Entrepreneurs who are capable of growing the innovation economy in New Jersey don’t always start in New Jersey. And that’s OK.
At least, that’s the idea behind a pilot program approved Tuesday at the New Jersey Economic Development Authority meeting in Trenton.
The program will provide $2.5 million that can be used to persuade young companies that have completed an accelerator program to take the next step and house their company in the state.
That’s how Kathleen Coviello, executive vice president – technology, life science and entrepreneurship at the EDA, explains it.
“If we have a New Jersey entrepreneur who wants to start a company, they might say, ‘I want to go to Newark Venture Partners and use their leverage with Audible because I want to be in voice digital,’ or they might say, ‘I’m a fintech entrepreneur and I want to go to the Morgan Stanley accelerator in New York because that better fits my needs,’” Coviello said. “We are saying, ‘Both are OK.’
“We want to make sure that those entrepreneurs get the training, mentoring, information, support to grow their business, which they’re getting at both of those places and at many other places, inside the state and out, depending on who the entrepreneur is and what the startup is. But, then, we want to make sure that they come back to New Jersey.”
To do that, Coviello said, it takes one thing: money.
“They are going to follow the money,” she said. “We see this time and time again.”
Coviello said state officials routinely go to demo days of accelerators in New Jersey — and around the country — and lure companies with financial offers.
“Think Techstars, Y Combinator, ERA (Entrepreneurs Roundtable Accelerator), Morgan Stanley,” she said. “People go to places such as Techstars for demo day and write checks, and companies follow the money.”
This pilot program will allow New Jersey to better compete for young companies across the country.
The state is willing to match whatever money the entrepreneur’s accelerator has provided, up to $250,000 — and will do so with a 10-year note that doesn’t have to be paid back until after seven years. In exchange for the risk capital being provided to the company by the EDA, the agency will receive warrants for 50% of the loan commitment. This means that, in the event the company is sold or has an initial public offering, the EDA will share in small percentage of the sale proceeds.
“The pitch we make to the entrepreneurs all the time is that we only collect if there’s an exit, if there is success,” she said. “It’s a 10-year note with no payments for seven years. So, it’s not direct equity. You’re not giving up anything today. And when you have your big payday, the state cheers and gets a teeny little piece of it.”
The state is giving more than just money.
An entrepreneur would have to house its company in one of the state’s 18 approved NJ Ignite locations. There, the state would give six months’ free rent — a total that could be increased to nine months if the location so chooses.
Coviello hopes the program will perpetuate growth of the innovation economy in the state. The hope, she said, is that successful startups will fuel more successful startups — as the small amount they return in profits will go to future startups.
“What I always tell the entrepreneurs, too, is I want to see serial entrepreneurs in the state,” she said. “So, when you’ve had that exit, you probably have a two-year engagement to work with the company. After that, you’re going to want to start another company and you’re going to want the state to have the capital to help you. And isn’t it great that your success is going to fund other entrepreneurs in the state, too?”