Slater fund track record mixed bag

Judged purely as an investment vehicle the Slater Technology Fund, which has returned $3.4 million on investments of $23.4 million, comes up short, concede managers Richard G. Horan and Thorne Sparkman.
As a job creator, however, the 3,513 employment-years of work, much of it high-paying, generated by seed-stage companies Slater entities have invested in from 1997 through 2011 look much better. And most importantly, Slater managers say, is the $394 million in follow-on investments the companies have raised from other sources, amplifying every $1 in taxpayer money spent with $16.69 in private capital, according to figures provided by the fund to Providence Business News.
But in the 15 years since Slater began investing, the effectiveness of public venture-capital programs remains difficult to evaluate, though they are a significant part of the state’s economic-development strategy and are set to become an even larger part over the next few years.
State leaders have found Slater an easy target for budget cuts even as they back the fund for federal money. After $1 million was cut from the Slater budget in 2010, Gov. Lincoln D. Chafee has proposed cutting $500,000 from the state’s $2 million contribution in his fiscal 2013 budget, although he said it is not a reflection on the fund’s performance or its value.
This year Slater started receiving a $9 million infusion of federal funding to bolster what has been a shrinking annual state contribution.
And now other public economic-development agencies are dabbling in equity investing.
This winter, the R.I. Economic Development Corporation, which was central in Slater’s $9 million grant, made its first direct equity investment when it took a small stake in smart-grid company UtiliData through the state Renewable Energy Fund. When the UtiliData deal was approved, EDC officials said it was a model for future economic-development investments.
And Providence, in a joint project with Slater, startup-accelerator BetaSpring and the Cherrystone Angel Group, is investing a $1 million federal grant in $50,000 equity-convertible loans to companies that promise to stay in the city for a year.
Unlike return-driven private funds, public funds generally work towards multiple goals not necessarily tied to maximum capital returns.
Traditionally, job creation has been at the center of almost all public economic-development efforts, whether they employ venture-capital tools, straight grants or business-incubation assistance.
That was especially true for Slater, which in its earlier years was actually five separate “Centers of Excellence,” focused on spurring economic activity in distinct sectors, including design and marine technology.
In those early years, Slater operated mostly as a grant-making body with little or no eye toward recouping its investment, let alone generating healthy returns. “When I arrived in 2002 it was five different Slaters and originally there was no focus on return on investment,” Horan said. “In mid-2005 we began merging into one fund focused on biotech and information technology companies with a hybrid of grants and loans. Now we are focused on equity.”
Of the $23.4 million Slater invested between 1997 and 2011, $2.9 million was in grants, $15.4 million in loans and $5.4 million in equity investments, although most of the recent loans can be converted into equity.
That $23.4 million went into 111 companies, approximately half of which – 54 – are now out of business and never generated significant capital payback or job-creation returns. Fourteen more are still operational, but have no prospect for significant expansion or investment returns.
Slater considers 27 companies it invested in, some of them ongoing concerns and others already wound down, to have generated substantial returns, either in jobs created or money paid back, at some point in their history.
These companies include stable and successful, if not overly large, enterprises such as Epivax, FarSounder, Senesco Marine and Bristol Harbor Group.
It also includes companies that raised significant private venture-capital investments – such as Afferent Corp., Tazz Networks and Spherics – that ultimately couldn’t commercialize their technology and, after years of generating employment, folded.
Finally, Slater has 16 active investments in companies that it considers good bets for future returns, some of which have already attracted private investment.
These companies include Mnemosyne Pharmaceuticals, RxVantage, Tizra, ProThera Biologics and Mofuse.
While the ultimate judgment on the fund’s investments will rely in large part on what kind of returns Slater sees from these 16 companies, Horan said even the older investments show a solid record, considering the low success rate of seed-stage companies and Slater’s mandate to be more risk-tolerant than private firms.
“Slater has been positive, certainly,” said Robert Manning, chairman of Cherrystone Angel Group, which invests in slightly later-stage companies than Slater.
“They have more of a jobs bias, where angels and venture capitals are looking at a return on equity, but I think Slater has some reasonably good expertise and has been able to put some money to work,” Manning added. “I don’t think they have been as effective as maybe the public policymakers would like them to be. If someone is lending in debt form they expect money to come back.”
One way to evaluate how Slater has done is to compare it to economic-development investments made next door in Massachusetts, but finding an analogous vehicle is difficult in the Bay State, which spreads its public economic-development investments over several programs targeting different industries. With funding from Gov. Deval L. Patrick’s $1 billion life sciences stimulus bill, the Massachusetts Life Science Center’s accelerator program has invested $9.6 million in 16 biotech companies since the end of 2008.
Four of the companies have paid the Life Science Center back with interest: Good Start Genetics of Boston, InVivo Therapeutics of Cambridge, 4s3 Bioscience of Medford and Pluromed of Woburn (which was recently acquired by Sanofi.);
In total, the Life Sciences Center has seen a $2.5 million return on its Accelerator Program investments, a better rate of return than Slater.
But the $70 million Life Science Center-backed companies have raised in follow-on capital is well below Slater’s $394 million, although Slater has had many more years and many more companies to raise money.
The Massachusetts Clean Energy Center has invested approximately $25 million in loans, convertible loans or equity in renewable power technology companies since 2002. But the Clean Energy Center was not able to provide any data on returns or job creation from those investments.
Independent of how many of Slater’s bets have come out winners, there are questions about whether the current size of the fund is large enough to have a substantial impact on the economy.
The $23.4 million the fund has invested over the years has come from a $35.2 million contribution from Rhode Island taxpayers, meaning that roughly one-third of the tax dollars dedicated to Slater have gone to operating costs.
Especially in its early years, part of Slater’s mission was to nurture young entrepreneurs, which included running incubator programs that cost money and didn’t show up in the investment pool.
In recent years, Slater has cut back its operating expenses, but with only three full-time employees, there isn’t that much more it can cut without taking away from its essential function.
Especially since the recent budget cuts, Horan said Slater has concluded that its current state funding level is too low to sustain a meaningful program and it needs to grow to have a significant impact.
The $9 million in federal funding is a piece of the solution, but ultimately, Horan said Slater has to generate higher returns to sustain a meaningful level of investment for the long-term.
“It’s still at a size where it is not going to move the index,” Horan said. “We need to take it to scale. Ultimately, we want to take this to $10 million in investments annually, more like a venture-capital firm, where we can attract outside funding.”
Improving its return on investment would both increase the amount Slater has to plug back into promising companies, and could help attract outside investment in the fund itself to provide sustainable revenue for when the federal grant runs out. On the reason for wanting to cut Slater’s state funding to $1.5 million, Chafee spokeswoman Christine Hunsinger said shifting the fund away from state funding had been a long-term goal and the federal grant provided an opportunity to do that.
“The Slater Technology Fund was always meant to be one of those funds that would raise outside capital and this is a moment in time when the governor’s office felt they could cut as that outside piece grew,” Hunsinger said.
And even as if the state does scale back its own funding to Slater, it could still increase its public venture-capital footprint with entities like the EDC becoming more willing to take equity stakes in local companies.
“We took the Renewable Energy Fund from straight grants to low-interest loans and then with UtiliData we took warrants in a small amount for something that would go back into the program,” said EDC Executive Director Keith W. Stokes about his agency’s use of equity investments. “We began to take more of a market development approach as we thought about how we could grow and how we could double and triple [our investment] and have something self sustaining, so we are not totally reliant on appropriations.”
So far, Slater has invested $500,000 of its first tranche of the federal grant, matching $500,000 of its existing funds, in a larger venture-backed A-round investment in Mnemosyne Pharmaceuticals of Providence.
While Slater wants to remain as large as possible and keep all the state funding it can, Horan said the loss of $500,000 under Chafee’s proposed budget would not be a serious blow under current conditions.
As the fund takes its first steps toward a self-sustaining, return-focused existence, Horan and Sparkman are more bullish than ever on a group of companies they have helped make job producers and hope will soon come through with major capital returns.
They point to the $1.05 million stake in Providence DNA-sequencing startup NABsys Inc. and the $750,000 invested in Medrobotics, a company lured from Pittsburgh to Middletown and Raynham, Mass.
They are also excited about the $750,000 in software-firm Andera, which has expanded to 87 employees this year in new downtown Providence offices.
And also about Concordia Fibers of Coventry, a 90-year-old textile manufacturer that Slater’s $500,000 in financing allowed to diversify into biomedical devices. Concordia was purchased by Biomedical Structures of Warwick last year and that company recorded “record setting capital growth” since the acquisition.
“Our pipeline is as fertile as it has ever been,” Horan said. “With the infusion of federal dollars, Slater is in the strongest position it has been in our time here.” •

No posts to display