Should state invest in startups?

By Patrick Anderson
PBN Staff Writer

With a relaxed, tech-sector optimism, Betaspring has come to embody the Providence startup scene at a time when Rhode Island is searching for an entrepreneurial antidote to the failure of 38 Studios LLC. More

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Should state invest in startups?

PBN FILE PHOTO/TRACY JENKINS
NEW IDEAS: Amir Ata Ghofrani, co-founder and CEO of Quitbit, at a Betaspring open house last October.

By Patrick Anderson
PBN Staff Writer

Posted 3/3/14

With a relaxed, tech-sector optimism, Betaspring has come to embody the Providence startup scene at a time when Rhode Island is searching for an entrepreneurial antidote to the failure of 38 Studios LLC.

At its loft-style offices on Chestnut Street in a former factory, politicians and Web developers mingle at launch events while collaborations and networking bubble up across numerous industries. Where 38 Studios tried to realize the billion-dollar aspirations of a single video game, Betaspring nurtures the ambitions and ideas of dozens, and potentially hundreds, of smart, novice entrepreneurs.

Since the accelerator’s creation in 2009, co-founders Owen Johnson, Allan Tear and Jack Templin have raised more than $2 million from private investors and another $2 million in federal funds through a stimulus program for state-level investments in small businesses.

Tapping those federal dollars meant partnering with Rhode Island’s maligned state economic-development apparatus, which was rocked by the 38 Studios bankruptcy soon after investing in Betaspring and subsequently overhauled.

Now, nearly two-and-a-half years after the U.S. Treasury awarded Rhode Island $13.1 million from a stimulus program to help small businesses, it is investigating whether the state’s use of those funds, and its investment in Betaspring in particular, violated federal rules.

While many states have received and spent their entire allocations from the State Small Business Credit Initiative, Rhode Island has received only about one-third of its $13.1 million as a result of compliance concerns.

The investigation comes at an awkward time for Betaspring, which is nearing the end of its current investment round and is expected to begin fundraising to start a new fund by the end of this year.

And the timing could be even worse for the Slater Technology Fund, which is supposed to receive more than two-thirds of Rhode Island’s total federal award and use it to transition away from dwindling state support toward financial independence.

On a broader level, the investigation also raises new questions about the R.I. Commerce Corporation, which managed the federal money, and whether the state should be involved in startup investing at all.

Concerns about Rhode Island’s use of SSBCI funds first emerged from a state-commissioned audit of the program from Lyon Park Associates, a consultancy headed by a former U.S. Treasury compliance manager.

The Lyon Park audit concluded that Rhode Island’s Betaspring investment violated the rules of the SSBCI program because most of it ended up going to the accelerator’s operating expenses and not the startups themselves. The audit rejected the idea that accelerator services provided by Betaspring startups could count as investments.

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