For the better part of three years, D.C. start-up incubator 1776 has tried to nurture infant companies by giving them a pool of mentors, connections to other entrepreneurs and cheap real estate. Now it also has $12.5 million to invest in them.
On Tuesday, the incubator announced the closing of a “seed fund” for early-stage start-ups in the District and elsewhere, meaning it is no longer accepting new investors. The fund has already put money into 20 start-ups, including six D.C.-based companies and start-ups based as far away as Germany and Israel.
The fund is a reflection of 1776’s growing ambition beyond its beginnings as an organization dedicated to fostering innovation in and around the District.
“Even before we launched, we had in mind that we were building a global enterprise,” said co-founder Donna Harris, herself a former technology entrepreneur.
The company added an Arlington, Va., location in April when it acquired incubator and venture fund Disruption Corp., and a West Coast location when it bought San Francisco incubator Hattery. Since 2013 the organization has hosted a nationwide March Madness-style competition for start-ups in 16 cities.
The fund is targeting start-ups that have developed proven concepts but are too small to interest a typical venture capitalist. Technology start-ups in the earliest stage of development usually get by on small investments from family and friends, or on loans from “angel” investors willing to risk backing an untested enterprise. Most start-ups fail, and investors often lose the money they put in.
Harris says the average 1776 investment will be about $100,000, small change for a well-established company. But for an early-stage start-up, an investment that size can go a long way.
One such business was RideScout, a transportation-options app that got the seed fund’s first investment — a cash infusion of about $40,000 — in the first half of 2014. Led by four Army veterans who met at West Point, the company moved into 1776 in May 2013, formally launched later that year and was purchased for an undisclosed amount by Daimler, the German automotive company that makes Mercedes-Benz cars.
The investment was a small slice of a larger $2 million fundraising round, but RideScout’s leadership team says the capital came at a critical time.
“Once 1776 had skin in the game, the incentives were better aligned for them to help us,” said RideScout Vice President John Gossart. “We had a team we were paying, so we were burning money even as we were raising funds from investors.”
The start-ups at 1776 tend to work in the health, education, energy and transportation sectors, all heavily regulated industries. The incubator got its start with $200,000 from the D.C. government, along with a mandate to stimulate the local tech scene.
“Where other than D.C. would you come up with something like this? If you think about what our city does really well, we’re doing this every day on behalf of global Fortune 1000 companies, but start-ups don’t have the money for a K Street retainer,” Harris said.
In RideScout’s case, Harris helped the start-up find the right people within D.C.’s transportation department to test its app and evaluate how best to sell it to other municipalities.
Today RideScout has formal partnerships with municipal governments in Chicago, Austin and San Francisco, among others.
The fund will be managed by 1776 founders Donna Harris and Evan Burfield, along with 1776 chief financial officer Steve Graubart and Rusty Greiff, a senior adviser with New Markets Venture Partners. Equity stakes in companies that grow from the fund will be held by 1776.