Suspended city loan program victim of own success

(Updated, 10:08 a.m., April 9)

121nexus used its $50,000 Providence Innovation Investment Program loan to hire its first employee and four interns to develop a mobile voter-data system in time for the 2012 presidential election.
Splitwise used its city loan to pay rent, hire an employee and keep improving its mobile check-splitting application until the company’s first round of private financing kicked in. “It came at a really important time for Splitwise, months before we were going to be able to close any private investment,” said CEO Jon Bittner about the Providence investment. “In our case it also helped give other investors – friends, family, angels – more confidence in us, because they realized they were investing with the city.”
Splitwise and 121nexus were among 33 companies – including most graduates of the last two classes of the Betaspring startup accelerator – to take advantage of the federally funded city loans offered to select entrepreneurs who agreed to stay at least one year in Rhode Island’s capital.
They could also be among the last.
The city suspended the loan program, a victim of its own success, late last month after it had burned through $650,000 more than the $1 million set aside when it was launched in the fall of 2011.
Although $50,000 loans don’t sound significant in economic-development terms, they’ve played a big part in the rapid growth of Betaspring and the startup hub thriving at its Chestnut Street headquarters.
With cities and startup accelerators across the country competing to attract entrepreneurial talent, the city money gave Betaspring a major edge it’s now scrambling to replace.
And as a public investment in the technology sector, the Innovation Investment loans represented a stark strategic alternative to job-creation incentives for large companies, such as the 38 Studios LLC investment, that are often a feature of state economic-development efforts.
“I think it is important not to underestimate the [significance] of $50,000 for startups companies: it is a bridge fund that lets them settle in Providence,” said Melissa Withers, Betaspring chief of staff. Withers said of the 31 Betaspring companies that received city financing over 18 months, none have left the city while still in business, but at least three have folded.
Although the long-term success rate for technology startups is low, those 31 companies have already raised $4.6 million in private capital, Withers said.
Officially, Providence Mayor Angel Taveras has paused the city loan program to study it, but it’s difficult to imagine the loans returning as they were. Whether for better or worse, they never worked exactly as intended.
When it was launched, the Innovation Investment Program was designed to piggyback on the investments of three organizations: Betaspring, Slater Technology Fund and Cherrystone Angel Group.
Any company backed by one of those three was eligible for a city loan under the premise that leveraging the experience and judgment of these specialized groups would have a greater impact than the city trying to invest on its own.
But because Betaspring is so different from the other two, working with far more companies at much earlier stages of development, graduates of the accelerator snapped up virtually all the money.
Of the two city loans to non-Betaspring companies, only one – to Slater-backed Alektrona Corp. – actually followed an investment from one of the other two participating organizations.
The other Innovation Investment loan to a non-Betaspring company went to Maternova Inc. because city officials thought it was backed by Slater, said Ann Gooding, director of communications for the Providence Department of Economic Development.
Maternova was actually supported by an investment from Social Venture Partners Rhode Island.
Cherrystone Angel Group never had a company that it invested in take advantage of the program. “We never came across a deal in Providence that would have qualified,” said Peter Dorsey, executive director of Cherrystone Angel Group, which invests in early-stage companies. Dorsey said the $50,000 could have been a useful addition to a financing package if Cherrystone had invested in a company that fit the Providence residency requirement while money was still available.
At Slater Technology Fund, not long after the Alektrona funding round last February, Managing Director Richard Horan inquired about financing for another company but was told the city money had already run out.
“Capital formation for seed and early-stage companies is a scarce resource and any sort of reliable source of funding to build these ventures is valuable,” Horan said. “We followed with interest the announcement of the program and tapped into it for one company. We will follow the developments and see if they find more capital.”
By last June, the city had already spent the $1 million initially set aside for the Innovation Investment Program, but wasn’t ready to stop the program, which is managed by the Providence Economic Development Partnership.
So the city tapped into the partnership’s revolving loan fund, which is funded through the same U.S. Housing and Urban Development grants as the Innovation Program, for $650,000 to finance the next round of Betaspring startups.
It was only four weeks before another 15 Betaspring companies would have been eligible for the $50,000 loans that the city froze the program to evaluate its effectiveness and whether the current Betaspring-heavy structure is optimal.
“At the beginning there was no understanding of who would come through the door and the loans were open to all three [organizations],” Gooding said.
“Our expectation was that we would receive interest from all three entities. We didn’t know that so many Betaspring companies would take it.
“The mayor is very interested in seeing entrepreneurs grow in Providence and stay in Providence, but we want to be able to justify how the money is spent,” she added. As is often the case with public economic-development investments, evaluating the effectiveness of the Innovation Investment loans promises to be challenging.
Of the 33 companies to receive loans, 12 of them have not filed required monitoring reports meant to update the city on their progress.
Gooding said the city is not aware of any companies having left the city or folded, but acknowledged that officials don’t know a great deal about what some of them are doing.
Companies that took a city loan have the option of paying it back with interest or converting it into equity, with Providence getting preferred stock at a 20 percent discount.
Considering the fledgling nature of most Betaspring companies and how many have scant revenue, the equity route is likely to be popular and is automatic when startups raise $100,000 or more of new private money.
Gooding said no companies have begun paying the city back yet, but the reports that have been filed point to at least 46 new hires from loan recipients.
If only one of the startups who took the city loan hits it big, it could easily pay back the investment on the rest, but it could be years before anyone knows if that will happen.
But even if that doesn’t happen, the investment could pay off for the city by attracting entrepreneurs who wouldn’t come here, or stay here, without it.
“We had decided we would move to Providence for three months and when we found we were able to get $50,000 to stay, we decided to stay,” said 121nexus CEO Foster Sayers.
Withers said Betaspring will wait to see what the city will do with the Innovation Investment Program and will also consider outside funding sources to replace some of what has dried up.
“This program helped us get to critical mass really fast,” Withers said. “We have created a legitimate entrepreneurial community.” •

A previous version of this story incorrectly stated that Betaspring was unaware that any of its program graduates that had folded.

No posts to display