As a venture capitalist targeting New England, I spend most of my working day looking for, and working with, growth-oriented, early-stage companies in the region. Like most early-stage investors, I seek high-growth industry sectors in which to find and fund companies. Some of the region’s more visible industry ‘clusters’ include biotechnology in Cambridge (Genzyme, Biogen Idec), optic lenses in southern Vermont (Omega Optical, Chroma Technology) and natural products in northern New England (Stonyfield Farm in New Hampshire, Tom’s of Maine, Ben & Jerry’s in Vermont).
When our fund develops a region- and sector-focused investment strategy, we research sector competencies that may be found in the regions we serve. Clusters – geographically concentrated groups of interconnected companies, universities and related institutions that arise out of linkages or externalities across industries – matter because they often increase the productivity with which companies compete. When states focus on clusters, other resources often emerge, such as university talent, capital sources and other items important to a developing company or cluster of companies. As investors often seek to extend the life of their equity investment by leveraging their capital with government contracts, bank credit, and other such sources, a purposeful focus of this sort can pay dividends.
As clusters develop (whether by concerted effort or accident), states can enhance their development strategies by considering where they have current competencies and where they would like to see focus (and capital) for growth. Investors looking for attractive investments apply their sector strategy with a given region’s competency whether work force, university research/faculty/students and a strong industrial and/or entrepreneurship culture.
Rhode Island’s Resume
The R.I. Economic Development Corporation describes a number of sectors in which it believes the state has a compelling story to offer companies. RIEDC’s sectors include:
• Consumer Products and Design
• Defense and Homeland Security
• Financial Services
• Health and Life Sciences
• Information Technology and Digital Media
• Manufacturing and Industrial Products
• Marine Trades
• Tourism and Hospitality
Of these eight sectors, four represent areas in which venture capital can play (and is playing) a meaningful role:
• Consumer Products: Certain sectors in consumer products can realize venture returns. Cherrystone Angel Group invested in Narragansett Brewing Company. Clear Venture Partners’ prior fund experience (outside of, but soon inside of, Rhode Island) includes six investments in consumer products categories.
• Health and Life Sciences (HLS): HLS has long been an attractive area for venture investment, both locally and nationally. Locally, the Slater Technology Fund (STF) – a state-funded Rhode Island focused, early-stage fund – has been the most active early-stage investor, managing ten active investments in its portfolio. Cherrystone Angels has also invested in two companies in this sector.
• Information Technology and Digital Media: Like HLS, this sector is a sweet spot for venture capital nationally. Slater has 13 active investments and Cherrystone two in this sector.
• Manufacturing and Industrial Products: Less of a venture capitalist darling, this category is typically served by later-stage investors. That said, Slater has made two investments in this sector – Concordia Manufacturing and Bioprocess Technologies (and Clear will target this sector); Clear Venture Partners will also be investing in high growth MIP companies.
Capital to Support Sector and Technology Expansion
As is clear from the list above, Rhode Island has only a select-few investors committed to supporting early-stage investment (Slater, Cherrystone and, soon, Clear). While meaningful venture capital has flowed in behind early Rhode Island-based investors (particularly in the HLS sector), early-stage venture capital that can support Rhode Island’s emerging and established industry sectors/clusters is currently quite limited.
The state is working to address this capital gap, with the Rhode Island Innovation Tax Credit (targeted to individual investors), a 50 percent state tax credit granted to investors who invest in a Rhode Island business that produces traded goods or services and has annual gross revenues of less than $1 million in the prior two calendar years. The credit targets Rhode Island’s growth sectors: biotechnology and life sciences; communication and information technology; financial services; marine and defense manufacturing; professional, technical and educational services; industrial and consumer product manufacturing and design. This sort of sector-focused program is certain to stimulate individual (and, later institutional) investor interest in emerging technologies.
States such as Connecticut, Massachusetts and Maine have recognized the importance of focusing the state’s energy and resources to development of industry clusters. EDC’s sector orientation coupled with the tax credit represent critical components in the development of a high performance “ecosystem” akin to that of Rhode Island’s neighbor to the north. Continued collaboration between area universities, emerging growth businesses, risk investors and state government is essential to fostering and sustaining Rhode Island’s technology and manufacturing economy. •
Michael Gurau is managing general partner of Clear Venture Partners (www.clearvcs.com). Michael can be reached at mg@clearvcs.com.
