New 'Granite Fund' To Put Local Capital In The Hands Of N.H. Startups

Jul 25, 2012

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How to grow high tech in New Hampshire --- that’s a question a lot of people are asking these days.  Borealis Ventures, one of New Hampshire’s only venture firms, is teaming up with the state’s Business Finance Authority to get local capital in the hands of local innovators.

EC: A few years ago, New Hampshire entrepreneurs Gerard Murphy and Andy Young were playing darts in a bar in Nashua – when they got a great idea. They would start a business that stores digital photo files for professional photographers, in a new and better way.  To do that, they needed seed funding.  The problem is, getting startup money in that formative stage - is hard to do in New Hampshire. And in Boston, Murphy says, investors were skeptical.

MURPHY: Outside of New Hampshire people, even in Cambridge which is very close, they did look down upon a New Hampshire startup, or New Hampshire resources. They didn’t think that a sophisticated startup that would be venture- worthy would come from this ecosystem.

EC: Over the last year, only 11 venture capital deals went down in New Hampshire – compared with 400 in Massachusetts. And only 10 percent of those went toward early-stage funding. Without that, no startup can actually start up.  But now, a new venture fund is trying to make it easier for high-tech startups to get off the ground in New Hampshire, and stay here.

It’s called the Granite Fund, and it’s a collaboration between one of New Hampshire’s few venture companies, called Borealis Ventures, and the New Hampshire Business Finance Authority, or BFA, which manages state funds. The first $4.5 million dollars in the Granite Fund is state money, from the federal government’s 2010 Small Business Jobs Act.  Jack Donovan, the director of BFA, says the next step is finding private investors.

JD: Any investors are eligible, although we’re targeting foundations, endowments, other groups, that hold a lot of capital in the state.

EC: The Granite Fund is one of many managed by Borealis Ventures and it represents a new kind of public/private collaboration for the state.  When other states have experimented with venture investments, they have either simply insured private investors against loss, or participated as an equal partner.

With the Granite Fund, New Hampshire’s involvement is a little bit of both. The state will reap returns, if the new startups thrive.  But if things go sour, Donovan says, the state absorbs the first 15 percent of losses.  

JD: What we're doing is we're a subordinate partner I guess I would say, we have the upside, but we're shouldering a lot of the downside.

EC: The state’s “subordinate” position sounds like a bad deal for New Hampshire, but it’s actually strategic. In order to convince investors with endowments to get on board, the fund has to provide better returns than traditional investments – without too much risk. Yet, investing in early-stage startups in New Hampshire is essentially a risky business.  New Hampshire doesn’t have the high tech infrastructure that Boston does, right next door.  So by shouldering the first 15 percent of losses, the state is hoping to create an attractive environment for local investors. 

Jesse Devitte is a co-founder of the fund’s managing firm, Borealis Ventures. He says the formation of the Granite Fund marks a new stage in the development of New Hampshire’s high-tech economy.

JD:  We live true to this model of ‘live free or die,’ and sort of rugged individualism -- you do this on your own. To have the Business Finance Authority step up and say we've got this program we want to commit resources to make sure that we have the fuel in the state to fund the growth for the next generation of technology companies, this is a really exciting thing.

EC: If investing in local businesses isn’t appealing enough on its own, the folks at Borealis and the BFA will tell you the Granite Fund is also a good investment.  While traditional investments are suffering with the global financial crisis, New Hampshire’s high-tech economy is growing.  Meanwhile, earlystage funding of high-tech can offer much higher returns than traditional investments.  That’s why Borealis feels confident it can raise that promised $25.5 million.

That’s good news for young firms like Mosaic. Although Mosaic has already grown out of the seed-funding stage, Gerard Murphy says a boost in local venture capital could go a long way for the future of high tech firms in New Hampshire.

MURPHY: Cambridge specifically, has a reputation as a really good place to start businesses, and then people leave, Facebook is the prime example of that. I think people can start businesses in New Hampshire, and stay here forever.

EC: Which new startups will the Granite Fund be investing in – and who will the private partners be? That, I’ve been told, is top secret. But if you see some new startups getting off the ground over the next few years, that might be thanks, in part, to the Granite Fund.