Fund Offers Shot At ‘First-Mover’ Status

January 9, 2012 : Worcester Business Journal, by Matt Pilon

Maynard-based Acacia Communications is in a race to 100. Megabytes per second, that is.

The winner, said CEO Raj Shanmugaraj, could grab a big piece of market share providing high-speed data transmission products to fiber-optic networks, which are burdened by an ever-growing need to move more bytes through their infrastructure.

If Acacia is in a race, think of the state’s Emerging Technology Fund as a nice pair of running shoes. The fund, overseen by the quasi-public agency MassDevelopment, provided a $3 million loan to the venture-backed company last year for testing equipment, servers and computers to outfit their facility in Clock Tower Place – once the home of another tech pioneer of its day – Digital Equipment Corp.

Shanmugaraj said Acacia could have financed its equipment through a bank or venture lenders, but said the tech fund offered a better interest rate and has more lenient terms in the earlier part of the loan payback period, a boon for a start-up company that doesn’t expect to be cash positive for a year.

“The better the terms, the better for us,” Shanmugaraj said.

MassDevelopment does not disclose financing terms publicly, spokeswoman Kelsey Abbruzzese said.

Abbruzzese said the 8-year-old fund often lends to venture-backed companies that are not yet profitable. MassDevelopment’s goal, she said, is to ensure such “teenage companies” stay or expand in Massachusetts.

So far, Acacia has done just that. The company started with six telecom veterans in 2009 and now has 50 employees. It also plans to move its operations into a larger space at Clock Tower.

Acacia's product is complicated, but boils down to this: applying modulation, signal processing and other techniques to send blips of light through fiber-optic cable at a speed 10 times faster than that of your premium home Internet package.

Shanmugaraj said “bandwidth-hungry” developments like Netflix, have driven the demand to push-more data through the cables.

“If you want to go up higher in speed in the fiber optic domain, the conventional systems don't work because the light pulse you're sending through the fiber-optic cable gets smeared pretty badly,” he said.

He said high-speed systems like Acacia's take several months to integrate into fiber-optic networks, so it's crucial to be one of the first to market.

“In telecom, the first-mover advantage is substantial,” he said.

Tech Fund Impact

Created by the Legislature in 2003, the Emerging Technology Fund has provided $44.8 million in loans and guaranties to 26 companies – six of which are in Central Massachusetts and netted $7.7 million, collectively.

Biomedical Research Models of Worcester (BRM), which performs contract research, received a $700,000 guaranty last year from the fund on a $1-million private loan.

CEO Dennis L. Guberski said the guaranty allowed BRM to hire a new CEO and a sales and marketing staff.

“The net effect is it created $3 million in new bookings,” Guberski said.

Was it crucial to the growth of BRM, which now has 52 employees?

“The growth wouldn’t have been as rapid, that’s for sure,” he said.

The tech fund is an evergreen fund, meaning the proceeds go back into the lending pool. The state has provided nearly $50 million in funding since its creation. But $15 million of that was reallocated the Massachusetts Growth Capital Corp. (MGCC), which provides gap financing to businesses when banks won’t.

Gregory Bialecki, secretary of the state’s executive Office of Housing and Economic Development, said such reallocations are part of his agency’s strategy and that it won’t need to request new capital from the Legislature for the next several years.

The tech fund has earned about $7.2 million in investment and operating income in its lifetime while writing off two bad loans worth $2 million. It has $8.2 million in loans in the pipeline and $18.1 million in cash, according its third-quarter report, required by the Legislature.

Bialecki acknowledged that the fund lends to companies that pose greater risks for bank loans, but said the results thus far verify the state’s lending strategy.

The tech fund is specifically for companies like Acacia to buy plants and equipment and usually supplements private financing already secured.

“In almost every case, we are adding to capital they can get from the private marketplace,” Bialecki said.