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State-backed venture capital fund could be on its way out

on May 4, 2011

A state-backed venture capital fund that’s widely praised by supporters for helping lure 10 out-of-state venture firms to Ohio could be on its last legs.

The Ohio Capital Fund's future is hazy because it isn’t clear whether the fund is much of a priority for Gov. John Kasich and the Republican-dominated legislature. The fund, which was established as a “fund of funds” by the legislature in 2003, has committed $125 million of a possible $140 million to 23 venture firms and is expected to be tapped out in terms of investment commitments within the next few months, according to Tarik Adam, investment manager with Fort Washington Capital Partners Group, which was hired by the state to administer the Ohio Capital Fund (OCF).

New legislation is needed to continue the fund, but a House bill that would do just that hasn’t gone anywhere since it was introduced in January. A similar proposal passed the House by a vote of98-0 in the state’s last legislative session, but didn’t make it to a vote in the Senate.

“If they don’t get something done in the next year or so, the first OCF will likely be the last, which will be a shame,” said Steve Haynes, a managing partner with Cleveland-area venture firm Glengary. Glengary is one of 23 venture funds to receive an investment from the OCF, which doesn’t specify the amount it invests in each fund. The maximum per-fund investment is $10 million.

If the state doesn’t re-up on the OCF, it’ll also be somewhat puzzling, given that it seems that just about everyone involved in the program considers it a success.

“Our goal is to bring more eyes and ears to Ohio in terms of early stage investing, and we think we’ve done that,” Adam said.

At the state level, OCF is managed by the Ohio Department of Development. Ben Lagemann, a risk capital program manager with the agency, said OCF has “absolutely” done what it was designed to do, noting that the fund has funneled capital to 50 Ohio companies and helped create or retain 1,900 jobs.

And OCF has also been a boon to the venture funds it’s invested in — providing benefits beyond just money. Haynes said OCF’s investment in Glengary was “critical” in his fund’s efforts to raise money from other sources. “Other investors know that OCF has performed a tremendous amount of due diligence in every fund in which they’ve invested,” he said. “That’s really important.”

Better yet, supporters say, OCF hasn’t cost taxpayers a dime — and it isn’t expected to, according to Adam.

Here’s how the Ohio Capital Fund works: OCF is financed by $150 million in bonds ($10 million must be kept in reserve, meaning there’s $140 million to invest) issued on its behalf by the Columbus-Franklin County Finance Authority. Investors who buy those bonds are eligible for state tax credits to offset any losses they incur as a result of their investments, but the state only issues those tax credits if the fund suffers losses — and so far it hasn’t.

Any fund that receives money from the OCF must agree to invest half of that amount in Ohio-based early stage companies. The OCF is also required to invest 75 percent of its capital into Ohio-based venture funds. Venture firms that have set up Ohio offices as a result of an investment from OCF include East Coast-based Edison Ventures and Michigan-based Arboretum Ventures. Each has established Cleveland locations.

So what’s the objection to continuing what Haynes called “one of the best — if not the best” economic development programs in the state?

Rep. Jay Goyal, D-Mansfield, wishes he knew. Goyal is a co-sponsor of House Bill 43, which would add an additional $100 million in bonds to the state-backed venture program, an amount that would allow the OCF to invest in at least 10 additional venture funds.

The problem is Goyal can’t even get a hearing for the bill, which he introduced three months ago. Goyal said that even though he’s asked Rep. Nan Baker, R-Westlake and chairman of the House Economic and Small Business Development Committee, “multiple times” why the bill hasn’t gotten a hearing, he’s “received no answer as to why that is.”

“It is peculiar, given that this passed the House unanimously last assembly,” Goyal said. “Why I’m not even able to get a hearing is puzzling.”

Baker didn’t return a call, but it’s difficult to think that if re-upping the Ohio Capital Fund was any kind of a priority for Gov. Kasich, he’d let Baker know. Given Kasich’s heavy rightward leanings and private-market-worshiping ideology, one would think he’d love a program that uses state guarantees to help private enterprise secure more cash and funnel it to growing private companies.

“Knowing that the state has limited capital to support economic development — and given that it’s very unlikely to have to use its own cash — you’d think the administration would support something like this,” said Haynes.

Indeed you would, but then you’d be wrong.

Lagemann from the Department of Development was noncommittal about the Kasich administration’s backing of the OCF.

“We’re evaluating our options,” he said. “We don’t want to continue an existing program just for the sake of continuing it.”

Lagemann said the administration is reviewing all forms of assistance the state provides at every stage of an Ohio business’ life cycle.

“We’re evaluating programs within the context of the whole capital continuum and determining how each program fits a distinct and targeted purpose to achieve our economic goals,” he said.

So at least the Kasich administration is leaving the door open for a renewal of the OCF, even if it’s given no indication that it actually wants to see that happen.

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