After four years of investing, USM’s Momentum Fund seeks additional $6M

When the University System of Maryland Board of Regents first established a fund to invest in early-stage student-, faculty- and alumni-led companies, they funneled $10 million from the system’s operational balance into it.  

The hope was that the fund would become evergreen, with the money made from the investments serving to refill the pot. So far, only one of the Maryland Momentum Fund’s 24 portfolio companies has been acquired: an edtech company focused on K-12 vocabulary, called InferCabulary, that was officially bought in March. The fund’s leaders say this is only an issue of timing — the companies are too young to sell, but exit events are expected to begin in the next few years. 

For now, though, the Momentum Fund, which made its first investments in 2018, is looking to the university system to provide stop-gap funding. With $2.6 million remaining, the fund asked the USM to provide another $2 million per year for the coming three years to continue supporting USM-affiliated startups, a move that the USM’s finance committee unanimously agreed to during a virtual meeting on Wednesday. The full Board of Regents will vote on the allocation at a future meeting.

The funds would come from the USM’s unrestricted fund balances.

Other sources of funding have been floated throughout the fund’s existence; early on, for example, USM leaders discussed fundraising an additional $15 million for the fund, according to Lindsay Ryan, USM’s interim executive director of economic development. But they realized they could do more impactful work with a small fund that also encouraged co-investors to invest in its portfolio companies.  

This method has worked even better than expected; when the Momentum Fund launched, its leaders hoped other investors to co-invest in the fund’s portfolio companies at a 1-to-1 ratio, with a company earning an additional dollar for each dollar the fund put in. That ratio has actually turned out to be 6.7-to-1, according to Claire Broido Johnson, the Momentum Fund’s managing director. Additionally, 180 unique co-investors have invested in Momentum Fund portfolio companies. 

The original decision to take the money for the Momentum Fund from the USM’s operational balance came from the system and the state’s desires to support local entrepreneurship. 

“(We) thought that it was worthwhile to make that investment as a system. If we’re not betting on ourselves, asking others to bet on us is tricky,” Ryan said.

That bet has paid off; 65% of the fund’s portfolio has either received follow-on capital or achieved profitability, and the companies’ revenues have grown from $4.49 million to $13.9 million over the years. 

Johnson expects the fund will begin seeing significant returns on its investments in around three years — most venture capitalists who invest in pre-seed or other very early-stage startups, like the Momentum Fund does, expect returns in five to seven years, she said.

“It’s important to be realistic about when we can expect returns,” she said. “There are four or five companies we’re incredibly, incredibly hopeful for … I’m very hopeful that in the next three years, we’ll have a few really nice exits that will be very impactful to the Momentum Fund and the state of Maryland.” 

The Momentum Fund’s work also includes supporting other USM-affiliated entrepreneurs that the fund itself may not be interested in investing in, for whatever reason. This can include connecting those entrepreneurs with other investors, especially entrepreneurs who might not know where to look otherwise. 

“We’re here not just as a mercenary VC,” Johnson said. “We’re also here to try to build the entrepreneurial ecosystem.”