Risk and REWARD | Joe Kumiszcza's got a $100 million game plan for growing Maine's technology sector

MESDA has a clever ring to it, perhaps because within certain circles in Maine it's associated with all things techie. But the Westbrook-based technology association has decided to throw off its old moniker. Ditching the outdated acronym that originally stood for the Maine Software Developer's Association, MESDA will now be referred to as the Technology Association of Maine, or TechMaine for short.

TechMaine Executive Director Joe Kumiszcza says the name better reflects the broad spectrum of technology companies the trade association now assists, which range from software developers to biotech and IT firms. But TechMaine will not divert from its original calling, which is to help carry Maine's economy into the future, right up to the bloody brim. "It's not just cutting — it's the bleeding edge," Kumiszcza explains.

Now more than ever, Kumiszcza is looking beyond the horizon at the many possibilities for the state's technology sector. And TechMaine is zipping into 2008 with several ambitious plans, including creating a software testing center for students and pushing for a $100 million venture capital fund that could invest in technology start-ups in the state. The spin-offs from both ventures could be significant: The testing center could fertilize a growing technology cluster in southern Maine, and the venture fund could stimulate economic growth by investing in promising new companies.

TechMaine's aim has always been to forge a robust technology community in Maine. And if its membership count is any indicator, the industry here is growing. MESDA started in 1992 with seven member companies; now it has nearly 300. But to create a foundation for a truly prosperous tech sector in Maine, with shining computer screens lit up across the land, Kumiszcza says TechMaine still needs to build up two critical components: education and capital.

First off, Kumiszcza wants to open a software testing lab and usability design center in Westbrook next fall. A university, college and vocational high school — along with the city of Westbrook — are behind the project, which will have students testing software for local companies. Not only would the center provide a needed service, Kumiszcza says, but it could also create a skilled workforce and potentially draw more technology companies to the state.

And to muster up some major capital, TechMaine is attempting to attract $100 million in venture capital to Maine in a financial arrangement called a "fund of funds," which is a way for Maine to attract capital to fund risky — but potentially very successful — young businesses. But Maine would be liable for covering any loss of this investment money, a risk that has raised some doubts in Augusta.

"What can Maine specialize in?" Kumiszcza asks rhetorically, setting up his pitch for promoting technology here. "The Brookings Report came out last year, and Maine has a brand, and that is quality. Where does quality and technology intersect? It doesn't right now."

But Kumiszcza says the software center, which will test for quality assurance, could help bridge the gap between a lot of software and excellence. And generating investment capital, too, could help build a bigger bleeding-edge technology sector, stretching the Maine brand to encompass not just lobster rolls and balsam pillows, but sophisticated software programs as well.

The search for funding
Cheryl Phillips-Day, the chief technology officer for BlueTarp Financial in Portland, says when her company started out in 2000, the leadership team had a hard time wrangling investment funds. Again and again, BlueTarp, which provides credit lines for contractors, found that venture firms were unwilling to hand over money because the company was located in a small city in a rural state.

"What we have found, by and large, is the larger venture capital firms want to move you to a larger metropolitan deal where they have a lot of projects and deals," Phillips-Day says. (BlueTarp did eventually raise $35 million over the past few years after going on what Phillips-Day describes as "horrendous road shows" to sell their business idea to potential funders.)

Peter Murray, the founder and chief technology officer of Portland software developer Quantrix, says many venture capital firms asked his company to leave the state. But he resisted. "I'm in Maine because I want to be in Maine," he says. "The thing that Maine has going for it is the quality of place. Entrepreneurs want to be here, but not because there's lots of venture capital."

Meanwhile, local venture capital funds are far and few between, Murray says. Kumiszcza says, too, that while it's possible to attract up to $500,000 here from some financial sources, it's not easy to land much beyond that.

So, to inject capital — lots of capital — Kumiszcza and the TechMaine board last year asked the Maine Legislature to guarantee an investment of up to $100 million in venture capital that could be used to invest in Maine firms, with an agreement that the state would cover any potential losses.

Kumiszcza says now is the time to act to stir up capital, because he insists that accessible venture capital funds need to follow the recent research and development bond passed in November, which will inject $55 million of R&D investment into the state. He says those willing to take the next step to develop the ideas that come out of the research and development phase are going to need capital. Or else, "we'll lose the ideas we funded," Kumiszcza says.

The fund of funds, as it is called, basically works by mobilizing capital from relatively conservative sources, such as banks, to use for far riskier ventures, such as biotechnology start-ups, which, when successful, can offer lucrative returns. But Maine has to first secure conservative capital from a lender, which it would do by guaranteeing up to $100 million. A legislative committee scheduled a Dec. 4 work session on the proposed fund bill. After listening to testimony, legislators decided to schedule one more work session before pushing the bill to the floor for a vote next session, which begins in January. Sen. Peter Mills, a Republican from Skowhegan who is sponsoring the bill, says support from committee members was enthusiastic.

Although Mills says that he was initially wary about the fund of funds when he first learned of it last year, he has grown to believe in it. "Frankly, I greeted it with skepticism," he says. "It sounded too good to be true, and it was hard to understand. But it wasn't hard to understand that the state's credit was being placed at risk, and for what reason, what gain?"

The gain is that the fund manager would invite venture capital firms to invest in Maine companies, according to Catherine Renault, director of the state Office of Innovation. "We'll need to work very hard to polish our companies to present to these guys," she says.

In the handful of states that have implemented a fund of funds, "they have worked out awesome," Renault says. Ten states have such funds, and three more are developing them. (For more on how Maine's fund would work, see "Venture adventure," this page.)
Oklahoma set up a $100 million fund 13 years ago. Since then, 19 companies in Oklahoma have received investment capital, and they in turn have created more than 1,000 jobs and increased economic activity in Oklahoma by $695 million based on an economic multiplier effect, according to Renault. The only blemish in Oklahoma has been an $8 million loss incurred after the dot-com bubble burst.

Peter Mills says that he would like to make sure Maine taxpayers are protected, not only from any huge bills that might result from bad investments, but also by ensuring they see some benefit from taking on such a risk. His instinct is to introduce a clause encouraging venture firms to at least look at Maine companies as they consider their investments. "There is a balance there," he says. "We should make sure [the fund manager] has enough freedom to produce a liberal return, but create either inducements or constraints to ensure that this benefit rebounds in the Maine economy."

Mills says he has been warned that enforcing tighter constraints could turn firms off or cause the fund to fail. Venture firms would not cherish being limited to a small market like Maine's. They would be challenged to find enough profitable companies here in which to invest the entire $100 million and gain substantial returns, Mills says. Instead, venture firms will need diverse portfolios to bolster the fund, which is in Maine's best interest.

Computing power
Besides finding more money for Maine, Kumiszcza is also trying to stimulate more education and train more students in the software development field.

And a new software testing and usability design center, as Kumiszcza envisions it, would attract local computer science students who could work at the center for credit, testing real-world software submitted by companies.

"Software testing and development is like a job shop," Kumiszcza says — in other words, it's a hands-on experience that'll give them the tools they need to find good-paying jobs after they graduate. Kumiszcza believes, as well, that too many companies currently use their customers as testers for their software, or outsource their testing needs because of a lack of local options. And he also suspects that liability issues will increasingly arise over software failures. Thus, anticipating a growing need for such a service, Kumiszcza says the testing center will be good business and good for businesses, as well as helpful for students.

Jim Smith, vice president of acquisitions at Unum in Portland, says the company now ships much of its insurance applications to India for testing. While he says Unum would consider using the TechMaine center to assess its "hundreds and hundreds" of software programs, he anticipates the center could also be helpful in producing an employee pipeline.

Erik Carson, Westbrook's director of economic and community development, has submitted an application for $300,000 in grant funding from the federal Economic Development Administration to support the testing center. He has applied in conjunction with the University of New England's pharmacology school and the city of Portland's proposed biotech business park on Rand Road. (Kumiszcza says he also will apply for $200,000 from the Maine Technology Institute.)

Carson says Westbrook has teamed up with Portland and UNE because the software testing center fits into the region's overall push to become a bustling hub of biotechnology. "We're trying to build a life-sciences cluster here," he says, adding to a group that already includes Idexx, Artel, UNE and Maine Medical Center. "There is a constellation of stars spinning around this sun, which is life science."

The center's anticipated funding is expected to support the nonprofit center for two to three years before it becomes self-sustaining based on contracts with companies, Kumiszcza says. The center plans to hire about seven staffers and a new faculty person at the University of Southern Maine.

Meanwhile, Carson and Kumiszcza are negotiating for a space in Westbrook. They're tentatively looking at a 2,000 to 3,000-square-foot space at the Sappi Fine Paper mill in Westbrook. This space in particular is attractive because it's located in a 250-acre Pine Tree Zone that encompasses the mill. And the mill is now running at sharply reduced capacity, with much of the facility sitting empty. If new businesses moved into this zone they could apply for the tax breaks originally meant for Sappi, Carson explains.

"[The center] needs to be in a location that is going to work to encourage associated business to be nearby," Carson says about the center. "It will create a cluster."
"It's a holistic approach," Kumiszcza says. "Workforce development [and] economic development. We'll try to put all the pieces together to build technology in Maine and to build Maine's economy."