Who’s Who in RI Venture
Wednesday, March 16, 2011
As Rhode Island's economy shows signs of revival, entrepreneurs need more than just bravery and innovation to get their ventures off the ground — they need capital, and they need it now.
The state houses several entities — venture capital, business development, and government-funded — intended to provide developing businesses and startup companies with the loans they need to get their ventures up and running. Choosing the right one is essential to establishing and growing a new or underfunded business — but the choice may not be as simple as it once was.
The Entrepeneurial Challenge
"It's easy for entrepreneurs to get frustrated," said Peter Dorsey Jr., President of the Business Development Company of Rhode Island (BDCRI). "When you're looking for an investment, you have to make sure you are talking to the right people."
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe capital investment market is changing, with two major trends emerging in the past few years — decreasing barriers to entrepreneurship and increasing numbers of small-scale, early stage investors. Coupled with much-needed innovation in the face of the recession, these trends have made it easier to start a company and secure funding — but more competitive for firms looking to invest.
"Advances in technology have made it possible to launch a venture with less capital than used to be necessary," said Robert Maccini, Managing Director of Angel Street Capital. "This opens the investment market to angel investors and small investment groups."
Compared with other states, Rhode Island is home to just a handful of private equity, venture capital, or business development firms, each with a different target group and varying levels of funding for startup and development loans. Only two cater specifically to local, RI-based businesses — the BDCRI and Cherrystone Angel Group.
BDCRI - Since 1953
"We're a source for good, local companies that can't get everything they need from a bank," said Dorsey when asked what differentiates the BDCRI from other investment companies in the state. "A lot of good companies lost money during the recession. We're putting grease back on wheels that were squeaking."
Founded in 1953, the BDCRI works closely with the Small Business Administration (SBA) — a federally-funded loan guarantor with district offices in every state — to secure federally-guaranteed loans for underfunded, technology-based businesses in and around Rhode Island.Though the company will rarely lend to startup companies, it will invest between $100,000 and $2 million (though the SBA only guarantees loans up to $750,000) to promising businesses at all other stages of development, particularly those in software, medical technology, and other high-tech industrial sectors.
The BDCRI is a good option for businesses with some, but insufficient, funding. It provides short, medium, and long-term loans with potential for further investment, and, according to its Dorsey, the company often provides the final piece of funding to create a comprehensive financial package. The company's portfolio includes neighborhood search engine Web site NeighborhoodScout.com, whose President Andrew Schiller called the BDCRI "a treasure trove and secret weapon to grow businesses in the region."
Delivery System is Changing
The Cherrystone Angel Group is a member-led financing group that offers early stage investment funds and financial advice to companies within a two-hour drive of Providence (or willing to relocate to Rhode Island). Founded in 2004 with over 50 member "angels," as an outgrowth of the BDCRI, Cherrystone is Rhode Island's first organized angel investment group.
"The delivery system [for capital investment] is changing," Dorsey said. "It's a less formal process now... Cherrystone reflects that."
Cherrystone generally offers loans between $100,000 and $500,000, raised by its constituent investors. Unlike the majority of business lenders in Rhode Island, Cherrystone offers loans to businesses in almost any sector -- not just technology-based ones -- as long as the company has an "exceptional management team with proven ability to execute a business plan" that will "build a defensible business in a emerging or growth market," according to the Group's Web site. Its portfolio is far more diverse than its competitors, boasting not only high tech and software companies like Ion Signature Technology, Inc. and Advanced Image Enhancement but also the dessert chain Finale, and Rhode island's popular Narragansett Beer Brewery.
"Venture capitalist firms need to see fast exits, so they aren't necessarily the best option for all businesses," said Dorsey, explaining what investment options exist for non-web- or technology-based businesses. "But Cherrystone and the BDCRI will invest across a wide spread. It's a matter of knowing what buttons to push."
Adapting to New Technology
The youngest name in Rhode Island's capital-loan market, but also one of the most promising, is Angel Street Capital (ASC) — a digital media consulting and investment firm founded in 2010. Though the firm also caters to businesses outside the state, it's portfolio boasts several successful RI-based companies.
"It's great if we can invest in a local company because it provides the opportunity to meet and work closely with management teams," said Maccini, who co-founded the firm. "But 'local' is not defining criteria. When you look at the landscape in Rhode Island, it's really limited."
ASC offers consulting services and loans between $50,000 and $250,000 to companies in the digital entertainment and media industries, including firms that provide tools and services to digital interactive media.
Though the company is generally interested in companies in the early stages of their life cycle, it recently extended its services to Mercury, a mail and printing services firm that has been in business for over 50 years and is now transitioning their business into a digital marketing firm. This may be the beginning of a new trend in capital investment — offering loans to companies in transition periods as the business world rapidly becomes technology-dependent.
Technology is the driving force behind the shifting capital market. Innovations in software have reduced the need for offices, desks, phones, and other typical startup costs — including people — making it possible for small teams to turn blueprints into market sales with limited funding.
"With new cloud technology and decreased bandwidth costs, what used to take millions of dollars of dollars to launch now only takes a few hundred thousand," Maccini said.
Thinking Small to Start
Needing less money means that more entrepreneurs are looking for smaller early rounds. High-tech innovations will probably favor smaller investment groups in the long run. In fact, by some estimates, the number of venture capital firms that exist today may shrink by 65 percent in the next five to seven years, according to Fast Company's Steven Rosenbaum. A Harvard Business School study shows that 95 percent of all venture firms have been generating dismal returns on their loans — likely a result of individual investors becoming more prominent on the small business scene.
But David Martirano, co-founder and General Partner of Rhode Island's sole venture capital firm — Point Judith Capital — believes "there is still room [now and in the future] for venture capital.
"We're very active, hands-on investors," he continued, when asked what differentiates his firm.
Point Judith specializes in technology-based startup and early life cycle stage across three categories: Internet and mobile, healthcare, and clean energy. The firm offers initial investment loans between $500,000 and $3 million, and, unlike many similar venture capital firms, it also offers the potential for future loans — up to $6 million over a company's lifetime. Point Judith's portfolio boasts successful companies like enVista and Fidelis Security Systems — however, only a few are based in Rhode Island.
Slater - the State Option
The lack of a strong local portfolio by many Rhode Island-based investors raised the question of what the state is doing to encourage business development — a crucial factor in rebuilding the state's economy. Funding is one outlet through which the government can provide support, but unfortunately, funding in Rhode Island, especially in comparison to other states, is limited.
Startup projects seeking government funds should look into the Slater Technology Fund. Targeted at life science and information technology ventures and financed by the RI General Assembly, the Slater Fund provides up to $3 million annually in seed funding for local technology-based projects. Slater typically invests in ventures based upon ideas and methodologies originating in academic institutions, government research labs, or commercial enterprises and premised on the possibility of raising substantial follow-on financing from private institutions.
Since 1997 Slater has funded over 90 technology ventures in Rhode Island with over $20 million, often "providing the catalyst for these projects to transition from laboratories to the investment stage or product sales," according the Fund's Web site. These companies, including eyecare biotechnology company Neurotech and environmental modeling software company Accurate Environmental Forecasting, have gone on to raise over $200 million in external funding after Slater's initial investment.
Though a promising start, the Slater Fund is simply not enough to foster the growth necessary to see economic revival in Rhode Island in the near future.
"Businesses in Rhode Island have relatively limited options — that is historically true, " said Maccini. "If you think about the infrastructure here, like the universities, for example, there is a wealth of opportunity in the technology and biomedical sectors. There are a lot of promising companies... but more venture capital firms elsewhere."
Providing an Incentive
Lowering tax rates on capital gains or providing tax rebates for local companies would provide incentives for promising entrepreneurs to remain in-state, as would tax breaks or credits for hiring new employees and other indicators of expansion. According to Maccini, Mofuse (a mobile content management company invested in by Angel St. Capital) received a tax certificate from the state to offset the company's income tax.
"The government helped make Mofuse much more attractive to invest in," said Maccini. The site now powers over 40,000 mobile sites and landing pages.
"The problem is that the state economy is in shambles. No one wants to spend money now, though that will create jobs in the long run," Maccini said. "No one is championing the cause for tax policies or more funding. Maybe there isn't a large enough group of investors."
"The opportunities are here," Maccini continued, "but the funding is not. Why should promising companies stay [in Rhode Island] if they are getting their funding elsewhere?"
Dorsey and Maccini also called for Rhode Island to forge and reinforce its network of business owners and potential investors, making sure the delivery system is vetting the best deals.
"What we need to strengthen is mentorship from experienced investors and entrepreneurs," added Dorsey. "Throwing seed on hard ground is not the same as cultivating it. More money is not always solving business problems. We need to build a community, create and concentrate networks to nurture early stage business development, get people interacting. That's where RICIE [Rhode Island Center for Innovation and Entrepreneurship] and the annual business plan competition come into play. They support the mechanisms that foster development."
"Our goal is not just to be capital," said Maccini. "[At Angel St. Capital] this is our full-time job. We want to get involved; utilize our background and connections to provide services, not just money."
Getting Beyond "No"
Though Rhode Island may not be the ideal environment for startup growth and the development of young business ventures, it is important to remember that not all big ideas require big funds. Microsoft raised a mere $1 million in venture capital — in 2010, it made over $18 billion in profits. Even with the state economy struggling, there are opportunities in Rhode Island for entrepreneurs and small business owners to get the capital — and services — that they need.
"If you have an investable proposition, the money is out there," said Dorsey. "If no one wants to lend you money, don't blame the market. Learn from a 'no' — usually there's a good reason. You just have to figure it out."
(Editors note: Angel Street Capital is an equity investor in GoLocal24 - the parent company of GoLocalProv.com)
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