State VC arm plots new path in crowded investing field

by MVStaff

Boston Business Journal

Date: Friday, July 20, 2012, 6:00am EDT

The Massachusetts Technology Development Corp., the state’s venture capital arm, has a brand new name, a focused mission and plenty of money to invest in early-stage companies.

Yet the MTDC’s modest track record and a number of high-profile blow-ups involving government-affiliated investment programs for emerging technologies — names such as Solyndra and Evergreen Solar come to mind — raise questions as to whether the newly dubbed MassVentures has what it takes to successfully nurture fledgling Bay State businesses. The outfit’s ability to back promising startups is further complicated by the area’s abundance of private investors and venture firms clamoring for a stake in those very same businesses.

MassVentures President Jerry Bird will have none of it. “We complement what the private sector does as opposed to compete with it,” Bird said during a recent interview. “We have to find a gap that’s not being addressed.” Bird joined the old MTDC in 2005 from Clafflin Capital Management Inc. He took the operation’s reins last year when his predecessor Robert Crowley resigned amid a controversial state purge of high-paid public workers. In the months since he has seen eight of the organization’s 11 board members replaced and overseen a complete overhaul of MassVentures’ brand and investment strategy.

MassVentures’ mission-makeover came in June, after 300 entrepreneurs responded to a survey saying there was a capital gap that the state venture firm could fill. To be sure, Bird said many first-time CEOs and entrepreneurs need MassVentures’ advice, deep knowledge of state regulations and access to capital earmarked for emerging technologies.

Among the biggest — and perhaps riskiest — changes embraced by Bird’s team is a plan to take lead positions in venture investment rounds. It’s something MassVentures hasn’t done in the past, Bird said, but it is a move that sends an important statement concerning the operation’s willingness and ability to support entrepreneurs in the earliest stages of development.

MassVentures has a $25 million evergreen fund to invest, including $5 million in new money awarded in this year’s state budget. Bird expects to make new seed investments totaling up to $500,000 in five-to-seven companies starting July 1 — MassVentures is on a state fiscal year calendar — and then another $2 million in follow-on deals.

Over its 36-year history, MassVentures has invested $83 million in 133 companies predominantly concentrated in the IT, telecom, energy/environmental and health-care IT sectors. Bird said the organization’s internal rate of return (IRR) is 16.5 percent on money invested thus far. He calls the organization’s performance a good return for the taxpayers of Massachusetts, especially after accounting for jobs created through its investments.

But others are less impressed. Howard Anderson, a professor at the MIT Sloan School, said he is skeptical about whether MassVentures truly complements the rest of the state’s venture/startup dichotomy. “They serve a legitimate purpose, but they’re not the only game in town,” Anderson said. “It’s not like there isn’t a mechanism in place.”

Anderson also noted there is a danger that government-backed investors such as MassVentures, which have limited flexibility and scale when it comes to deploying capital, will more often be stuck with the leftovers passed over by private investment peers. “There is a need for capital, but if the traditional private sectors aren’t investing in a company, there’s probably a reason for that,” he said. “The private sector guys will not kiss every pretty flower that comes up.”

MassVentures’ existence has not been without controversy. In 2004, the venture capitalist governor, Mitt Romney, vetoed state funds for the firm, only to have the Democratic Legislature restore them. Six years later, the state auditor accused it of cooking job-creation data, an accusation that later proved false, according to Bird. And in 2011, Gov. Deval Patrick forced Bird’s predecessor Crowley to resign amid a state house-cleaning of high-salaried quasi-public agency chiefs. At the time Crowely’s annual pay was $188,000.

But Bird said MassVentures’ new name wasn’t an attempt at a fresh start. “MassVentures really is a much clearer description of who we are and what we do and who we do it for,” Bird said.

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