Looking for stronger growth

LIGHTING A PATH FORWARD: IlluminOss Medical founder and Chief Technical Officer Robert Rabiner has been able to attract $50 million in capital since founding the bone-repair technology company in 2007, but his success has not been duplicated very often in the region. / PBN FILE PHOTO/RUPERT WHITELEY
LIGHTING A PATH FORWARD: IlluminOss Medical founder and Chief Technical Officer Robert Rabiner has been able to attract $50 million in capital since founding the bone-repair technology company in 2007, but his success has not been duplicated very often in the region. / PBN FILE PHOTO/RUPERT WHITELEY

Editor’s note: In celebration of Providence Business News’ 30th anniversary, staff writers and contributors examined the stories and trends that defined the region’s business scene for the period.
It’s no big secret that small businesses rule in Rhode Island.

That’s not to say big businesses play small roles, but with 96,166 small businesses employing more than half the state’s private workforce – or 221,636 people – in 2012, the economic impact of their presence is undeniable.

“As in many other states, there is a strong core of people [in Rhode Island] who are interested in starting or growing their small businesses,” said Edward Huttenhower, the newly hired director of the R.I. Small Business Development Center.

The dominance of small businesses in the Rhode Island economy has translated to the dominance of small businesses in the pages of Providence Business News in the last three decades as well. The number of stories written about new and old small businesses, interviews with small-business owners and analysis of small-business trends are almost immeasurable.

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But throughout the many pages written about small business are some overarching trends and intertwining themes prevalent throughout Rhode Island’s small-business community.

“Building a business is never easy,” said Mark S. Hayward, district director of the U.S. Small Business Administration’s Rhode Island district office.

Access to capital plays a large role. From tech startups to mom-and-pop corner stores, finding money to build the infrastructure around a new idea can be daunting, especially for a first-time entrepreneur. And it doesn’t get any easier for mature businesses looking for working capital to expand operations.

Enter the SBA. In 1987, the federal agency approved 79 loans through its 7(a) and 504 loan programs totaling $15.8 million. Fast forward to 2015, SBA Rhode Island approved 366 SBA-backed loans in conjunction with traditional lenders totaling $88.9 million.

The numbers have fallen slightly since the agency’s peak in 2004 when it backed 1,139 loans totaling $106.6 million, but that’s not necessarily a bad sign, as the SBA in its design is meant to support small businesses that are struggling to find capital from traditional lenders.

“We’ve seen cycles of both ups and downs,” Hayward said. “Last year was significantly up from the prior year and that’s just the way the economy goes.”

Rhode Island small businesses were hit especially hard during the Great Recession. The unemployment rate was among the highest in the nation, and the robust growth in new businesses dropped sharply after the financial crisis of 2008. Indeed, the net gains of businesses in 2008 fell to fewer than 500 compared with about 2,300 in 2007, according to data from the R.I. Secretary of State’s office.

The state’s slow recovery from the recession clearly reflects the number of new businesses, which still hasn’t reached pre-recession levels, totaling about 1,400 in 2014.

Despite the slow-growing numbers, however, there has been a noticeable buzz in recent years regarding the startup community. A number of businesses incubators and accelerators have cropped up throughout the state and have helped cultivate fledgling ideas into full-fledge businesses.

Among those in this group are number of organizations are tapping into the startup community, including the Business Innovation Factory, RevUp by Betaspring, Social Enterprise Greenhouse and Slater Technology Fund, to name a few. And a recent Brookings Institute study identified the innovation economy as a potential area of growth for the state, which has struggled to find its identity in face of the sharp decline in the long-standing industrial economy.

“A lot of growth comes out of what we identify as clusters, so this is everything from the biotech in Boston, to the Internet clusters in San Francisco and Seattle to the nanotechnology cluster in Albany, [N.Y.],” Liam C. Malloy, economist at the University of Rhode Island, told Providence Business News in 2015. “We haven’t found out what our comparative advantage is.”

And, of course, if the innovation and startup economy is truly a part of Rhode Island’s future comparative advantage, it will often come back to a question of capital, which is scant in the Ocean State compared with its neighbors Boston and New York City.

“The issue here in Rhode Island is our reliance on capital outside of Rhode Island,” said Richard G. Horan, senior managing director at the Slater Fund. “We have two highly respected equity funds, Providence Equity Partners LLC and Nautic Partners LLC, but they do not invest in early-stage startups and neither of them are focused on Rhode Island in their investments.”

The lack of access to venture capital is another reason why successful startups in Rhode Island tend to move elsewhere. Some in Rhode Island say it’s time to start thinking of the state as a part of the economic system of Boston, which is only an hour drive north.

“We’re a great on-ramp, but we’re just not a part of the highway,” said M. Cary Collins, the Michael A. Ruane endowed chair in business innovation at Providence College. “At the base of the on-ramp, we’re helping people build airplanes, but then we’re surprised when they fly off and land in Boston.”

Small business will undoubtedly continue to be the legs of Rhode Island’s economy. What exactly that looks like in the future, however, is still to emerge. •

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