Want to invest in a venture capital fund, one whose primary goal is financing tech startups in Rhode Island?
Though dependent on a yearly infusion of $3 million from the state budget in recent years, the Slater Technology Fund wants to build on that annual sum with private capital from wealthy investors, companies and venture capital firms.
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“We don’t believe that taking Slater to the next level should be done with public-sector funding,” said Richard G. Horan, the fund’s senior managing partner. He and Slater’s board of directors are planning to make the transition from a solely state-funded entity to one that also uses private funds during the next year, he said.
Unlike traditional VC firms that want to maximize returns – and that couldn’t care less about the state in which they invest – Slater is chartered with financing ventures only in Rhode Island, in an effort to spur the “innovation economy” and create high-paying jobs in the state.
Much of the success of the fund’s upcoming transition, however, will hinge on Slater’s ability to bring private investors aboard. David J. Martirano, a general partner at Point Judith Capital Partners in East Greenwich, said that investing in startups carries a higher risk, though also a potential for higher returns.
“I think [Slater] could raise money” from private investors, said Martirano. It would be an attractive investment for someone seeking high potential returns and wanting to help create jobs in the state, he added.
The Slater Technology Fund today focuses on providing seed capital and loans to get ventures off the ground, serving a segment that venture capital firms usually shun due to the high level of risk. Such seed investments made up less than 2 percent of the total U.S. venture capital in the past year, according to PricewaterhouseCoopers’ and the National Venture Capital Association’s MoneyTree report.
Despite the demand for yet more seed capital, Slater’s appropriation in the state budget has been level-funded at $3 million for the past three years as state lawmakers and Gov. Donald L. Carcieri have grappled with large deficits.
Already, Slater has cut costs to put more of its money into investments. In 2005, five Slater funds focusing on separate market clusters were combined into a single entity. The full-time staff was pared to four people. And from fiscal years 2005 to 2006, Slater’s expenses dropped from $1.76 million to $1.46 million as its investments jumped from $1.5 million to $2.5 million.
Still, many agree that Slater needs more capital to invest, to be effective and to prevent startups from leaving the state as they grow.
“I think probably one of the major limitations Slater has is that it doesn’t get enough funding to adequately invest in the kind of companies that it wants to fund,” said Garrett B. Hunter, a founding member of the Cherrystone Angel Group, a group of private investors based in Providence.
Massachusetts has one of the largest venture-capital clusters in the country, and more state funding for startups. Rhode Island already has seen some of its most promising startups relocate to the Bay State, in order to tap those resources.
Last year, early-stage pharmaceutical firm Spherics Inc. moved from Lincoln to Mansfield, Mass., to receive a $2.5 million loan from MassDevelopment’s Emerging Technology Fund. In 2003, Cyberkinetics Neurology Systems Inc. moved from Providence to Foxboro, to gain closer access to the Boston labor market.
Both companies had received initial financing from Slater, and though Horan contended that the firms still employ people and buy services from the Ocean State, he said the added capital the fund is seeking to attract from private investors would help to prevent such defections.
With its current budget, Slater can invest up to $500,000 in a company.
The objective of adding private capital to the mix is to raise that limit to $ 1 million, Horan said. Those larger investments, he said, would give the fund more influence over where companies decide to locate.
Though Horan said the mission of the fund would still be to invest only in ventures based in Rhode Island, he conceded that private investors are more interested in returns than in retention.
“The private sector does not have economic development as a high priority,” he said. “They have return on investment as a high priority.”
The fund now measures the success of the companies in which it invests by how many jobs are created and the amount of outside investment that’s attracted, as well as the standard return on investment.
Since 1997, Slater has either invested, awarded in the form of grants, or distributed as loans slightly more than $10 million, to 90 ventures, and has committed to invest another $5 million, according to financial statement provide by the fund. The fund has been able to recoup about $1.9 million from those investments so far.
Meanwhile, the fund reports, Slater-funded companies have produced a total of 623 jobs and attracted $193 million in investments from other entities. Horan noted that the companies also add to the state’s economy by paying for legal, accounting and other services.
Jeffrey R. Seemann, the dean of the College of Environment and Life Sciences at the University of Rhode Island and a member of Slater’s board of directors, said that adding private capital at the fund “is a great opportunity for a public-private partnership.” Seemann is also co-chairman of the R.I. Science and Technology Council.
“I think that the history is, if you give small amounts of money – or even a couple of chunks of small amounts of money – it doesn’t give the company the kind of momentum it needs to really push forward,” said John Oliver, an assistant professor of research at Brown University and founder of Gene Spectrum in Providence.
Dr. Barrett Bready, M.D., chief executive of NABsys Inc. in Providence, said the state needs more seed capital to invest in biotechnology in order to compete with Massachusetts and states in the Mid-Atlantic region, all of which offer more incentives than here.
Both Bready and Oliver operate their businesses at Slater’s biotechnology incubator, at Richmond Square on the East Side. They have proposed merging their two ventures, in order to pool resources; both are developing technology to reduce the cost of sequencing of DNA.
“It’s well established that biotechnology is going to be the economic driver of the next 50 years, if not 100 years,” said Bready, who also teaches courses at Brown on the biotechnology industry. “No region or state can afford not to be part of that.”
