LI venture firm to be reviewed by feds

Canrock Ventures managing director Mark Fasciano on Jan. Canrock Ventures managing director Mark Fasciano on Jan. 31, 2012. Canrock has put nearly $2 million of Innovate NY funds into five startups where it is either the largest shareholder or owns a significant stake. Photo Credit: Chris Ware

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U.S. Treasury investigators are trying to determine whether a venture capital firm in Brookville violated conflict-of-interest rules by investing taxpayer dollars in small technology companies in which it has sizable stakes.

Canrock Ventures, a 4-year-old investment business, is the subject of the review by Treasury's Office of Inspector General, a department spokesman confirmed.

The inspector general's review of Canrock began after Newsday asked the Treasury Department questions in early November about one of Canrock's federally funded investments.

A spokesman for the inspector general's office said Friday, "I can confirm that Canrock is one of the entities that our auditing people are going to be looking at in connection with their review of New York's" use of the federal investment dollars.

In 2012, Canrock was among seven venture firms chosen by New York State to invest a total of $35 million in federal funds in tech startups across the state. New York created an investment pool, the Innovate NY Fund, whose goal is to back promising new businesses with a combination of government and private money.

Canrock has invested nearly $2 million of Innovate NY funds in five computer software companies where it is either the largest shareholder or owns a significant stake. Four of the startups were co-founded by Mark Fasciano, a Canrock partner, according to the companies' websites and Fasciano. He also is chairman of the board of directors of three of them.

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Treasury guidelines prohibit conflicts of interest between the venture firms giving out federal dollars and the startups receiving them.

The somewhat arcane rules stipulate that startups getting investments of federal funds cannot be "a related interest of an . . . executive officer, director, principal shareholder . . . of the financial institution lender or investor" that is putting federal money in the startup.

Venture firms such as Canrock must certify in writing that there are no conflicts of interest in their investments.

 

No conflicts, Fasciano says

Fasciano, in an interview, denied that there were any conflicts in Canrock's Innovate NY investments. After their own examination, state officials last fall said Canrock was in compliance. They since have decided to review the matter further.

Treasury takes conflicts seriously. In July, the department took back money invested in an energy startup in St. Louis because of a rules violation that auditors called "a reckless misuse of funds."

Treasury found that a director of the Missouri agency that invested federal dollars in startups was also a director of the parent company of the energy startup that received the funds. Treasury voided the investment even though the director was recused from the vote on investing in the energy startup.

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Canrock has been allocated a total of $5.7 million in Innovate NY funds to invest on Long Island and in New York City: $4.5 million comes from Washington and $1.2 million from the Goldman Sachs investment bank.

Canrock and Fasciano have been key players in trying to develop a technology economy in Nassau and Suffolk counties that creates high-paying jobs and keeps young people here. Since its founding in 2010, Canrock has invested more than $18 million in 22 companies on Long Island and elsewhere.

Fasciano, 45, of Port Washington, was among Gov. Andrew M. Cuomo's first appointees to his Long Island Regional Economic Development Council, which devised a five-year job creation plan and recommends projects for state aid.

Fasciano said there were no conflicts of interest in how Canrock deployed Innovate NY money, and that New York officials knew about his dual roles as a Canrock partner and board chairman of three of the companies receiving funds.

He also said Canrock's deep involvement with the recipients of Innovate NY dollars, while uncommon in the venture capital industry, is crucial to the firm's plan for boosting startups' survival rate.

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"Not only do I believe there is no conflict of interest, but this close relationship that we have with our companies is the heart of what we do at Canrock . . . it's essential to the whole strategy of building companies," he said. "It was disclosed from the start in our application to New York State" for federal funds. "Canrock is in compliance."

State officials concurred last year.

Responding to complaints from a shareholder in one of the tech startups, Empire State Development reviewed reports filed by Canrock and spoke with Fasciano. "We are satisfied that Canrock is in compliance with the program's requirements," Kenneth Adams, chief executive of the agency, which administers Innovate NY, wrote in a Nov. 1 letter to the shareholder.

 

'A more detailed review'

A month later, state officials decided to take a second look. "I have directed my staff to conduct a more detailed review and look further into the concerns raised in your letter," Adams said in a Dec. 2 letter to the shareholder.

On Friday, Empire State spokesman Jason Conwall said, "As the review is ongoing, we cannot comment further at this time."

New York State doesn't select the companies that receive Innovate NY investments; they're determined by the participating venture capital firms. But the state is ultimately responsible to Treasury for the proper use of the funds.

Most of the Innovate NY money entrusted to Canrock comes from the State Small Business Credit Initiative, a $1.5 billion program established four years ago by Congress to help lift the country out of the Great Recession.

Fasciano said Canrock has invested Innovate NY funds in the five software startups because each offers the promise of a big return when it's sold to another company or issues stock to the public.

He said Canrock also has met the program's requirement to invest twice as much, or about $3.8 million, in private funds (including its own money) in the startups.

Four of the software startups that Canrock has invested Innovate NY dollars in are housed at its business incubator, ThoughtBox@LIU, on the LIU Post campus in Brookville. Fasciano said that, generally, Canrock is the largest shareholder in incubator tenants.

Each tenant pays a monthly fee to Canrock for accounting, human resources, management consulting and other services.

Fasciano said this "shared services" fee is a component of the salaries that Canrock pays its staff and two of the three managing directors. The startups have likely used some of the federal money to pay the fee, he said.

General Sentiment Inc., one of the tenants, was the subject of Newsday's initial inquiries to Treasury.

In January 2013, Canrock invested $500,000 from Innovate NY into General Sentiment, a Brookville tech business. Fasciano and others founded the company in 2008.

The Innovate NY investment came after General Sentiment ended 2012 with $361 in the bank, according to the company's year-end financial report, which Newsday reviewed. The business also was on its third CEO in four years.

General Sentiment tracks public opinion on the Internet about topics such as consumer products, entertainment, politics and sports. It accurately predicted the winner of "American Idol" in 2011. The next year, it lost more than $1.7 million on revenue of about $934,000.

In four letters to state officials last year, General Sentiment shareholder William J. Mich Jr., a software executive in Ronkonkoma, asked how the company qualified for a taxpayer investment. State law stipulates that recipients of Innovate NY money "demonstrate a potential for substantial growth and job development."

Fasciano said that General Sentiment "has outstanding potential . . . it's got a massive and hugely valuable database that's been building up on public opinion on every topic, every day since 2009. And it has some marquee customers."

The close ties between Canrock and the startups, such as General Sentiment, that it funds and helps to build aren't standard practice in the venture capital world, several experts said.

"It's usually not the case that a venture capitalist will invest venture money in their own business," said Dennis J. Ceru, a professor of entrepreneurship at Babson College in Wellesley, Mass. "They lose their objectivity . . . So, one of the hallmarks of venture capitalists is not to get too close."

 

DOLLARS FOR LOCAL TECH STARTUPS

 

Canrock Ventures, a Brookville-based venture capital firm, has invested money from the state Innovate NY Fund into five technology startups. They are:

General Sentiment Inc. (Brookville)

-- Tracks public opinion on the Internet

-- $500,000 Innovate NY investment

-- Canrock managing director Mark Fasciano is co-founder and board chairman

Karma411 (Brookville)

-- Internet-based fundraising tool for charities and not-for-profit groups

-- $500,000 Innovate NY investment

-- Fasciano is co-founder and board chairman

Sentiment Alpha Capital Management(Brookville)

-- Hedge fund that uses Web analytics in making investments

-- $425,000 Innovate NY investment

-- Fasciano is co-founder and manager

Thrive Metrics Inc. (Brookville)

-- Internet tool for analyzing business email and other communications to improve customer service and financial results

-- $400,000 Innovate NY investment

-- Fasciano is co-founder and board chairman

Vidaao Inc. (Manhattan)

-- Internet tool for finding freelance videographers and managing video projects

-- $50,000 Innovate NY investment

-- Canrock managing director Jim Estill is an investor

SOURCES: Company websites, Canrock Ventures, Empire State Development, SEC filings, Newsday research

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