Yes on Question 4 | Maine's innovation economy depends on early capital for startups
On June 8, voters in the state will be asked to decide on Question 4, a $23.75 million bond issue that provides capital investment to stimulate economic development and job creation. Included in this bond are $3 million for the Maine Technology Institute and $4 million for the Small Enterprise Growth Fund. These are critically important funding institutions in the state and region and are worthy of voter support. Here’s why:
Early-stage capital desert
There has long been a capital gap for early-stage companies seeking up to $500,000 of pre-commercialization and early commercialization equity funding; even in venture capital-rich metro markets like Boston, this “small money” investment is hard to come by. Venture capital funds that manage more than $100 million, which constitute the vast majority of funds in the market, seek to invest upwards of $5 million per company over a series of financing rounds. Most of these funds find it uninteresting to provide $500,000, as their targets tend to be a whole lot higher — the typical top-tier VC fund manages $500 million plus (suggesting a $20 million average per company), making that capital gap all the greater. With the recession that began in fall 2008, that early-stage capital gap has become that much wider.
Historically, this capital gap is taken up by the angel investor community of wealthy individuals, both in its organized, group investing form (for example, www.maineangels.com) and in its less well organized, lone wolf form. Unfortunately, angels, both individually and as a group, suffered in the current recession just like their professional fund manager brethren. Existing investments suffered from sales shortfalls stemming from the recession and an inability to access follow-on capital, as professional fund managers pulled back from new investments to focus on existing ones. Adding to angels’ distress was the loss of up to 40% of their worth that might have dropped with the market downdraft that occurred in early-mid 2009; less worth coupled with portfolio companies in distress has translated to full-scale early-stage investor withdrawal from the startup market. The recession also hit funds’ ability to raise new capital from institutional investors, who also suffered portfolio loss from the recession, dampening their enthusiasm for backing new funds.
Maine’s unique assets
For years, both MTI and SEGF have provided critical early-stage funding — pre-commercialization in the case of MTI, post-commercialization in the case of SEGF — to companies whose primary business activities and headquarters are in Maine. MTI, a technology granting organization, provides “small money” grants ranging from $10,000 to write a business plan, for example, to up to $500,000 for a significant development project. MTI’s funds require matches that leverage capital from other sources.
SEGF writes checks that range from $100,000 to $300,000 as an initial investment in a company and always leverages capital from other investors. (For full disclosure, SEGF has participated in all three of the Maine investments that CEI Community Ventures, a fund I’ve managed for Coastal Enterprises since 2003, has made in Maine. Also, MTI has provided grants to one of the three Maine companies.)
Venture capital is well recognized for its outsized impact on both job creation and innovation. With so little funding of any variety for early-stage companies, I worry about Maine’s future ability to compete in the New England economy, let alone nationally or globally.
Small business is well recognized for its job impact, accounting for more than 70% of all new jobs created in the economy. The Small Business Administration’s definition of “small” is fewer than 500 employees and less than $6 million in after-tax earnings; this suggests companies that might be as large as $50 million to $125 million in revenue — not so small by early-stage venture standards. However, companies, particularly the “gazelles” characterized by their high growth rates and their attractiveness to risk investors, are the seeds that bloom into the larger small businesses that drive the economy. No water (capital), no flowers (growth companies).
My experience with both SEGF and MTI has been very positive and their value has been clear to me from the get-go — they provide essential risk capital to Maine’s startups, which help to pave the way to job growth and innovation in the state. As someone who has worked alongside professionals in both organizations, I can attest to their value to the marketplace, to co-investors and to the innovation economy. Vote yes on Question 4 on June 8.
Michael Gurau is president of Clear Innovation Partners, a Freeport-based firm formed to catalyze and sustain innovation and entrepreneurship in rural and urban economies. He can be reached at mg@clearinnovationpartners.com. Read more Venture Builder here.
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