The state's venture capital sector is showing signs of life.
Three new funds have sprung up in recent months with plans to make available more than $130 million in capital to high-growth, small- and medium-sized companies in the state.
The new funds were formed as a result of the revised Insurance Reinvestment Tax Credit program, passed last year by state lawmakers, which provides incentives for insurance companies that invest in high-growth businesses through state-registered fund managers.
The new funds are targeting investments in companies with fewer than 250 employees and whose workforce largely resides in Connecticut.
The additional capital is welcome news to the state's business community, which has traditionally lacked a strong early stage investment base, particularly for pre-seed companies.
The stakes are high for Connecticut's economic development efforts since a key element in ensuring the growth of bioscience — an industry that is thought to be one of the leading future growth sectors for the state — is making sure capital is available for businesses to develop their technology.
"This will do a lot to drive more capital into the hands of Connecticut businesses," said Liddy Karter, the managing director of Enhanced Capital Connecticut, which is one of the recently started funds that has raised about $30 million in two separate investment pools.
Karter said her fund, which was launched by national asset manager Enhanced Capital Partners in New York, will identify and underwrite debt and equity investments of up to $3 million in qualified firms — from seed-stage to mature operations. They are looking at industries ranging from manufacturing, information technology, and healthcare, to business services and green technology.
Enhanced Capital recently finalized its first deal with New Haven-based software analytics firm Hadapt Inc., which operates in Science Park in New Haven.
The other new funds are Advantage Capital Connecticut Partners, which was formed by Missouri-based Advantage Capital Partners in partnership with Ironwood Capital in Avon, and Stonehenge Capital Fund Connecticut started by Stonehenge Capital in Louisiana.
Advantage Capital has raised $72 million earmarked to invest in about 25 Connecticut companies. Stonehenge, just started in recent weeks, has raised about $35 million.
Advantage Capital and Ironwood Capital have already invested in eight Connecticut-based companies, including recent deals with Norwalk-based XLerant, Inc., which is a software company that provides corporate budget preparation software, and The Green Life Guides LLC in New Haven, which operates The Green Bride Guide, an online site for green wedding ideas, products, and services.
Ryan Brennan, the managing partner of Advantage Capital Partners, said the new fund represents the first investment his firm is making in Connecticut companies, and the draw is the revised tax credit program. Their typical forms of investment include early stage, expansion equity, mezzanine financing, senior and subordinated loans and government-guaranteed lending.
"We took notice last year when the state passed the bill to attract money for small businesses," Brennan said.
Victor Budnick, a managing director with Ironwood Capital, said its fund has the ability to invest as much as $10 million in a company. The largest commitment so far is $7.1 million.
Brennan said his group is also trying to raise another $28 million to start a new fund, which could be up and running by the end of the year.
The revamped Insurance Reinvestment Tax Credit program was passed in 2010 as part of the major jobs bill initiative, and can leverage up to $200 million in investments.
The program leverages private capital provided by insurance companies that is then invested by state-certified fund managers. In exchange, insurance companies receive credits toward their premium tax liability.
There are several restrictions in the program. Twenty-five percent of the investments made by fund managers, for example, must be committed to green technology efforts, while 3 percent must go toward pre-seed investments.
Industry leaders have always raised concerns about the lack of a strong early stage investor base in Connecticut. In some ways, it's been a national trend, as venture capitalists have increasingly shied away from early-stage companies, creating a major funding gap.
Connecticut Innovations, the state's technology investing and innovation arm, is generally considered a successful fund, but its resources are limited.
In 2010, investors injected about $225 million into Connecticut companies, a 43 percent increase from the $157 million invested in 2009. That sum represents 58 deals, compared to 39 deals in 2009, according to the MoneyTree report, a joint effort of PricewaterhouseCoopers and the National Venture Capital Association.
Brennan said many states are moving aggressively to make more risk capital available to companies, and he believes Connecticut is heading in the right direction.
"If companies can't get access to that money, they will either not grow or move out of state," he said.
Karter, who is the founder of the state's Angel Investor Forum, said the program is an important one because even though a fair amount of venture capital firms exist in Connecticut, investment in Connecticut companies is lacking.
Karter said Connecticut ranks fourth in the nation in capital under management, but ranks 14th in the country, in terms of dollars invested in Connecticut businesses.
That gap exists in part, Karter said, because there has been a lack of investment opportunities in the state. While the new funds may not be able to cure that ill completely, they will provide much needed capital to early stage companies looking for their first significant round of venture funding.
"Not having capital is like breathing through a cocktail straw," Karter said. "This fund will help deal with that gap."
Victor Budnick, managing director, Ironwood Capital
Liddy Karter, managing director, Enhanced Capital Connecticut