01:00 AM EST on Tuesday, January 31, 2006

BY ANDREA L. STAPE
Journal Staff Writer

PROVIDENCE -- Point Judith Capital Partners came to an interesting conclusion at the end of 2001: Rhode Island is just too small.

The venture-capital firm had just raised a $12-million fund to make investments in young technology companies in the state. But the firm found there weren't enough young technology companies in Rhode Island and Southeastern Massachusetts that were ready for investment dollars, said Gina Raimondo, one of Point Judith's managing partners.

"We quickly realized that it was too narrow," said Raimondo. "Primarily, our mission is to generate a top rate of return [for our investors] -- so you can't be too limited."

With $12 million and too few places to invest it, Point Judith did the obvious -- it went back and raised more money.

Despite a downturn in the industry and economic uncertainty, in 2002 Point Judith Capital expanded the fund to $23 million and began looking for young and mid-stage technology, communications and health-care companies throughout the Northeast.

Since then, Point Judith has invested about 86 percent of its fund in nine companies -- from a beer maker to a cellular tower company -- in four states, according to Raimondo. Currently, it has seven operating companies in its portfolio, three of which are based in Rhode Island: Tazz Networks, Afferent Corp. and Narragansett Brewing. It is poised to invest in two more companies soon, putting all of the money from the first $23-million fund to work, according to Raimondo.

One of the companies in which it invested has been shut down, but another was sold in 2004.

Taqua Inc. -- a telecommunications company started in Massachusetts -- was bought by Tekelec for $94 million in cash, according to Raimondo. The sale generated a significant financial return on Point Judith Capital's investment -- the major goal for any venture-capital firm.

"For firms that were started when they were -- in 2001 -- a lot of firms are taking a long time to get their first significant exit," said Matt Harris, managing general partner of Village Ventures, a Massachusetts-based investment firm that committed $5 million to help launch the Point Judith fund in 2001. "For Point Judith to have their first significant exit really moves them to the top of the stack." Village Ventures invests in funds in areas of the country -- such as Rhode Island -- that have traditionally had difficulty attracting investment.

After carving out a niche, Point Judith Capital is now raising a second fund, of $50 million, and is focusing on the same formula, said Raimondo. The company expects to close Point Judith II in late March or early April, she said.

It's a good time for Point Judith to raise money. In 2005, 182 venture funds attracted $25.2 billion, the highest yearly total for funds since 2001, according to a report from the National Venture Capital Association and Thomson Venture Economics.

And now, Point Judith has plenty of places to invest, said Raimondo.

"We now have a deep pipeline of investment opportunities, about half a dozen," she said, adding that, with the new fund, the firm plans to invest between $3 million and $5 million per company.

But getting back to a point where the market looks favorable has taken years.

When Point Judith was forming, in 2000 and 2001, it wasn't the only venture-capital firm interested in the state. MerchantBanc, out of New Hampshire, was looking at setting up a fund focused on investing in Rhode Island companies. Boston's Zero Stage Capital had invested $15 million in Rhode Island companies, in the year and half prior to 2001, and was continuing to eye investments in the state.

The economy was strong, and Point Judith was able to raise money from local institutions and individuals -- Fleet Development Ventures put $1.5 million into the fund and The Rhode Island Foundation invested $1 million, according to previous Providence Journal reports. Other investors included Beacon Mutual Insurance Co., The Business Development Company of Rhode Island, Citizens Bank and CVS Corp.

By the end of 2001, however, the United States had been attacked by terrorists, the dot-com bubble had burst and the economy was slipping.

Investors who had put money into risky dot-com companies lost that money, leaving venture capitalists nervous about making new investments. In addition, many entrepreneurs were reluctant to start up new companies in such an uncertain economic atmosphere, said Raimondo.

"2001 and 2002 were very difficult years to put money to work in this business," she said.

After the shakeout, Point Judith was the only venture-capital firm with a presence in Rhode Island. To Raimondo, that's been to the firm's advantage. Point Judith Capital hasn't had to compete with the hundreds of Boston-based venture-capital firms for companies to invest in.

To help bring in deals to invest in, Point Judith added three venture partners: Jeff Weiss, Brad Waugh and Michael Doyle. All three, having previously started and sold companies, give Point Judith credibility with entrepreneurs, said Raimondo. The three also help the firm find and evaluate possible investments in telecommunications, health care and technology.

The firm looks at about 300 possible investments a year, said David Martirano, a managing partner at Point Judith Capital, and invests in about 3.

But although Point Judith Capital Partners is seeing more deals coming in, Rhode Island still continues to lag behind other New England states in attracting venture capital.

Out of 89 companies that received venture capital in the third quarter of 2005, only 2 were from Rhode Island, according to a report by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. And one of those companies has already relocated to California.

But, the report adds, that could change this year. Venture-capital investments nationally continue to be strong. Investments in 2005 were on par with those in 2004, a significant rebound from the previous three years, according to the report. Venture capitalists last year invested $21.7 billion in 2,939 deals, according to the report.

"We're seeing a lot of deal flow," Raimondo said.

Success, though, could end up breeding competition for Point Judith, said Harris, of Village Ventures -- competition that might ultimately benefit young companies in Rhode Island.

"What we've seen is that people are attracted to the lower cost of business in Rhode island -- that's quite good -- and I think that's going to be a trend that we're going to continue to see," said Harris.

"The challenge for Point Judith is to stay the leading firm as the venture firms in Boston realize [what's going on in Rhode Island]. Point Judith needs to maintain their competitive advantage."

astape@projo.com / (401) 277-7269