City officials say the goal of the seed fund is to fill an investment gap between the credit cards and "friends and family" money most people use to start businesses, and the millions of dollars provided by venture-capital firms once a business has customers and demonstrates high-growth potential.
Providing seed capital is among the riskiest strategies that venture-capital investors can undertake. Typically, a business only gets such capital - from $200,000 to $500,000 - by giving up an equity stake.
City-sponsored seed funds are rare, according to the National Venture Capital Association. More common are efforts initiated by states through investments by public-pension funds in venture-capital funds. In 2001, Pennsylvania created three life-sciences-oriented funds through a portion of its share in the national tobacco settlement.
Alan Greenberger, deputy mayor for economic development, said in an interview that the new seed fund is modeled on the NYC Entrepreneurial Fund started by the Bloomberg administration in 2009 in New York.
After the collapse of Lehman Bros. in September 2008, New York was faced with losing "smart, mobile, very talented people," said Seth W. Pinsky, president of the New York City Economic Development Corp. So the NYCEDC launched nearly 100 initiatives to encourage people to become entrepreneurs.
For its seed fund, New York supplied $3 million in public funds and selected FirstMark Capital L.L.C. to run what is now a $22 million fund that has invested in five start-ups.
Philadelphia has not had a Lehman moment. Instead, Greenberger said, the Nutter administration noticed that certain segments of the city's entrepreneurial community were "strong and getting stronger."
For its "call for ideas" program, the Commerce Department would commit $500,000 over three years to fund those new ideas, Greenberger said. A board of five or six professionals, mostly from the private sector, would evaluate proposals and decide which should be funded.
It's not the first time the city has shown interest in jump-starting its entrepreneurial community. In 2001, the Street administration created Innovation Philadelphia, a nonprofit organization that disbanded in 2010.
The city's effort to create a seed fund comes two months after one of the nation's most active seed-capital firms, First Round Capital, moved its regional office into West Philadelphia from suburban Conshohocken.
Bob Moul, president of Philly Startup Leaders, a five-year-old nonprofit that provides resources and hosts events for entrepreneurs, said the lack of available early-stage and seed-stage funding has had an impact on the region. AdMob, Invite Media, Milo, and Warby Parker - accounting for a total of $1 billion in investment - all got their start in Philadelphia, but left after they had raised significant rounds of capital.
"If you think about if they'd stayed, what would have been created," said Moul, who is also CEO of appRenaissance L.L.C., an Old City firm designing technology for mobile-app developers. "The next generation of entrepreneurs and advisers."
Contact Mike Armstrong at 215-854-2980 or email@example.com.