Can startup incubators give R.I. an economic jolt?

Providence Business News

By Eli Sherman | Sherman@PBN.com

Without the opportunity to lure funding presented by Providence-based Betaspring, a nationally recognized business accelerator, Jon Bittner and his partners never would have brought their startup, Splitwise Inc., to the Ocean State. Nor would they have decided to stay, without a $50,000 investment from Providence in exchange for basing the company in the city for a year.

"During our initial fundraising, that size investment was enough to change our conversation from, ‘Why stay?' to ‘Why leave?' " said Bittner, who was living in Cambridge, Mass., before joining a Betaspring cohort in 2012. "We are no longer bound to stay in Providence but we have chosen to. We enjoy Providence's location, access to top universities, low cost, livability and vibrant arts and culture."

Bittner, the president and CEO, expects the company, a Web-based mobile-app platform that helps people fairly split up expenses, to grow from four employees to six or seven by year's end.

The company's success is what fledgling businesses tapping Rhode Island's growing community of startup-boosting incubators and accelerators all hope to aspire to. The odds, however, are especially long against them doing it and staying in Rhode Island.

Most successful startups will eventually relocate elsewhere when it's time to scale up, says M. Cary Collins, the Michael A. Ruane endowed chair in business innovation at Providence College. That's because most new businesses follow the investment funding as they grow, and that often places Rhode Island at a decided disadvantage, he says.

"An accelerator is a great place for hatching an idea that might take root, but the question is whether the soil here in Rhode Island is fertile enough for it to thrive," Collins said. "You can take it as a blessing or a bane, but we're situated between two major hubs in New York and Boston that do have the fertile soil."

The number of businesses incorporating in Rhode Island is growing, as 2,077 new companies registered with the state in this year's first quarter, representing a 4.4 percent increase compared with the same period last year, according to the R.I. secretary of state's office.

Startup activity in the Providence, New Bedford and Fall River, Mass., metro region has improved slightly in the past year, according to the Kauffman Index, which ranks the area No. 34 (out of 40) in the nation on its 2015 Metropolitan Area Rankings for Startup Activity. Last year, the index ranked the area No. 38. It's the only New England metropolitan area in the ranking after Boston, Cambridge and Quincy, Mass., which ranked No. 22, compared with No. 31 in 2014.

The metropolitan area of Austin, Round Rock and San Marcos, Texas, ranked No. 1 in the nation for 2015.

Increasingly, many businesses are utilizing nonprofit and for-profit accelerators, incubators and co-working organizations setting up in Rhode Island. The concepts are not brand new, but in just the last few years several have opened, including the Hatch Entrepreneurial Center LLC in Providence, The Hive RI in North Kingstown, Hope & Main in Warren, KLR Emerging Business Center in Providence, WorkDigz LLC in Warwick, and the Founders League, a joint venture of Betaspring, Brown University, the Greater Providence Chamber of Commerce and the University of Rhode Island, in Providence.

It's difficult to gauge just how sustainable these startup boosters will be, but Anthony R. Wheeler, Spachman professor of human resource management at the URI, says it's creating an opportunity for the state to capitalize on some of these fledgling companies.

But he agrees with Collins that Rhode Island needs to become an easier place for startups to grow for that to happen.

Wheeler and some colleagues are wrapping up a study that examines what works and what doesn't when trying to grow startups, focusing specifically on the knowledge-innovation sector. He expects the report to become public sometime this summer.

"There needs to be a coherent stream from an incubator to an accelerator to scale," Wheeler said. "Why is Massachusetts having [a lot] of startup activity, but Rhode Island isn't having a similar kind of outcome? The state might really want to look at it in terms of how it can really allow companies to scale here."

STATE SUPPORT

The state in fact had a hand in the creation of Rhode Island's first official business incubator, when the General Assembly in 1998 passed a three-part urban-revitalization plan signed into law by then-Gov. Lincoln Almond. The bill allotted $500,000 over two years to set up a public business incubator in South Providence dubbed Urban Ventures.

From 2000 to 2004 the group's portfolio grew from seven companies with total revenue of $241,472 and 16 employees to 25 companies with total revenue of $8.54 million and 77 employees.

Today, Urban Ventures is a shadow of what it was in its heyday. Scant fiscal support has hamstrung its ability to hire more personnel or even rent out more space. But what the group lacks in funding, it tries to make up for in effort.

Jr Neville Songwe, Urban Ventures' executive director and sole employee, splits his time working with 120 clients from around the state on a yearly budget of $140,000.

Songwe says Urban Ventures, with programs and services that are completely free, now largely focuses on Rhode Island's micro-business community – comprising enterprises with fewer than five employees. The Urban Venture model is unique, as other publicly funded small-business resources, such as the Rhode Island district office of the U.S. Small Business Administration and the R.I. Small Business Development Center receive funding from sources other than the state.

Edward M. Mazze, distinguished professor of business administration at the University of Rhode Island, serves on Urban Venture's board and said the organization, even in its diminished state, remains "critical in the community.

"We don't charge, and we do not do anything in terms of fundraising," Mazze said. "We recommend sources, but we don't guarantee funding."

But Wheeler has something else in mind. He thinks the state should consider setting up a public-private business economic cluster with elements of incubators, accelerators and access to capital that creates a collaboration between the state, higher education institutions and the startup community. It's an idea, he says, that's already shown results in other states, including the Research Area, or "The Triangle" in the Raleigh-Durham-Chapel Hill area of North Carolina.

The Research Triangle Park, founded in 1960, is now home to more than 200 companies and more than 50,000 people. The different industries invest more than $296 million in research and development at the region's universities each year, according to the park, which doubles the national average for innovation clusters.

ACCELERATORS BLOSSOM

When Betaspring started in 2009 it was one of about 10 accelerators in the United States, according to Chief of Staff Melissa Withers.

Today, she says, there are about 150 business accelerators nationwide and nearly 1,000 in the world.

Splitwise, named a Top 50 App of 2013 by Time Magazine, is one of 89 companies to have participated in Betaspring's original program. Other portfolio members include Modelo, NuLabel Technologies, AstroPrint, CompNet and several more.

Betaspring's initial model comprised a 13-week entrepreneurial boot camp to help fledgling companies find initial rounds of funding and set up internal controls to become profitable, but last week – after a yearlong hiatus from accepting new companies – Betaspring made a major shift and launched RevUp by Betaspring, which focuses its efforts on more-mature companies that are already generating revenue.

Before, Betaspring took 6 percent of each company's common stock, but now – instead of equity – participating companies receive $75,000 in cash, much like an unsecured loan, which RevUp collects back, in addition to 4-8 percent of each company's monthly revenue for 36 months.

Betaspring lost an important source of public funding after the city discontinued the Innovation Investment Program, which provided $50,000 convertible notes to companies that stayed in Rhode Island for at least one year (Splitwise was one company to receive funding from this program).

Collins says Betaspring's new approach will be more attractive to investors and will likely produce "more doubles and fewer home runs." But he's unsure how the loss of Betaspring as an accelerator for startups will impact the local growth of those fledgling companies.

Withers thinks there are plenty of resources around the region and country for new companies and sees RevUp as filling an underserved category of maturing companies that might not want to give up equity.

Thorne Sparkman, managing director of the Slater Technology Fund, says Betaspring's evolution seems natural, though he sees its shift to a different section of the startup continuum leaving a gap in Rhode Island.

"Yeah, I think it will leave a hole. Six to eight consumer Web companies every six to eight months will be less served now," Sparkman said. "But I think Rhode Island especially is more about quality than quantity."

Created by the state in 1997, Slater is one of the few local resources for startups to access venture capital. That lack of local investment capital makes startups more reliant on seed funding provided by some accelerators.

The nonprofit Social Enterprise Greenhouse is another well-known Rhode Island accelerator. It focuses on socially conscious enterprises. The organization, headquartered at 10 Davol Square, Providence, has sustained growth in the last five years.

The group says it started in 2010 with 10 partners, two programs, a part-time employee and two funding sources totaling $50,000. In 2014, the group recorded 150 partners and mentors, 10 programs, seven full-time employees and more than 50 funding sources totaling about $440,000.

Neither Betaspring nor SE Greenhouse has been able to compete with the largest regional accelerator, Boston-based nonprofit MassChallege. The latter has "accelerated" 617 startups in the last five years with graduates' collective valuation totaling $2.5 billion, according to the organization.

The accelerator is showing no signs of slowing down and in May accepted 128 startups from 2,200 applicants to partake in this year's Boston program, which included five Rhode Island startups: Response Technologies LLC, XactSense Inc., QuitBit, Healthy Roots and Increment.

Wheeler and Collins both see the Rhode Island startup community as an offshoot of Boston's startup ecosystem, something Wheeler says is a strength rather than a weakness for local accelerators and incubators able to serve as alternatives to that busy market.

"Not every company will want to accelerate or startup in Boston," Wheeler said.

SPREADING OUT

While accelerators mark the most aggressive avenue to development for startups, business incubators and co-working facilities offer alternative paths across nearly all sectors of the local economy.

These incubators and co-working spaces provide shelter and support to fledgling businesses and roaming professionals who would otherwise be working out of coffee shops or from home. While many of them charge for space – either on a weekly or monthly basis – the majority don't ask for any equity in return, which sets them apart from accelerators.

"I tend to like accelerators because you either succeed or fail quickly," Collins said, when asked how the models are different.

"As for incubators, I love the fact that we're typically using space that would otherwise be dormant," he added.

One reason why these entities don't appear to be stepping on one another's toes – at least for now – is because they're spreading out both geographically and within different industries.

"I think all the spaces have their own identities. I welcome all entrepreneurial spaces," said Kevin Murphy, co-owner of the Hatch Entrepreneurial Center.

In Providence, the Founders League and Hatch offer co-working space and some private office space fitted out for a variety of different of industries. The Design Office, at 204 Westminster St., hosts architects and graphic designers while the famed A220 is a leader in the art industry.

South of Providence, The Hive RI in North Kingstown has created a hub within Lafayette Village on Ten Rod Road. The mill used to house Rodman Manufacturing Co., which at its peak employed more than 500 people. Co-founder Tuni Renaud Schartner sees The Hive RI as an opportunity to revitalize economic activity in the area.

"It's not apples to apples for any of us, because we're all offering something [different]," she said.

To the east, Todd Thomas is setting up the state's newest nonprofit business incubator Tinker|Bristol, picking his niche in the manufacturing industry. Thomas said the space will also be used as a "makerspace," where people can pay weekly or monthly to come in and use tools to "tinker around."

"We have a slogan: ‘Caution: Your business might start unexpectedly,' " Thomas said.

SUSTAINABLE GROWTH?

Withers says Rhode Island doesn't have pent-up demand for startup space or services like Boston and other top-tier markets do, so it takes more than just putting up a sign, opening the doors and letting in the flocking entrepreneurs.

She doesn't see competition as an issue right now, but does worry that without "flow engines" bringing people in and out locally, the demand could plateau.

"This has been a two- or three-year process and the [profit] margins are crazy," she said of the Founders League. "We don't get paid, we pay the rent."

Bristol-based Hope & Main stormed onto the incubator scene last year with a plan to grow the culinary industry. Founder Lisa J. Raiola says the interest level since conception has been at "quantum levels."

"We're organically attracting others like a center of gravity," Raiola said. "That's a good thing too because … we can create collaboration by bringing together people."

Federico Manaigo, a New York-based developer, is looking to set up a like-minded venture within the West Elmwood neighborhood of Providence. Pending a tax-stabilization agreement with the city, Manaigo plans to renovate a Cromwell Street mill and establish a mixed-use facility called "Rooms and Works," which would double as a culinary center and residential units. He hopes to start construction this summer.

Collins says incubators and accelerators have a place in the local economy. But he predicts that unless Rhode Island can find a way to retain the startups, it will continue lose maturing businesses to other markets.

"We're a great on-ramp, but we're just not a part of the highway," he said. "At the base of the on-ramp, we're helping people build airplanes, but then we're surprised when they fly off and land in Boston." •