Allen Wagner January 23, 2014
The story of VC investing in Connecticut is inexorably tied to Connecticut Innovations, the Rocky Hill, CT-based VC firm formed in 1989 by the state legislature in Hartford to invest in high-tech, healthcare and cleantech startups in the Constitution State. PitchBook data show that the firm completed 68 VC deals in Connecticut in 2013, good for 77% of the state’s overall total of 88 financings last year. In an effort to find out more about the firm that has been nearly single-handedly growing the state’s venture capital scene, PitchBook interviewed Claire Leonardi, CEO of Connecticut Innovations, about the firm’s funding and philosophies, and Connecticut’s startup scene.
PitchBook also mentioned Connecticut Innovations in its recent 2014 Annual VC Valuations & Trends Report, which investigates trends in venture capital financings, fundraising, exits and valuation data.
Q: Can you tell us how Connecticut Innovations started and what it does?
A: Connecticut Innovations (CI) was formed by the Connecticut State Legislature in 1989 to help promising Connecticut companies get off the ground. CI is an investor with a dual mandate to generate market-rate returns on our investments and to create economic value for our state. Our equity group is Connecticut’s venture capital fund; its focus is on startups and early-stage technology-driven companies.
How does funding for CT Innovations work?
On the equity side, we operate much like a private sector VC firm. We provide investments through three main funding pools, each of which, beyond money, includes strategic advice and introductions to our vast network to give our entrepreneurs the highest chances of success. The funds include:
In addition to these three funds, CI administers the state’s angel investor tax credit program, which encourages angels to invest, and we provide a way for angels to connect with startups on our website.
Finally, we offer a venture mezzanine debt fund for growth-stage companies. And then when a company matures, we have a lending group that can offer debt of up to $5 million. Your readers might be interested to know that we support other activities that help companies succeed such as providing funds for the commercialization of bioscience technology, assisting companies with finding and winning federal R&D grants and backing efforts to build a more robust entrepreneurial ecosystem. Through these combined activities, CI is the leading source of financing and ongoing support for Connecticut’s innovative, growing companies.
Are there any investment mandates from the state government? What are CT Innovations’ own investment mandates?
CI is a quasi-public authority, which means we were created by the state legislature to perform a public function: to help grow Connecticut’s innovation economy. Because of our organizational form—quasi-public—we have the flexibility to operate the fund in the most effective way to boost economic activity in the state, which means creating jobs and viable companies. We do this by investing in high-tech companies based in Connecticut or those that are willing to move to the state. We pay special attention to barriers or gaps in the marketplace that are hampering companies that are trying to start and grow. We generate returns on our investments and are proud of our record of success with a gross IRR of 17% since 1995 when CI moved to a venture capital investment strategy. As with any private sector investor, our own mandate is to make good investments within our target industry sectors and stage focus. We invest in industries where Connecticut has a strong position, a competitive advantage and prospects of strong growth. To date, we have primarily invested in software and IT, bioscience, cleantech and digital media. We make a total of $20 million to $30 million in equity investments annually according to very specific criteria. We actively seek investments, funding only those companies that make it through our due diligence process.
How do you evaluate potential startups to invest in? What is your investment philosophy?
CI’s focus is on building technology and technology-enabled enterprises in Connecticut. When we are evaluating a potential portfolio company, we look for the following three characteristics, each of which we believe is necessary to build extraordinary companies:
As for our philosophy, CI takes a long-term view. We want to create innovative sustainable businesses. Like other VCs, we are active and involved, as a partner and as a resource, and as advisors and board members. We help our portfolio companies succeed by leveraging our networks, providing access to expertise, business partners and customers, talent, capital, and academic resources.
PitchBook Data show that Connecticut has seen growing venture capital activity over the last few years, particularly in healthcare and technology. What do you see as CT Innovations’ role in developing the startup and VC community in your state and the overall New England region?
In 2011, Connecticut passed its Jobs Bill that increased the state’s investment in CI by $125 million over five years. This increased commitment has enabled us to more than double our investment in early stage companies. Even with this new level of investment, we fund only a small percentage of the hundreds of ideas we see each year. One of the ways we’re reaching more entrepreneurs is through a network-building initiative called CTNext. Through this initiative, we engage entrepreneurs-in-residence, mentors and others, as well as support co-working spaces, events, outreach, grants and other assistance to connect and help all of our state’s entrepreneurs—not just those we can fund. Another initiative I’m proud of is that we’ve added educational content to our website—podcasts, videos, articles and other resources on topics such as corporate governance, accounting, public relations and more—that entrepreneurs can easily access and learn from.
New England has some amazing startups, talent, universities and venture capital firms, and Connecticut can play a role in helping VCs, entrepreneurs, large and small companies and academic institutions connect and build strong companies throughout our region. We’ve beefed up our communications platform to foster these connections. In addition, we are building awareness of the entrepreneurial community, focusing on the good news coming out of our startups—from the successful clinical trial of a new biodegradable device for ACL surgeries to the development of companies related to the internet of things, so that, not only are we promoting the work we’re doing, but we’re also promoting the work of our portfolio companies, which we see as every bit as important, if not more. Finally, we’re doing more to connect with other states. We recently co-sponsored an event with the New England Venture Capital Association, which led to meetings with Boston-area VCs, so we’re really trying to connect with more people and help build up New England as a great place to start and scale a high-tech company.
Healthcare seems to be a major focus for Connecticut Innovations, particularly technology systems and biotechnology. What in particular draws CT Innovations to healthcare?
Healthcare is a high-growth business sector and Connecticut has always been strong in biosciences and health-related businesses. We are seeing terrific opportunities from innovations and discoveries coming from our academic institutions, research nonprofits and both young and established companies. We believe that future success will be driven by what is referred to as “convergence science.” By this we mean that important innovations will come from combining knowledge of biology, chemistry, engineering, materials science, information technology and mathematics. We have strong talent across all of these disciplines in our state. Connecticut has renowned universities such as the Yale School of Medicine, which ranks fifth among medical schools receiving funds from the National Institutes of Health (NIH) and third in NIH dollars per faculty member, and the University of Connecticut and its partnership focused on human genomics with The Jackson Laboratory. We have a solid base of talented entrepreneurs and large, innovative medical device and pharmaceutical companies. In addition, Connecticut is home to some of the largest and most innovative health insurers as well as some of the most advanced manufacturers that serve both the medical device and aerospace industries. We’re really trying to capitalize on these assets and build our cluster of bioscience activity, and we are building a pipeline of new opportunities. CI is administering a new $200 million fund focused on the commercialization of new bioscience ideas. This is a broad-based effort to include a wide range of ideas that impact health from therapeutics and diagnostic concepts to new medical devices and IT-enabled strategies to improve outcomes. In today’s healthcare environment no one can go it alone: There’s a real need to connect all the dots and bring everyone together, and CI is playing a role in that effort.
What do you see as the up-and-coming industries that will see growing investment in the years ahead?
There are several: medical devices; healthcare-driven applications such as bioinformatics and diagnostics; the internet of things, including communications and sensors; information security and digital marketing; advanced materials; and SaaS and cloud-based platforms.
Claire Leonardi is the chief executive officer of Connecticut Innovations.
Claire manages CI’s full array of business startup and growth initiatives, which includes diverse lending programs, venture and equity investment funds, and programs to support innovation, entrepreneurship, collaboration and commercialization. Claire is a veteran investment and venture capital executive with more than 30 years of experience in the financial services industry.
Featured image is courtesy of Wikimedia Commons user elipongo.