STAFF MEMO To: From: Date: Subject:
i-GATE Development Corporation Board of Directors Brandon Cardwell April 9th, 2018 Equity Models for i-GATE
At the March 2017 board of director’s meetings, the board requested i-GATE leadership explore opportunities for taking equity positions in companies that participate in the incubator. This practice has become increasingly common with the rise of startup accelerators like Y Combinator, but it is less prevalent among non-profit incubators, particularly those supported in part by public institutions. In evaluating options for taking equity positions, it is important to first understand why the organization might wish to pursue that approach. The vast majority of startups fail, and according to a Crunchbase analysis, the average age of a startup at the point of acquisition is seven years old. i-GATE’s current business model requires recurring revenue in order to function, meaning equity in-lieu of membership fees would not be an option without additional subsidy from public or private partners. Therefore, potential revenue from equity should only be viewed as growth capital and not counted on to fund regular operations. There is the additional challenge of identifying appropriate mechanisms for making decisions about which companies we wish to take equity in, executing the transaction, and then holding the equity. Initial exploration working with i-GATE’s attorney indicates that a separate entity with a wholly independent governance structure would be required in order to avoid conflict of interest. An alternative approach staff has identified is to pursue a partnership with one or more investment funds develop an accelerator-like program that provides startups with capital, expertise, and some amount of free or discounted space and equipment access at the incubator. This approach would be particularly attractive for biotech and “hard tech” startups, that have difficulty obtaining appropriate space and need access to unique equipment to demonstrate technology. These are the same types of companies we wish to attract to Switch Labs, the industrial lower level of iGATE’s incubator, and a “Switch Labs Accelerator” would provide a highly differentiated offering that could attract startups from across the country to the Tri-Valley. Under the Switch Labs Accelerator model, the partnering investment fund(s) would review applications to the accelerator, make investment decisions, hold the equity, and provide mentorship and expertise. Switch Labs would provide a limited term of free or discounted space and equipment access, as well as a network of service provider partners who would be asked to provide special discounts and services in order to gain access to accelerator participants. The expectation would be that the fund(s) participating in the Switch Labs Accelerator would contribute some portion of any financial value derived from the equity to support i-GATE’s ongoing activities. In addition, the Switch Labs Accelerator would be a source of high-quality lead generation for the incubator. Perhaps most importantly, a program like the Switch Labs Accelerator would make i-GATE the unequivocal leader in hard tech startup development in the Tri-Valley.