Startups in Maine need to move quickly to become mid-sized companies
Photo / Tim Greenway
Bob Martin, managing partner at Strategic Equity Partners LLC, outside the Wishcamper Center on the USM campus in Portland.
At a time when the state, the country and the world are separating into small and large, rich and poor, entitled and disentitled entities with a quickly disappearing middle class, two Maine financiers and innovators are calling for what seems a tall task: building a “middle class,” or group of mid-sized, scalable Maine companies that can create and spin off new businesses and, more importantly, draw in skilled workers who will stay in state, around them.
“Maine continues to experience a lack of scale in enterprises that are worthy of significant investment,” says Bob Martin, managing partner of Strategic Equity Partners LLC, a Brunswick-based consultancy that helps companies grow with projects like business plans, due diligence, turnarounds, interim leadership and obtaining funding. He also is on the board of the Maine Center for Entrepreneurial Development and is former president of the Maine Technology Institute.
But there are some notable exceptions that he says can serve as strong examples, citing two Portland-based companies, Putney Inc., which recently saw a $200 million exit, and Kepware Technologies, with recently was bought for $100 million.
“These are two significant exits,” says Martin. “By and large, most Mainers didn't have a clue about either company. Between both of them you've got almost a quarter of a million dollars worth of refinancing that took place which will absolutely and significantly distort the statistics on equity funding in the state of Maine.”
He added that both companies were led by very serious, smart individuals focused on building their companies quietly and in markets that were largely outside the state.
“And neither company falls into that sexy, early-stage venture stuff that most people think about when we do Maine Startup and Create Weeks and all this entrepreneurial stuff,” Martin says. “It's all generally serendipitous based upon the fact that we don't have enough scale in terms of the kinds of industries that are in demand in today's world in what you see in other areas.”
“We need to fund companies that are scaling to be mid-sized in the $20 million to $100 million revenue range,” agrees John Burns, managing director of the Maine Venture Fund. “If we spawn a bunch of these we'll have natural clusters.” He added that Maine probably has only 25 such companies now. “We need to grow the small, five-person companies to $5-10 million,” he says.
Putney, a veterinary product company, in mid-March agreed to be sold to Dechra Holdings US Inc., an Overland Park, Kan., subsidiary of UK-based Dechra Pharmaceuticals Plc., for $200 million. Putney's net revenue was $49.6 million in 2015 and it had 63 employees as of last November. Safeguard Securities Inc., which had a 28% primary stake in Putney before the acquisition and had invested $14.9 million in the firm since September 2011, expects to realize $58 million in initial cash proceeds, almost a 3.9 times cash-on-return and a 42% internal rate of return.
And in December 2015 Portland software development company Kepware said it was being bought by PTC Inc., of Needham, Mass., for $100 million. Kepware, founded by Corson “Corky” Ellis in 1995, develops software that lets disparate industrial machinery communicate. It posted $20 million in revenue in 2015 and sells its product in more than 120 countries, with most sales overseas. It employs at least 115 and has been growing quickly, but remains unknown to most Mainers.
More money, targeted products
Martin's and Burn's remarks bear out when looking at the state of Maine's innovation economy within the Maine Development Foundation's “Measures of Growth 2016” report released in mid-April. Maine's total percentage of gross domestic product spent for R&D in 2011, the most recent year available, was $535 million, which is about 1% of the state's GDP and about $1 billion short of the 3% benchmark, according to the report. That ranked Maine 21st among U.S. states. However, the report said that Maine's total spending on R&D would reach 3% of the GDP by 2020.
Maine's percentage of total R&D funding from the private sector, at 58%, also trailed the 81% nationally and 80% in New England. Universities and colleges had 27% of R&D spending. However, the 15% from Maine's nonprofit sector was well above the 5% for New England and 2% for the country.
National Science Foundation data showed that R&D spending at the University of Maine rose to $101.2 million in 2014 from $77.6 million in 2013.
The report states that “Investment in R&D supports innovation, which has been shown to generate approximately 80% of all economic growth. Maine's spending on R&D also yields a high return on investment. It is important that we find an appropriate mechanism to provide sufficient funds for research and development, and equally important that our R&D activities generate meaningful economic activity for the state. Concentrating on Maine business and industry and the growth and expansion of R&D and innovation-oriented private sector companies is imperative.”
How to grow
Both houses of the Legislature also recently passed a bill to establish a $50 million capital fund to fill a hole in larger funding amounts. The fund would be available only to companies that create or retain 250 jobs that pay about $20 per hour, which is about 125% of the state's current median wage. It also would operate like a mutual fund into which investors, such as large companies, would put money that in turn would be lent to qualifying customers. There also would be no taxpayer obligations if a development or business fails. The fund also helps in gaps with banks, which can only lend up to 20% of their capital to a project. In all, the aim is to finance larger developments and innovations.
While the plan may look good on paper, Martin questions its benefit for funders: “The example they use is Kestrel . . . The idea that you're going to drop a large employer into the state is the same sort of fantasy that exists in towns that think somebody's going to fill up the millions of square feet of mill space.”
Martin says a couple things are happening in the investment world at large now that are going to drive change, and Maine has the opportunity to participate in those. First is the big shift going on, particularly in venture capital and institutional investing, into an arena that's known as ESG, or environmental, social and governance investments. These investors are seeking businesses and enterprises that solve a social need and whose governance issues are such that they want to pay attention to how much the CEO makes, how the board exercises its fiduciary responsibilities, what the values of the firm are and its environmental footprint, whether it is making products that are harmful or that help to protect the environment.
“There's a huge amount of interest in this type of investing,” he says.
He adds that this also responds to the other big need we have in the United States, to address some fairly significant infrastructure issues like energy, because he believes oil is so cheap now, but it's a blip and is beginning to bubble back up.
“We know that the issue of global warming is significant,” he says. “This suggests two things.” One is the need to pursue the development of alternative energy, which is an area where Maine has a pretty good position in in terms of technology development and people who are keenly interested in it.
“What we do not have is an acceptance of that at all levels of our state government,” he says.
Martin says there are half a dozen companies in Maine that are doing some pieces of this [distributed energy], and so the challenge to them is to get on the radar of those investors interested in funding them. One is PTT Distributed Energy Systems of Wiscasset, a subsidiary of Peregrine Turbine, which recently raised $100,000 of a $4.5 million debt and equity offering. Other related parts of the company have cobbled together earlier financing, including equity rounds and SBIR funding.
“But by the same token, they have to build up enough scale to be attractive to investors,” Martin says. “ESG investors are not interested in early stage companies that are small. So the idea of collaboration and being in an area where it is easy to find others who are like you is one of the reasons Silicon Valley is so successful. “So why aren't we taking more advantage of it with Massachusetts nearby? Part of it is the political atmosphere is kind of a barrier.”
“The other thing is what have as outputs from the university community that would help sustain that kind of growth. What is the first thing people ask about when they think of relocating to Maine? How do I get people to work for me?” he says. “It's going to get solved, but not overnight. You have to change the culture so that your university and college environment is rich and deep and that it has some scale in terms of graduates who want to stay.”
He says that's the theory behind the new Maine Center for Graduate Professional Studies now being built up at the University of Southern Maine in Portland. Martin also works at the center, and will focus on experiential learning based on relationships with Maine's business, legal and public service communities. The key, he says, is to get more interdisciplinary education so that lawyers, for example, know business issues in dealing with clients once they are in the working world.
“You still are stopped with some of the basic, non-sexy infrastructure issues that are going to be an issue for the state as long as we have as few belly buttons as we do,” says Martin.
Other issues include high-speed broadband, which can keep companies and students from coming to Maine.
Another area of growth related to renewable energy is climate migration. Global warming eventually will make places like Boston uninhabitable, and Maine will start looking pretty good as a place to live and locate a business. “I think Maine has a challenge in terms of land-use planning, infrastructure development … [and other things] that are going to be necessary to increase the population. I think the fact that we're losing population due to age is a transitory thing. From a public policy standpoint we need to think of how to address these issues on a collaborative basis in terms of providing the right and necessary infrastructure for the state ... figuring out ways to address those issues can attract the right kind of funders.”
Burns says Maine's innovation problems aren't just about the money. “Companies go where the money is,” he admits, “But Maine Angels shouldn't be considered an economic development tool. Investors are looking to assess companies with high return on investment.” He advocates for angel groups in different areas like Maine and Boston to forge stronger ties among themselves and with small venture capitalists that invest smaller amounts and may join a syndicate of investors.
Says Burns, “We need to build companies to get them to scale.”
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