City relaunching startup investment program

Providence is getting back in the startup game.
Following a yearlong hiatus, Mayor Angel Taveras is relaunching the Innovation Investment Program, which made $50,000 investments in seed-stage companies in exchange for a promise they stay in the city for at least a year.
Specifics of the new program have yet to be finalized, but already there are strong indications it will be a broader program than the one first created in 2011 that primarily fed graduates of the Betaspring startup accelerator.
At a meeting of the Providence Economic Development Partnership board, which controls the U.S. Department of Housing and Urban Development money that funds the IIP, Taveras and board members expressed a near unanimous desire to open the money up to more companies outside Betaspring.
“We are not limited to Betaspring,” Taveras told the PEDP board, which he chairs. “There is nothing to stop us from working with other accelerators.”
Between the IIP’s launch in November 2011 and when it was suspended last April, the city made $50,000 convertible loans in 33 companies, according to Taveras, with 21 of them still active in Providence and 15 considered on a “high-growth trajectory.” Combined, the companies employ 58 full-time-equivalent employees and have attracted $5.3 million in private investment.
The investments came with a 4 percent interest rate and converted to an equity stake in the company if it buys back shares, is sold or goes public.
The city’s original guidelines for the IIP were to leverage startup investments by Betaspring, the Slater Technology Fund and Cherrystone Angel Group.
Of the 33 companies who have received city investments, 31 of them came through Betaspring.
One of the two non-Betaspring IIP investments, in Alektrona Corp., piggybacked a Slater investment and the other, in Maternova Inc., was an independent bet PEDP staff made through their own familiarity with the company. The idea behind the program was to take advantage of the investing expertise and vetting capacity of the three independent groups by leveraging their bets with public dollars.
The overwhelming utilization of the program by Betaspring was a result of the fundamental difference between the accelerator, which nurtures nascent commercial ventures and the investment groups, which make much larger financial bets in a smaller number of more-mature commercial concerns.
Betaspring admits two classes of between 10 and 15 startups each year and, while the IIP was active, the vast majority of Betaspring graduates accepted it.
The city initially set aside $1 million for the IIP, but ended up spending $1.6 million as a result of the rapid utilization by Betaspring startups.
As it turned out, Maternova, the one investment the city made on its own, is perhaps its biggest success story and one of two investments, along with Nest4Less, to be converted to equity.
Alektrona, the lone Slater investment, has been wound down, according to information presented to the PEDP board.
Further complicating new investments in Betaspring is a recent audit raising compliance concerns about a separate state investment in the accelerator under a U.S. Treasury program.
The audit said Betaspring’s use of federal dollars to run its services for startups did not meet the criteria for an investment and not enough private capital was leveraging the public dollars.
Betaspring and state officials have both described the concerns as more procedural and administrative than substantive.
Still, Taveras said he would have the compliance issues studied before reopening the IIP to Betaspring or any other accelerator, as compliance with federal rules has been a problem for the PEDP and prompted the (since lifted) suspension of its revolving loan program. One major difference between the IIP and state investment through Betaspring is the city made and managed its investments in Betaspring companies while the state turned its federal dollars over to the accelerator to manage.
When the IIP was suspended, Betaspring executives said the program had given the accelerator a huge boost and competitive advantage over other cities in attracting entrepreneurs.
Betaspring co-founder Owen Johnson, reached last week before the PEDP met to discuss the program, said the city had not contacted the accelerator about restarting the IIP before or since Taveras announced it in his State of the City address.
To work through the details of a relaunch, Taveras tasked Economic Development Director James Bennett with putting together a subcommittee to study and recommend a structure and policies for a new IIP.
After the meeting, Taveras said he was eager to get capital out to startups as soon as possible and investing could begin again as early as March.
Among PEDP board members, there was discussion about whether the IIP should be restricted to piggyback investments from third-party groups or opened up to all startups that apply.
A related question, if the city did open the IIP more broadly, is how it would vet and choose between such high-risk investments.
Ultimately, Taveras said he wanted to maintain a level of flexibility in the program so the city could act to seed a special startup outside of third-party investors.
“If we see a company we think is worth $50,000, we should have some flexibility,” Taveras said. “I want us to be nimble.” •

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