This is the first post in a five-part series on the Massachusetts government’s role as a venture capitalist. Posts in the series will appear here as they are published.
In 2008, Charlie Grinnell found himself in the unenviable position of trying to raise Series A funding for his agricultural robotics startup Harvest Automation. There weren’t many venture firms investing heavily in agriculture and, despite many years of business experience, he had never run a venture-backed company before (a hold up for many VCs). To make matters worse, the economy was headed into what would be the worst recession since the Great Depression.
“It was really a tough slog,” said Grinnell. And yet by the end of 2009, his company had secured over $5 million in venture funding, thanks in part to early interest from an atypical venture investor: the Massachusetts government. Grinnell credits a funding commitment by the Massachusetts Technology Development Corporation (MTDC), a quasi-public venture fund created in 1978 by the Massachusetts state legislature, with helping to make his Series A possible.
Unlike other VCs, MTDC was interested in Harvest early on and not only committed funding, but helped introduce the company to other potential investors. For 15 months MTDC helped Harvest in its fundraising efforts, eventually joining Founder Collective and others in an A round to the tune of $500,000.
On the presidential campaign trail, Mitt Romney has been accusing President Obama of playing venture capitalist with companies like bankrupt solar manufacturer Solyndra, and in doing so has made the government’s role in startups a matter of national debate. Never mind that Solyndra and similar deals aren’t actually venture at all; should governments be acting as venture capitalists? And if not, why is Massachusetts doing so, not only through MTDC but also the Massachusetts Clean Energy Center (MassCEC)? Together, these entities invest millions annually into technology startups on behalf of the state in exchange for equity in the companies. Do these investments serve a legitimate purpose?
The Bottom Line
Through a series of interviews with state officials, VCs, academics and more, along with research into the structure and record of the state’s venture investing, two things became clear:
- The record of government venture investments in general is dubious at best. Many such efforts are poorly designed, badly implemented or both.
- Both MTDC and MassCEC are structured to avoid the many of common pitfalls of similar programs, are tasked with addressing real gaps in the marketplace, and are held in high regard by those in the innovation community with whom I spoke.
For reasons I will explain, assessing the success of these programs is extremely difficult, and the overall record of such initiatives should bias us towards skepticism. But despite going into this assignment with that mentality, I came away impressed. The Massachusetts government is acting as a venture capitalist, and by and large it is doing a good job.
Government Venture Funds Have a Lousy Track Record
In 1990, the state of Iowa, hoping to boost venture activity in the state, set up the Heartland Seed Capital fund. It seeded the fund with $15 million from the state’s Public Employees Retirement Fund, and after issuing a request for proposals, it selected the investment firm McCarthy Weersing to run it. Over the next three years, the fund made only a single investment of $1 million – perhaps partially explained by the fact that the firm had no investors based in Iowa – while collecting a fat three percent in management fees. When the state decided it had made a mistake, the investors sold back their one equity investment to the company to recoup for themselves management fees that the state refused to pay, and promptly sued the state of Iowa for a tidy sum.
“Unfortunately, these experiences are more the rule than the exception,” writes Harvard Business School professor Josh Lerner in his 2009 book Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed – and What to Do About It. In Lerner’s telling, the record of government venture investment is dismal. From New York City to Malaysia, such efforts have been plagued by poor program design and implementation. But as Lerner notes, these failures are not inevitable. In fact, there is reason to believe that, when done properly, venture investments by government can help address critical market gaps, thereby boosting a city, state, or region’s innovation ecosystem.
The remainder of this series will go deeper into these issues, examining what government forays into venture capital attempt to do, what is required for them to succeed, and finally looking at both MTDC and MassCEC to evaluate the Massachusetts government’s record in this area. Here is the schedule for the week:
Tuesday: We examine the goals of government venture efforts and define what success looks like.
Wednesday: We examine the MassCEC’s structure and record.
Thursday: We look at MTDC’s structure and record.
Friday: Concluding thoughts and summary.
To view all the posts in the series as they are published, click here. We hope you will weigh in throughout in the comments with your thoughts and experiences.