MTDC's Role in Massachusetts Venture Capital

Massachusetts Technology Development Corporation ("MTDC") is a Boston-based venture firm, formed in 1978 as a quasi-public corporation by the Legislature of the Commonwealth of Massachusetts (the "Legislature"), that is owned by the Commonwealth of Massachusetts (the "Commonwealth"), governed by an independent Board of Directors, and managed by experienced venture capitalists. Leveraging the entrepreneurial spirit, educated workforce, and centers of innovation of Massachusetts, MTDC has a long history of funding successful companies.

• Mission and the Capital Gap
• Background
• The Funding of MTDC
• Results

Mission and the Capital Gap

The Mission of MTDC is to:

1. Help create employment through the investment of capital and expertise in technology-based enterprises in the Commonwealth that have the potential for rapid growth,
   
   
2. Target technologies, regions and companies that aren't adequately served by private investors,
   
   
3. Complement, not compete with private venture and angel investors, and leverage MTDC investment dollars with private capital,
   
   
4. Nurture entrepreneurship among the citizens of the Commonwealth to stimulate long-term economic development

To accomplish this mission, MTDC invests equity capital in companies that for several legitimate reasons have difficulty raising it from the private sector. Since MTDC invests in companies that have little or no revenue and are years from being cash flow positive, debt is not a viable financing vehicle. The reasons these companies cannot raise sufficient equity from private firms include:

• The entrepreneur is seeking only $2-3 million of startup capital compared to the $5 million that most firms prefer to invest
  
  
• The management team does not have IPO or large M&A experience
  
  
• The company's industry is out of vogue with most venture capitalists
  
  
• The company is too early in its development

MTDC fills a critical need in bridging the capital gap experienced by many of Massachusetts' technology start-ups. Given the early stage at which MTDC invests, its equity capital is critical in getting a company to its next stage of development - often by filling out the team and productizing/commercializing technology. The current private venture capital community is not focused on, or structured to, invest in companies of the stage, size, or capital needs that MTDC targets. Yet many of these companies turn out to be successes.

MTDC remains one of the few true early stage venture investors in the state of MA including private firms. As the country and the Commonwealth remain mired in recession and funds from the venture capital industry slow to a trickle, MTDC continues to fill a capital gap and spur job creation in the Commonwealth. MTDC has remained active during this downturn. In fact it tied for the second most active Massachusetts venture firm in both the first and second quarters of 2009 according to Xconomy based on data provided by Thomson Reuters. It is one of the few investors still providing support to entrepreneurial driven, technology start-ups in the Commonwealth.

Background

The Legislature established MTDC in 1978 to address the capital gap for start-up companies and to encourage the growth of early-stage technology firms. Recognizing that Massachusetts would not be in a position to compete for manufacturing jobs on the basis of lower costs, the Commonwealth decided to pursue an economic development strategy that sought to grow innovative companies, companies that require access to early stage, start-up capital. MTDC's enabling and governing legislation is Chapter 40G of Massachusetts General Law as amended in 1993 and 2002. Through its 30-year history, MTDC has worked with most of the region's established venture and angel investors, law firms, accounting firms, and management consultants. It has an extensive network of over 132 management teams and boards of directors that were or are involved with MTDC's portfolio companies. These contacts and MTDC's long-standing presence provide the investment team with a significant portion of the 300 business plans they review each year, a large percentage of which have been pre-screened by people who know MTDC's investment style.

The investment team is actively involved with their portfolio companies usually at the board of director level. Through this involvement, they add significant value. The team's collective 50-year involvement in venture investing with over 100 early-stage companies and its experience gained through several major business cycles and countless sector rotations enable it to provide guidance in matters of operational, finance and sales strategy, corporate governance, and CEO coaching. The MTDC team has consistently maintained the discipline of building investor syndicates to leverage the investment capital that MTDC puts to work. While MTDC is usually the first institutional investor to get involved with an early-stage company, it always tries to build an investor syndicate to reduce risk and increase overall resources available. Over its history, MTDC has co-invested with over 100 venture capital firms, many of which remain valued deal sources.

The Funding of MTDC

Initial funding for MTDC came from a $2 million grant awarded by the Economic Development Administration ("EDA"), a division of the U.S. Department of Commerce, in 1979. These funds were used to establish a revolving loan fund for Massachusetts companies with operations involving a significant amount of technology. These companies also were required to be located in an "EDA" eligible area. In 1981, the EDA awarded MTDC an additional $1 million for a second revolving loan fund to assist in the creation and development of small, innovative, high-technology companies in Massachusetts, and the Commonwealth of Massachusetts provided $1 million in matching funds. After that, each year, from 1982 to 1988, the Commonwealth appropriated additional funds totaling $4.2 million, which allowed MTDC to create its first venture capital fund, called the Traditional Fund. This Fund is operated as an "evergreen fund" which uses gains realized from past investments as the primary source of funds for its operations and for investments. More recently, the legislature appropriated $5 million to MTDC as part of the 2004 Economic Stimulus Bill and $2.5 million as part of the 2006 Economic Stimulus Bill.

Results

The following are highlights of the MTDC story:

• MTDC-backed companies currently employ over 7,500 in the Commonwealth.
  
  
• MTDC-backed companies have an annual $612 million payroll.
  
  
• Sixteen portfolio companies have gone public.
• Over its 30-year history, MTDC's Traditional Fund, an evergreen fund, has generated a gross IRR of 16.5%, which would have been 27.1% using the current investment policy. Over that same period, the S&P 500 has returned 8.9% including dividends.
  
  
• MTDC invests in the "capital-gap" market where it continues to have many successes due to the multitude of opportunities that exist.
  
  
• MTDC has been making investments in Massachusetts since 1979. One hundred percent of its investment dollars have remained within the Commonwealth, and of the 132 companies in which it has invested, over 60 percent have been located in economically-targeted cities and towns within the Commonwealth.

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