NJEN Panel Discusses “Where’s the Money?” Alternative Financing for Tech Companies, Part 2

(NJTechWeekly.com is continuing to catch up on pre-Sandy coverage that would have been published in early November but was postponed because of post-storm chaos and the volume of Sandy-related stories. We apologize for the delay.)

While it was often difficult for the N.J. tech community to obtain funding in 2012, there were a variety of alternative options for companies, according to panelists at an October 10, 2012, New Jersey Entrepreneurial Network (NJEN) event in Princeton.

Some 60 attendees heard about crowdfunding, bank financing, a myriad of tools available from the state of N.J. and even a funding vehicle that gives immigrants green cards while providing financing to companies that create jobs.

New Jersey Economic Development Authority (EDA) director of technology and life sciences Kathleen Coviello’s presentation on ways the EDA can help tech companies was extremely comprehensive and demonstrated the agency’s view of its relationship with the state.

“Our role is to function as the bank for the state. We have money. As the bank for the state, we have underwriting standards we have to meet and due diligence we have to go through. Particularly in this tough economic environment, we have a fiduciary responsibility and must be fiscally prudent. We are not throwing money out the door,” Coviello said. However, she added, “we are doing transactions.”

EDA transactions made prior to the October meeting include providing $3.3 million to Fluitec, a Belgian company that had relocated to the U.S. and wanted to develop a manufacturing facility in northern N.J.

“This is one of the most attractive programs we have,” Coviello said, referring to financing through the Edison Innovation Clean Energy Manufacturing Fund, funded by the N.J. Board of Public Utilities and administered by the EDA. Companies can get up to $1.3 million in grant and the remainder in very low-interest loans if they meet certain performance metrics,” she noted. “We get funding for this from a sister agency formed to help promote clean technologies in the state of N.J.”

“We also just closed a transaction for FieldView Solutions (Edison), a company that has received funding through the Edison Innovation Green Growth Fund. “We provided that company with a million-dollar loan and, again, if they hit performance metrics, half of it gets converted into a grant.” (NJTechWeekly.com profiled FieldView Solutions here.)

Another  approved company, Phone.com (Newark), “provides phone services to small and medium-sized businesses throughout the state. The company was virtual at the time and already had a little bit of VC funding. We provided matching money to that VC money in the form of a loan with warrants. And the company is going to relocate to the NJIT EDC [New Jersey Institute of Technology Enterprise Development Center] and put down roots in New Jersey,” said Coviello.

CareKinesis , a Moorestown company with a healthcare IT business model, has also been helped by the EDA. Its founder, Cal Knowlton, already had a successful business in Pa. but wanted CareKinesis to stay on the Jersey side of the river, where he lived and had grown up. “We provided a matching loan program to some of the VC money he raised,” said Coviello.

She continued, “As the bank for the state, we administer some legislative programs. You may be familiar with the Net Operating Loss Program, which is unique to N.J. I’ve even spoken to the federal government about this, as they are looking to deploy something like it on a national level. Companies that are losing money can sell those losses for cash today.

“We all know as entrepreneurs that cash in hand today is much more important than taking it as a write-off against your future losses. The state says you can sell those losses to profitable N.J. businesses. We set the threshold and ask that the recipient companies demonstrate they are growing jobs in N.J. There are three checkpoints: year one, year three and year five. Companies have to be at 10 jobs by the end of year ten.”

This program has been very helpful to N.J. biotech companies, Coviello said, and it benefits profitable firms by providing them a tax shield. The process involves an annual application that must be received by the end of June.

“In his budget the governor approved a $60 million annual allocation for this program this year [fiscal year 2013],” Coviello said. There is always an oversubscription, she added. “This year we expect the average award to be around $920,000.” [NJTechWeekly.com will be publishing the 2012 list of tech companies that participated in this program.]

“We also administer tax incentives for job growth, so before any of you entrepreneurs think about signing a lease in N.J., see us about a program we have that can incentivize you to grow your jobs in N.J.”

Coviello said the EDA is constantly approached by people who need early-stage capital, but as a bank, the organization doesn’t give out “risky money.” However, the state does invest in venture funds, working with partners and professional managers.

“We are invested across 11 funds currently,” she said. Some of the funds are fully invested, and some have capacity in them. “We take a portfolio approach: we have healthcare, life science, early-stage, and growth venture funds.” The state puts money into the funds as a limited partner and requires the venture partner to match the money the state contributes with a three times multiplier, said Coviello.

“Most recently we announced a $3 million investment in Osage Partners [Bala Cynwyd, Pa.]. Osage had been doing transactions in N.J. on a one-off basis but was located in Pa.” Funds were selected during a competitive application process that evaluated the VC’s activity in N.J. Now Osage has opened an office in N.J., Coviello said, and it has to “turn $3 million into $9 million in early-stage investments” by funding companies with less than $3 million in revenues.

“This approach takes the due diligence process and puts it in professional hands,” she pointed out. “The VCs can offer the coaching and mentoring we can’t,” she added.

The state has also invested $2 million in NextStage Capital (Audubon, Pa.), “which will be turned into $6 million for N.J. entrepreneurs.”

Coviello also spoke about TechLaunch (Montclair), the first N.J. tech accelerator funded by the EDA and which NJTechWeekly.com has covered in depth.

Coviello discussed her organization’s support of biotech through a real estate play. The EDA has purchased a complete campus in New Brunswick from Johnson & Johnson and put in a state-of-the-art wet lab facility close to Rutgers and, geographically, in the heart of the pharmaceutical industry. “We have strategic relationships with Rutgers, so our tenants can use its resources for mentoring and cooperation on animal studies. We are really looking to build that pharma community,” she noted.