Colorado Bank Bets on 'Unbankable' Tech Startups

Home State Bank in Loveland, Colo., saw missed opportunity: technology startups in its community that had great ideas but were "unbankable."

"Brilliant people who have very little business acumen come to the marketplace with a great idea, but they don't have that next step — what I call mezzanine capital to bridge the gap between having a great idea and bringing it to market," says Jamie Hardy, private banking officer at the bank, which has $750 million in assets.

The bank has formed an unusual partnership with a technology company incubator, Rocky Mountain Innosphere, through which it supports and funds very young companies until they start to generate revenue and can become regular bank clients.

Last December the bank made a $500,000 commitment to Innosphere — $250,000 upfront and $250,000 to be used when needed. The money is a 10-year fixed bond with a 2% rate. It's administered by the Colorado Enterprise Fund, which lends the money out to deserving incubator companies.

In one example, about two months ago a startup approached the incubator with a large purchase order and a need for $70,000 in capital to fill it. Innosphere qualified the company and quickly created a 24-month loan with a stated interested rate of 8.5%. When the loan is paid off, it will go back into the pool.

"The interesting thing about this model is it's a revolving pool of funds," Hardy says. "Those funds go back into Rocky Mountain Innosphere and the Colorado Enterprise Fund for the next company that comes along. You're recycling the dollars created through these bonds. It's a perpetual revolving loan fund for 10 years."

The bank partners with the startups as their businesses grow, providing financial advice when needed.

Home State Bank has been encouraging other banks to commit funds to the incubator. First National recently committed $300,000, and a third bank plans to follow suit.

Rocky Mountain Innosphere, which started as a "virtual incubator" with limited space and budget, has scaled up over the past seven years. Today it operates in a 30,000-square-foot building that houses about two-thirds of the 40 young tech companies it supports. (The rest, referred to as "nonresidents," don't need the space.)

Innosphere helps the companies with business strategy, product development, prototyping, and market development as well as funding. "All of the other things for which we provide support really don't matter if the company can't get funded," notes Mike Freeman, CEO of Innosphere. "That's where the Home State Bank partnership has been so strong for us."

A "sage network" of volunteer experts in accounting, legal, banking, and other disciplines advises the startups. Most of the companies fall under three tech categories: infrastructure and ERP software, biosciences, and clean energy technology.

"We're seeing a lot of need for innovation in oil and gas, particularly to deal with all the negative ramifications of fracking," Freeman says. "Air quality, engine monitoring, water treatment — we've seen a significant increase in entrepreneurial activity in this space because [the big oil and gas] companies are looking for it."

Innosphere has already "graduated" five companies this year and expects five more to fly the nest by the end of the year. "Our goal is to have eight to ten companies a year coming out of Innosphere to the community that are funded, stable, and ready to grow and create an impact," says Freeman. That's where they become attractive and interesting to our banking partners, because they've added a couple of years of financial history and a track record, and they can meet minimal requirements for SBA and some of the other programs."

That's when Home State Bank takes a keener interest in these startups. "At that point, the discussions are centered in working capital lines of credit, equipment loans, and commercial real estate, because the companies have matured," says Hardy. "These companies become very attractive, and the earlier we get in front of them to partner and they recognize this partnership for what it is, the better — they recognize that we've been there all along."

So far, the bank has established depository relationships with eight of the companies, holding funds from private investment. "We've been lending those dollars out to other companies," Hardy says. "It's provided a very inexpensive way for us to float more loans."

One company in the Rocky Mountain Innosphere is EcoVapor Recovery Systems, which has developed technology that recaptures energy lost in the extraction of oil and gas. "There are huge oil companies that are saying this technology is revolutionary," Hardy says. "The CEO is 26 years old, a graduate of the Colorado School of Mines, and he's brilliant."

Another startup that's appealing to large oil companies is Logimesh, which has created a small chip that monitors the health of large engines and compressors. It operates off the kinetic energy generated by the motor it's monitoring.

A third, St. Renatus, is developing needle-free anesthesia for dentists — a nasal inhalant that numbs the upper palate. "The founder of the company broke his nose, went to the doctor for surgery and pointed out [as he was going under the anesthesia] that the roof of his mouth was numb," Freeman says. He repurposed the drug as a nasal mist that dentists could use instead of Novocain shots.

Home State Bank expects to continue its work with Innosphere. "Our goal isn't to ferret out the next Google, but to find companies that will bring 10-30 jobs to our community," Hardy says. "We've built our bank on companies like this, that's what Main Street banks are all about."