Slater progress stalled

By this point the Slater Technology Fund was supposed to have largely broken free of the state funding that created it and, with $9 million in federal stimulus, started down a path to self-sufficiency.
That was the plan drawn by Rhode Island’s political and economic-development leaders, who helped secure federal money for the nonprofit venture-capital firm at least in part so they could cut back its annual state appropriation.
Since the announcement of the $9 million award in 2011, Slater has followed through with investments in some of the Providence area’s most promising technology companies, a few of which have also drawn multimillion-dollar outside funding.
But while Slater’s state appropriation has been cut each of the last three years, it has received only $1.9 million, or less than one-quarter, of the $9 million in expected federal grants.
A U.S. Treasury review of how Rhode Island is investing its award under the State Small Business Credit Initiative, including Slater but especially with startup accelerator Betaspring, has put the bulk of the state’s $13.1 million award on hold.
That in turn has hindered Slater’s ability to raise the private investment needed to chart a course toward eventually operating without annual government support.
Private fundraising “has been delayed because of the uncertainties with respect to [the $9 million federal award],” said Slater Senior Managing Director Richard Horan. “Until such time as uncertainties are resolved, the delay in private-sector formation will persist,” he said. “Suffice to say resolving those uncertainties has been one of our most important priorities in the past three to six months.”
Compliance concerns about how Rhode Island used its SSBCI funds were identified in a state-commissioned audit by consultants Lyon Park Associates and subsequently handed over to Treasury officials.
Questions about Rhode Island’s $2 million investment in Betaspring turned on whether accelerator services qualify as private investments under the federal program. Lyon Park’s more modest concerns with Slater delved even further into the realm of accounting issues. Specifically, the SSBCI rules require each individual deal involving federal dollars to also include at least 20 percent private capital, meaning investors such as Slater cannot comingle the grants within their accounts.
Although the $1.9 million in SSBCI funding used in Slater deals since the start of 2012 was exceeded by roughly $16 million in aggregate private capital, most of it from outside co-investors, two of the six deals during that time period used federal funds exclusively and broke the 20 percent rule, according to Lyon Park.
A third investment may have been in violation depending on how the Treasury calculates the time frame for follow-on investments in each deal, something the consultant recommended seeking an advisory opinion on.
As a result of these concerns, Slater took steps to segregate its SSBCI funds from capital in its accounts containing state appropriations or returns from earlier investments.
And Slater rearranged the deals singled out by Lyon Park – $250,000 investments in medical-imaging company Lucidux LLC and electric-distribution company VoltServer Inc. – so that each now includes at least 20 percent Slater funds, which are considered private capital in this context.
In the case of a $250,000 investment in smart-grid company VCharge Inc., which followed funding from outside investors, Slater has offered to use its own capital instead of federal dollars if Treasury decides the other investments were too far removed to count.
All of these accounting maneuvers have resulted in Slater having little available to put in new investments.
Slater received $3 million annually from the state as recently as 2009, but since the recession, that number has been cut each year and is pegged at $500,000 in Gov. Lincoln D. Chafee’s proposed fiscal 2015 budget. Slater’s last investment was a $100,000 follow-up in VCharge last fall. Half of its $500,000 2012 investment in IlluminOss Medical is contingent on the company reaching performance milestones, and so while spoken for, has not been delivered to the medical-device manufacturer.
“We are in some respects in suspended animation regarding the outcome [of the Treasury review],” Horan said. “There are a large number of companies in the portfolio and pipeline, investment-grade propositions that would be well-served by additional SSBCI funding.”
Under the agreement with what was then the R.I. Economic Development Corporation, Slater was supposed to get $1.5 million, which it did, in the first tranche of SBCI funding, then $3.1 million and $4.4 million respectively in the second and third tranches, which the state could apply for after the first had been used.
Because the third recipient of SSBCI money, the R.I. Small Business Loan Fund, saw its deal flow dry up in 2012, it advanced $500,000 to Slater and $600,000 to Betaspring to keep capital moving. That finished up Betaspring’s funding and meant the next tranche to Slater would be $2.6 million.
Horan declined to discuss the possibility that federal officials would not allow Rhode Island, and ultimately Slater, to access the remainder of the SSBCI funds.
Former EDC Executive Director Keith W. Stokes, the architect of Rhode Island’s three-part allocation of SSBCI resources and now a consultant at The Mayforth Group in Providence, said he has not been close enough to the administration of the program to know if the results of the state’s investments had matched expectations.
“From my perspective, the goal was always to build a pipeline and provide access to capital for early-stage companies and Slater and Betaspring have been successful doing that,” Stokes said. •

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