Copyright by John F. Hodgman, President of MTDC, 1984 to 2001
During his first administration in 1975, Governor Michael Dukakis was confronted by a major recession with unemployment peaking at 12.3%. Dukakis appointed Howard Smith as his Secretary of Manpower Affairs, and assigned him the task of developing the Commonwealth’s economic development strategy.
Smith decided there was more job creation potential from trying to help new companies get started and existing companies expand, than by trying to recruit out of state companies to relocate in the Commonwealth. In order to implement this strategy, Smith commissioned a survey of what emerging and established Massachusetts employers thought they needed to grow in the state.
One of the top concerns of employers and entrepreneurs was the difficulty new and emerging companies were having in finding credit and investment dollars. During the 1974 recession, capital markets throughout the nation had become severely constrained.
Smith and his team organized a “Governor’s Capital Formation Task Force” to analyze the problem. This Task Force recommended the creation of several quasi-public financing organizations, which were then established during 1977-78. These included:
- The Massachusetts Capital Resource Corporation (MCRC);
- The Massachusetts Industrial Finance Agency (MIFA);
- The Massachusetts Community Development Finance Agency (CDFC); and
- The Massachusetts Technology Development Corporation (MTDC)
While all of these financing organizations played major roles by leveraging private capital to help the state revitalize its economy, this is the story of the MTDC, now MassVentures, the Commonwealth’s venture capital firm.
When the Dukakis Capital Formation Task Force looked for models for the MTDC, the experiences of investment structures such as the American Research and Development Corporation, SBICs and venture capital partnerships were readily available. However, MTDC’s focus on startup and early-stage technology companies was influenced by the mission and history of the Massachusetts Science and Technology Foundation (MSTF) that was started in 1969. In particular, the chronic “capital gap” encountered by technology-based entrepreneurs demanded an unusual type of venture capital firm.
The drafters of the legislation creating MTDC looked at the MSTF charter and decided to have the new entity take over the assets and liabilities of that organization. The historic collaboration between higher education, government and business that was imbedded in MSTF, became part of the culture of MTDC. In addition, the MSTF management assistance program was carried over directly to MTDC.
The MTDC would be a quasi-public corporation with an indefinite life, governed by a board of directors comprised of 8 private sector individuals and 3 ex-officio State government officials. Its mission and operating policies would be specified in its enabling statute so that it would focus exclusively on seed and early-stage technology companies based in Massachusetts. Its fundamental purpose was to increase employment in Massachusetts through the creation and growth of these companies.
When the MTDC enabling act was passed in 1978, the governance structure, mission, policies and purposes were all included. However, there was no appropriation for the investment program. Instead, there was an operating budget appropriation to continue the staffing of what was previously the MSTF.
The MTDC developed a strategy to secure investment funds from the Federal Government. In 1979, it received a revolving loan fund grant of $2 million from the Economic Development Administration (EDA) of the U.S. Department of Commerce. Then in 1980 the White House established the Corporations for Innovation Development (CID) initiative. The MTDC received a second grant for $1 million for a CID loan fund to be matched by $1 million for an equity investment fund from the Commonwealth of Massachusetts. Now that the MTDC had $ 4 million, its investment program was able to commence.
The challenge was how to identify the appropriate types of companies that met the requirements of the funding sources. By its charter, MTDC needed to find that a company was having difficulty raising capital on affordable terms before it could invest. It also had to find that acceptable co-investors would be willing to join in each investment syndicate. The $ 2 million EDA Revolving Loan Fund and the $1 million Federal CID Loan Fund were restricted to debt investments, and only the $1 million Massachusetts CID Fund could be used for stock purchases.
Since the EDA Loan Fund was the first pool of capital available, initially the MTDC focused on established technology companies that were bringing new products to market and would be able to service debt. Later, the CID blend of debt and equity funds were targeted at start-up companies. Once it began to realize capital gains, the MTDC used these to increase its equity investment fund.
MTDC’s first investment of $250,000 was made in December 1979 in Spire Corporation in the form of a debt instrument with warrants. In 1980, a total of $850,000 was invested among 5 companies, Discom, Xylogics, Solenergy, Saum and Icon. These 6 initial investments were the beta tests of the investment process. In 1981 and 82, MTDC was able to ramp up its investments in start-up companies. During these years, startups such as Aspen, Ikier, Publishing Technology, Interleaf, and Randwal were added to the portfolio. Of these early investments, Aspen, Discom, Interleaf, Spire and Xylogics ultimately went public and provided returns that enabled MTDC to invest in many more companies. The early track record of success was established.