe a “bridge-funding” program to mean.

“Bridge fund” is typically found in university settings.  A bridge fund provides supplemental funding when a primary program’s funds run short.  Thus, if a research project has one grant that is ending, and another grant won’t start for three months, a dean or vice provost might step in and provide “bridge funding” to keep the team together in the transition between grants.  The purpose is to allow operations to continue until the new source of funding is secured.  Here are instances from City University of New York and the University of California, Irvine.

The University of Washington also uses “bridge fund” in this way:

The Provost’s Office will provide bridge funding to support faculty to span the gap in critical research programs. The University of Washington ranks among the top research institutions in the world and has a budget of over $1 billion in research grants and contracts. The UW and the region depend on the discoveries that come from our research programs. Several pressing issues face us during the next few years: (1) NIH funding, which accounts for about half of our research funding, is flat; (2) starting and more established faculty face increased competition for limited federal and non-federal research funds; (3) investigators may face loss of key personnel or key research resources.

University bridge fund programs are internal grant programs, just as is the UW’s Commercialization Gap Fund program, despite its melodramatic name–it is just a bridge fund operated by C4C rather than by the Office of Research.

Given that UW is already operating bridge funds, a state law would not be needed to authorize such a thing.  So why did UW apparently go to the legislature for this law?  The reasoning must be in the two elements that follow, and which qualify “bridge-funding programs”:  for start-up companies, and using funds from the “federal government and the private sector.”  What do these two elements do to the idea of a university bridge fund program?  First, the law moves the recipient from being a faculty member working on research to a “start-up” company.  Second, the source of funds is shifted from internal university funds to funds from other sources.  That is, the fund will disburse money to certain companies, but not using university money.

For such a fund to be a “bridge fund” and not, say, a venture investment fund or a grant subcontract program (such as the federal STTR program) or a kind of bank loaning money, the fund would look for companies that 1) had just started up; 2) had a source of funding; and 3) for which that funding would run short before they secured a new round of funding or got a product on the market generating revenue from sales.  That is, the legislature intends a bridge fund, not a generic venture capital investment fund or a bank loaning money.

The federal State Small Business Credit Initiative (SSBCI) program run by the U.S. Department of the Treasury operates in a form that could meet the expectations of a bridge fund.   The SSBCI program came into existence in September 2010 with the goal of providing to state governments to “leverage private lending to help finance small businesses that are creditworthy, but are not getting the loans they need to expand and create jobs.” No doubt the state legislation anticipated the state’s participation in SSBCI funding.

At the Washington site for SSBCI, we find this text:

W Fund

The W Fund, projected to be a $25 million venture fund, will invest in early-stage life science, biotech, medical device, alternative energy, and information technology companies emerging from universities, research centers and individual start-ups across Washington. The objective is to spur company formation and job creation from Washington’s significant research and development base. Fund recipients will be located in the state, providing vital capital and creating economic opportunity in key growth sectors.

There’s nothing here about the W Fund being a bridge-fund program.  A bridge fund would identify companies formed around state university “technology” that have some funding but now need more while trying to raise more.  That would be a bridge fund.  It would not have to take the form of an equity investment (or a convertible note–meaning a loan at the start but convertible to equity later, a typical seed investment strategy to avoid placing a value on company shares for tax and later rounds of investment reasons).

And in any event, equity investment *by the state agencies* is forbidden by the state constitution, as confirmed by the public rejection of SJR 8223, so however a bridge fund set up by UW might operate, UW cannot take an equity position in the startup companies, whether with UW money or with money from other investors.  But it appears that UW made an attempt, with RCW 28B.10.631 to set it up that if SJR 8223 was approved, the “as provided by law” phrase in SJR 8223 would have given effect to RCW 28B.10.631 along with the other legislation set up to provide for operating funds to also be invested, but through the Washington State Investment Board.

In all, a very clever ruse.  Folks are playing with words so that “bridge-fund” means “closing a gap” and a gap that needs closing is one between the money investors are willing to put in for a risky venture and the money the risky venture wants to get to pay off its own founders and still huff and puff toward a product–or more likely to be sold to a big company wanting to get it out of the way or to strip it for its engineers and scientists.   It is as if “bridge” is a metaphor for anything that “crosses a gap”; that is, “bridge” is to be an abstraction that can mean any sort of use of “money” and “gap” is an abstraction that means any sort of “speculative opportunity.”  That is, if words don’t really mean anything and general usage is no guide.  This legislation passed unanimously in the senate, with only two brave opposing votes in the house.  Just what did the legislators think “bridge-funding” and “gap” meant?  Were they all in on the cleverness to follow?

The W Fund is an early stage tech venture fund, with a reported broader focus than that provided by the state legislation, which is predicated on companies “created around the technologies developed at state universities.”  The addition of “individual start-ups”–meaning, apparently, startups that don’t have any connection to state universities or other research institutions in the state–is not part of the bridge funding legislation authorization, even if it is part of the SSBCI scope of possible investments for federal money.  It is not what C4C is authorized to be responsible for under RCW 28B.10.631.  The W Fund is a venture capital operation with only a portion of its activity directed at UW and other state university “technologies”–the rest can be any investment it cares to make.  It is a free-lance venture fund set up with cover provided by UW and using public resources to subsidize private venture investments.   The W Fund General Partner (which would be, apparently, W Fund Management, LLC–which appears to have been created by the Washington Research Foundation) can do what it pleases, of course, but the state law authorizing UW to be involved is not so broad as that.

Perhaps, as with other things, UW will contend that C4C does not need the law to have the authority to run private, for-profit companies, and that the law was just for “clarification”.   Perhaps UW will argue it’s all the same: a bridge fund is a venture fund is a lending program–“bridge-funding” programs are intended to be “any thing we want to do involving startups and profit-seeking from their success (or even just appearance of future success), so long as we affix “jobs” or “economic development” to the reasons why public money is involved.”  Maybe UW will offer a different explanation.  I am sure it will be an exciting read.

You might ask yourself:  Should state agencies be running for-profit companies for the benefit of private investors?  Are state-run for-profit companies an appropriate use for state resources?  Do you think the state is a good entity to be picking “winners and losers” in the private sector?  Are state-backed startups intrinsically better than other startups, and so worthy of state subsidies where other entrepreneurs can just struggle along on their own?

Is it a really keen thing that faculty scholarship–personal property protected by the US constitution and federal law when it comes to copyrights and patents–be impounded by the state to fuel this sort of state-self-serving thing?  The C4C business proposition, if there is one, is to sell off faculty scholarship to speculative investors, and by doing so save the Washington state economy by creating jobs “on the Utah model”.  The only apparent likely winners in this whole thing is that bit of UW called C4C, which gets to extract a hefty operating fee from money to be invested, whether there are any jobs or not, and the W Fund’s “partnering” speculative investors, who get a neat state subsidy for their gambling habits.

About Barnett

I have worked for 20 years in roles to support innovation and research at universities, much of that time at the University of Washington. Presently I work as an independent consultant to universities and small companies. I was born in Walla Walla and have lived on both sides of the Cascades. I have studied literature, mathematics, and interpretation. I have worked as a software programmer and writing instructor. My current areas of specialty are intellectual property and innovation, with an emphasis on open strategies. One of my recent projects has been to support Open 3d Printing, which is pretty cool stuff. I'm politically independent and find myself supporting candidates whose judgement I value, even if I disagree with them on visible issues of the day. I have a native grown Washington approach to getting things done that starts with being forthright, acknowledging what we don't know, and asking for folks in leadership positions to do the right thing.
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