City to invest in startups

SPRINGBOARD: From left: Allan Tear, Jack Templin and Owen Johnson, above in a 2010 photo, are the founders of startup-accelerator program Betaspring. / PBN FILE PHOTO/RYAN T. CONATY
SPRINGBOARD: From left: Allan Tear, Jack Templin and Owen Johnson, above in a 2010 photo, are the founders of startup-accelerator program Betaspring. / PBN FILE PHOTO/RYAN T. CONATY

Can a $50,000 loan convince a promising technology startup to locate in Providence for at least a year, maybe permanently?
The city and three prominent Rhode Island investment groups think it can and are already in late-stage talks with as many as nine emerging entrepreneurs interested in the newly launched Providence Innovation Investment Program.
The program, established with a $1 million grant from the U.S. Department of Housing and Urban Development, is designed to leverage the bets already being made in emerging companies by Rhode Island investor-accelerators Betaspring, Slater Technology Fund and Cherrystone Angel Group.
Under the program, the startups and early-stage companies those three partners are mentoring or investing in will be eligible for the $50,000 loans, which are conditional on the companies locating in Providence for at least a year.
While many other cities in the country have business incubators, mentoring programs and privately run investment funds, Providence officials believe this new program is unique in the way it uses public capital to harness private expertise.
“They have experience weeding out companies on the startup level,” said Providence Economic Development Director James Bennett about the role of the three investment groups in the Innovation Investment Program. “They come from the venture world and can move a lot quicker than we can.”
The first companies eligible for loans under the program are the 11 that graduated from Betaspring’s 12-week mentorship program this summer.
Depending on how many of those companies accept, a large chunk of the initial $1 million federal grant could soon be accounted for, but Bennett said he envisions going back to HUD for additional grants so the loan program can be extended to future Betaspring classes and however many companies invested in by Slater fund and Cherrystone are interested.
“Certainly if we get these out with alacrity, we can go back and ask for more,” Bennett said. “I think it will take several months [to invest the money] but now that the program has gone viral, we will see.” The loans come with a 4 percent interest rate and can be converted by the city into an equity stake in the company at a 20 percent discount if and when the company buys back shares, is purchased or goes public.
Bennett, who started as city economic-development director this past summer, said he hadn’t known the HUD program providing the money was available until recently and when Providence’s bid was accepted, he thought of involving the investment community. He said he is unaware of any other municipality similarly using public funds for potential investment stakes in local companies.
“One of the things I have noticed being around Providence is we have a very well-educated work force and that now we are now starting to keep those folks in Providence,” Bennett said. “We are becoming known as the startup state. Once we you get in the startup space, this is how you grow.”
Of the 11 Betaspring 2011 graduates eligible for loans, eight are “seriously considering” the $50,000 offer and reviewing the legal documents connected with the investment, said Alan Tear, Betaspring co-founder and managing partner.
For Betaspring, which works with entrepreneurs at an earlier stage of the business-development process than the other two investment groups, the city program adds some additional financial muscle to their mentorship program as it competes with startup accelerators in Boston and New York.
“We have always said our goal is to create world-class companies and a world-class entrepreneurial community,” Tear said.
One of the most important of those next pieces is investment capital allowing entrepreneurs working with Betaspring to scale their good ideas into fully fledged businesses.
Betaspring already invests $55,000 in each of its companies, plus all of the in-kind contributions the program involves. Combined with the city’s investment, entrepreneurs who go through the Betaspring program now will have access to more than $100,000 in investment capital, putting the program on par with other accelerators with larger private backing. “There is a time about six months after Betaspring when companies are trying to raise initial capital, making progress with first customers, where this money is extremely critical,” Tear said. “It makes it much more likely that the companies will be successful and makes it much more likely that those teams will find Providence the right place for their next phase of growth.”
For Cherrystone, which invests in more mature emerging companies, including Betaspring itself, the value of the city program rests more in helping convince companies to stay in the city, than the financial boost.
“What’s happening in the whole Providence and Rhode Island ecosystem with Providence Geeks and Betaspring – this creates a financial incentive for the companies to locate here,” said Cherrystone Executive Director Peter Dorsey. “The idea is that early-stage investing is risky. It takes a lot of expertise to do and chase those investments. This is saying, “if you can get the smart money on it, we will piggyback on it.’ ”
Dorsey said Cherrystone will likely make only a handful of investments that include the city component each year and they don’t have anyone immediately in the pipeline.
At Slater Technology Fund, where the typical funding round for a company is usually in the $500,000 to $1 million mark – with Slater making about half the investment – Managing Director Thorne Sparkman said last week he was in the process of finalizing the fund’s first investment involving a city component.
Sparkman called the primary benefit of the Providence Innovation loans the “team effect” that comes with a number of different groups and stakeholders in the area all working together to magnify its attractiveness to entrepreneurs.
“It’s a clever and innovative tactic that the city is employing to make a pretty big bet on innovation,” Sparkman said.
“People who are that risk tolerant and that big a believer in innovation are few and far in between,” he said. •

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