By Alexander Soule
Asked a year ago his biggest wish for the Stamford Innovation Center where he is managing partner, Barry Schwimmer cited a venture fund to invest in emerging companies.
With the promise of writing loans to local companies in growth mode, Schwimmer’s Petros Connecticut Fund has secured $18 million in backing under a state program that helps financiers raise money by awarding tax credits to insurance companies that commit cash to those local investments.
Petros is joining three others in the state including Enhanced Capital and Stonehenge Capital, which both have Stamford offices; and Ironwood Capital of Avon.
Schwimmer is managing director of the Stamford Innovation Center, which opened in 2012 in the Old Town Hall building that previously had been vacant. The center provides office space for a small number of startups, while hosting an ongoing program of events.
In his new role as managing director of the Petros Connecticut Fund, Schwimmer will look to make debt investments between $250,000 and $2 million across a range of industries, with the tax-credit program mandating a quarter of funding disbursed go to companies working with green technology. Schwimmer hopes that within seven years, the Petro Connecticut Fund will have between 20 and 30 companies in its investment portfolio.
“Connecticut … has been dominated by big companies — whether it’s banking or insurance or GE or what have you — and it’s really only been recently that there’s been a recognition that developing a strong economy requires lots of companies and diversification,” Schwimmer said. “There’s been lots of innovation here in the state of Connecticut, but we have not fostered the startup mentality here — it just had not existed … And there’s still an enormous amount of work to do.”
Petros is based in Austin, Texas, with one of its founding partners previously with Enhanced Capital. Since raising money in 2011 under the initial authorization of the program, Enhanced Capital has invested in more than 50 companies, according to Liddy Karter, managing director in the firm’s Stamford office. Those businesses include Fresh Green Light, a franchised driving school with 11 locations in Fairfield County; Financial Tracking Technologies, a Greenwich company with compliance software for hedge funds; Sovereign Home Health, which handles care needs in the home for older people with ailments or dementia; and the Stratford companies Two Roads Brewing and Innoteq, the latter a maker of pharmaceutical coatings.
To qualify for funding, companies must have their principal operations in Connecticut, with at least 80 percent of employees either living in the state or the same percentage of company salaries paid to residents.
Unlike a venture capital fund, which is structured to reap gains through the sale of a company that can shift control to owners elsewhere, the InvestCT fund is set up to allow fund managers to make money from interest charged on loans, which Karter said offers better odds of companies growing locally.
“Our goal is to see these companies grow and be held (as) local companies,” Karter said. “We’re seeing a lot of opportunities across the board.”
Despite the existence of the state-backed Connecticut Innovations venture fund and tax incentives to encourage “angel” investments from private investors, local startups have routinely compared the state’s venture funding environment unfavorably to those in Boston, New York City, northern California and other high-tech centers. Even so, both Hearst and PwC tracked large increases in venture funding in the fourth quarter of 2015 compared with a year earlier, with Karter predicting those numbers will see sustained momentum this year.
In broadest terms, the InvestCT fund is structured to address the so-called mezzanine stage of investment as companies look for a cash infusion for hiring or buying needed equipment to handle orders that are materializing for their products or services. Since the financial panic of 2008 and 2009, mezzanine funds have provided a source of capital for business owners otherwise having difficulty getting interest from banks, and who do not want to sell control of their company to traditional venture capitalists.
“Following the recovery from the recession, there has been a relative drying up of credit from traditional lenders like banks, especially for middle market borrowers and those with less than prime credit,” said Peter Lukas, a partner in the New York City office of KPMG knowledgeable on mezzanine funds. “That’s opened up more opportunity for non-traditional lenders, … especially those looking for enhanced yields with mezzanine lending.”
Under InvestCT rules, a small portion of the new Petros Connecticut Fund will be allocated to the smallest “pre-seed” deals for nascent startups in the early stages of developing products or services. With Schwimmer’s dual role as head of the Stamford Innovation Center, startup entrepreneurs won’t have a hard time finding him; in time, he hopes the Petros platform will be able to expand to cover the gamut of startup financing from launch to later stages.
“Over time, that may evolve to become a more important part of our model — I’m not sure,” Schwimmer said. “I feel like this is a very important first step and we’ll see where it goes … If I do my job, it’s going to work.”