States ramping up investment in start-ups
By Steven Overly,
Officials in Maryland and Virginia are increasingly taking on the role of a financial investor in their economic development efforts, deploying millions in taxpayer dollars to up-and-coming companies that they hope will create jobs.
It’s a strategy that is both full of potential and fraught with risk.
The District has also taken steps to help foster its start-up community, though it has been less aggressive than its neighbors in providing investment capital.
Their efforts address a perennial need in the start-up community for capital that can propel business ideas into viable companies. That’s particularly true of firms in industries that often require a lot of cash to get off the ground, such as technology and life sciences.
For investors, however, there’s always a gamble. The return on investment could be big if the company finds success. But many new ventures fail to achieve their full potential or fold altogether, which in turn results in a loss.
Maryland fetched $84 million in a tax credit auction last week that it will funnel to young firms as part of the state’s InvestMaryland program. One-third of the sum will be invested directly by the state into companies and the remaining two-thirds will be distributed to venture capital firms that will invest it as they would any other capital.
InvestMaryland was the cornerstone of Democratic Gov. Martin O’Malley’s economic development initiatives during last year’s legislative session. The auction last Thursday sold off $100 million worth of future tax credits to 11 insurance companies.
“If you’re making good investments and you’re investing in quality companies, they’re going to create jobs and they’re going to create economic opportunity,” said Christian Johansson, Maryland’s secretary of business and economic development.
Risk is an inherent part of any economic development initiative, he said, but added that equity investments have the potential to bring more money back to the state over the long term.
The state has had success in the past. A similar fund was created 17 years ago with $25 million and it returned $61 million over time, Johansson said.
Virginia’s Center for Innovative Technology has had $6 million to invest this fiscal year through its GAP Funds program. Though significantly smaller than Maryland’s figure, the sum marked a major hike in funds compared with previous years.
“This just provides us the opportunity to address more of [the deal flow] and fund deals that we would have previously passed on,” said Tom Weithman, the program’s managing director and vice president.
Weithman said the program’s staff has doubled to six employees in the past year and they have closed a record number of deals, most worth between $50,000 and $100,000. Next year’s funding remains in limbo.
“We’re investing in what we believe will be high-growth, sustainable companies and we believe if we invest in those ... new jobs will be created and new revenue streams will be realized for the state,” he said.
The nonprofit takes steps to ensure the money remains in the state. The companies must have their headquarters in Virginia and pledge to remain in the commonwealth, Weithman said. Ideally, the firms will then attract subsequent money from private investors.
The District has made its own efforts to spur growth in its budding tech sector as young entrepreneurs look to establish companies in the city. But current regulations limit economic developers’ ability to make direct investments.
“There does not appear to be any law that enables us to invest directly into VCs or even companies,” said Jenifer Boss, a senior business development representative in the office of the deputy mayor for planning and economic development.
The city’s main investment vehicle to date has been the Certified Capital Company Program, known as CAPCO. The program was created in 2003 and is run through the department of insurance, securities and banking.
The program raised $50 million through the sale of tax credits to insurance companies, then divided the money among three venture capital firms to invest in District-based companies by 2013.