All four of last year's portfolio companies are still operating, and all have between two and five founding members and employees, said Vaughn. All four companies were also selected to appear as Presenting Companies and showcase their technology in the Demo Room at the CED Tech Venture Conference in 2012.
In our conversation, we discussed the application process and the goals of the program. Read our interview, below.
CED: What is the main purpose of the Cherokee-McDonough Challenge?
Vaughn: Through the Challenge, we are trying to create an effective community of support around high impact environmental startups. Ideally, the Challenge will greatly enhance the chance of success of early stage environmental startups by encouraging a culture of respect and sustainability-based values and by providing insights on such things as: how to communicate with investors and raise capital, corporate structure, lean operating principles, rapid prototyping and crowdfunding. Eventually, we hope to have a strong network of alumni who can mentor and invest in future Challenge entrepreneurs, who will be addressing the most pressing environmental challenges of their time.
CED: How do you know if you'll be successful?
Vaughn: There certainly is no guarantee of success and funding early stage startups, most of which are not even incorporated, is a particularly risky endeavor. In twenty years we will know if we have been successful if at least some of the Cherokee-McDonough Challenge portfolio companies are achieving the audacious goals they set out to achieve when we decided to invest. We want to support and fund bold, innovative companies that will solve the environmental challenges facing our world today, tomorrow and well into the future. In the process, these companies will greatly enhance the standard of living of the global community in which they exist while providing meaningful jobs for employees, associates and partners.
CED: This year, Bill McDonough is involved – what does this mean for the competition?
Vaughn: We are very excited about Bill's involvement. In fact, he was involved to a great degree last year. He even went so far as to invite one of the entrepreneurs to an annual sustainability retreat, which he hosts in Iceland each summer for sustainability experts, CEOs and government leaders. Bill's involvement enhances the profile of the Challenge and provides Challenge entrepreneurs a chance to receive invaluable feedback about their sustainability strategy.
CED: Tell us a little bit more about how McDonough became involved?
Vaughn: Bill is a longtime friend and adviser to Cherokee. Tom Darden, Cherokee's CEO, has been friends with Bill for quite some time. So, Bill has been aware of the Challenge since the beginning. He seemed to have a great time meeting all the entrepreneurs at last year's finale, so I asked if he would like to be involved again. I was honored when he agreed to co-sponsor the Challenge.
CED: How are companies selected?
Vaughn: In addition to Cherokee team members, we invite the Advisory Committee to participate in the selection process by reviewing and scoring applications. Also, the Blackstone Entrepreneurs Network, another partner organization, will do an initial review and ranking of the applications this year. Based on the initial ranking, we schedule meetings (i.e., a conference video call or in person meeting) with the top 10 - 20 ventures. The Cherokee Challenge team then ranks the ventures a final time before proposing our selections to Cherokee's managing directors. Based on their feedback, we select the top three to five ventures in which we invest.
CED: In your press statement, you say that companies must finish with a working prototype. Can you go into a bit more detail on what that means for the companies?
Vaughn: The press release states that each company '...should finish the summer with a working prototype...' Of course, all companies may not be able to build a working prototype by the end of the summer. Thus far, that has not been the case. Even if the prototype is not a working prototype, we feel it is very important to have some sort of prototype in hand when you approach investors. Prototypes help you and others understand how your technology works and how it can be improved. Broadly, it has never been cheaper or easier to build a prototype and we feel it is critical to do so as early as possible--even before raising any outside capital, as long as it can be done cost effectively.
CED: Is the challenge open to anyone? What are the restrictions, if any?
Vaughn: It is open to any venture based in the United States. We would love to accept international applications but, at this time, the transaction costs of investing such a small amount internationally prevent us from so doing.
CED: Does Cherokee take equity in the winners’ ventures? How much/how is this determined?
Vaughn: Yes, 3%, 6% or 9%, depending on the stage of the venture. The vast majority of the time, we will expect 6%. However, there are times when we will expect as little as 3% or as much as 9%. Our equity position is determined by a number of factors, but generally we will expect 3% if the venture has already received a significant amount of funding (from the founders or others) and/or is post-revenue. We will expect 9% if the venture is relatively immature, but has a promising founder or team behind it.
CED: What else do winners commit to doing? What are their benefits for winning?
Vaughn: Winners are expected to attend the weekly dinner meet ups we host throughout the summer. They are required to provide updates to Cherokee and the Advisory Committee at these meetups. We use the meetups to check their weekly progress and to discuss specific topics, such as lean operating principles, how to develop pro-forma financials and forecast one-, three- and five-year projections, how to communicate with investors and what to expect from angel and venture capital investors, and how to leverage crowdfunding platforms effectively.
Vaughn: Being a Challenge venture means that you have access to an experienced and talented Advisory Committee. The Advisory Committee provides entrepreneurs immediate access to some of the most successful and well-known entrepreneurs, venture investors, attorneys, accountants and advisers in the region. In addition to the broader intended outcomes I mentioned question 6, the Challenge is designed to ensure that each venture is structured and incorporated properly and that the entrepreneurs have investor ready fundraising documents as well as a thoughtful capital raising strategy. We also provide free office space throughout the summer as well as a communications coach for the entrepreneurs.
CED: The application deadline is April 30 – would you encourage people to complete their application early?
Vaughn: Yes, that is a huge benefit to us because it allows us more time to complete due diligence. If you turn-in your application early, you have a much better chance of receiving a call or email inquiry.
CED: Would you describe the ideal applicant?
Vaughn: That is difficult to do because entrepreneurs come in all shapes and sizes with various strengths and weaknesses. Of course, entrepreneurs tend to share some commonalities--such as an ability to envision a future that others have yet to imagine and an ability to connect the dots quickly--but they are all individuals. Personally, I like working with entrepreneurs who are passionate, humble and determined to solve big problems.