Portland’s Way of Investing in Startups
In the midst of the worst recession in a generation, the City of Portland did something extraordinary. Without concern for custom or precedent, we created one of the first publicly-backed seed funds in the United States to invest in local startups.
The Portland Seed Fund began operating in 2011 and has proven to be one of the most successful seed stage investing platforms in the United States with nearly $11 million under management and investments in 74 companies. These firms have created more than 350 new jobs and attracted an additional $100 million in outside capital.
What seemed natural and instinctive to those of us in leadership positions at the time has become a curiosity throughout the United States. The question we always get asked is:
“How did a municipal government go about creating a taxpayer-backed seed fund in the depths of a major recession?”
A Good Crisis
Things looked bleak in Portland in 2010. We were in the midst of the worst recession any of us had ever experienced. What famously made our situation worse was the continued influx of new residents, drawn to Portland by the lifestyle but without jobs and even the money to rent their own apartments.
Seizing on this unique moment, local entrepreneurs approached Portland’s mayor about ways in which the city could support the startup community. Portland possessed a small but vibrant startup community that firmly believed that Portland had a future as a startup hub. Portland has always been a small business economy with, until recently, only two Fortune 500 companies and the vast majority of firms with 20 or fewer employees.
For local startups, access to capital was top of their list of priorities. Compared to Silicon Valley and Seattle, Portland was considered a backwater for venture capital. Even when VCs found a diamond in rough of Oregon, accepting the investment usually meant firms had to leave Portland since, according to the myth, no company could successfully scale and exit here.
Luckily, the right people were in public office at the time. Sam Adams, a 13-year veteran of City Hall, had just been elected mayor. Adams spent years interacting with the small business community during his years at City Hall and his understanding of the needs of small, growing businesses was unusual for a member of City Council. He proved this by hiring as one of his aides Skip Newberry, a young ex-startup executive and lawyer.
The local startup community also found a kindred spirit in me, first as the head of economic development and later as the executive director of the Portland Development Commission, Portland’s economic development and urban renewal agency. I had spent most of my career financing small businesses, first as a community banker and later in the commercial finance industry.
In 2009, I shepherded a new economic development strategy through City Council predicated on the belief that if Portland was going to pull itself out of the recession, it would do so by betting on firms started and growing right here. When the entrepreneurial community approached us in 2010, we were looking for a signature initiative to demonstrate our new approach.
Finding the Right Team
Despite our affinity for working with startups, we knew we had to get this idea into the right hands. We had $500,000 in funds previously earmarked for traditional small business loans to invest and needed a management team willing to take on our ambitious mission.
Luckily, Angela Jackson and Jim Huston showed up at the right time to run our little fund. The pair had an inspired plan and, more importantly, demonstrated an enthusiasm for the endeavor that belied the risks and hurdles. Jackson and Huston quickly set to work raising matching funds and immediately secured $750,000 from the State of Oregon and Portland’s neighbor, the City of Hillsboro, Oregon.
The pair would ultimately raise an additional $1.75 million from private investors to begin operations with $3 million under management.
One last hurdle remained. To address an Oregon constitutional prohibition on government agencies owning private securities, we made a critical decision to grant our initial investment to a local not-for-profit to serve as the limited partner in the fund. In subsequent investments, we established our own non-profit affiliate to serve as the limited partner and ensure that any profits flowed back to an organization affiliated with the City of Portland.
With the investment structure figured out, Jackson and Huston were free to do what they do best: pick companies and help them be successful. The Portland Seed Fund will celebrate its eighth Demo Day this month with more than 74 portfolio companies, more than $4.5 million invested and seven exits.
The Seed Fund is now on to its second fund and the City’s investment has grown to $1.5 million across both funds. Most importantly, the Seed Fund has become an anchor in the now robust Portland startup ecosystem.
The Challenge of Inclusion
The success of the Seed Fund and the Portland startup community has exposed new gaps in our local economy. Like most startup hubs across the U.S, our entrepreneurial community is largely white and male, with the resulting benefits from Portland’s flourishing economy flowing to a narrow group of founders.
Harkening back to our recession mentality, the City of Portland has taken the lead and created a new fund. The Inclusive Startup Fund, like its predecessor, is intended to jump start a new Portland entrepreneurial ecosystem to benefit those left behind by the current economy. The Inclusive Startup Fund will have a clear mandate: identify and fund the most promising companies founded by women and entrepreneurs of color.
Given the success of the first fund, the seed fund model is no longer viewed as a novelty. The new fund has been broadly supported by public partners, with investments once again from the City and the State of Oregon, as well as Multnomah County, Portland’s home county.
Time will tell if this fund has the same impact as the last but in one measure the fund is already a success. Traditional investors have already stepped up ahead of the new fund to fund diverse founders. No complaints here; the more competition the better.