Stakes are rising for TTDC, as VC group presses for change
Feelings run deep among venture-capital executives who believe the state is doing far too little to advance high-growth sectors of the Tennessee economy.
In the face of that energy, Tennessee Technology Development Corporation President Eric Cromwell is working to keep the lid on, and win VCs' support for furthering a "dialogue" with state government officials and legislators, with an eye toward balancing a host of issues and passions.
A two-day TTDC Tennessee Innovation Conference held here Nov. 20-21 made clear that that "dialogue" will include TTDC and its allies offering Gov. Phil Bredesen and the General Assembly a plan for tech-driven economic development.
The event also provided a public opportunity for the venture-capital community to validate the the TTDC agenda, and to further strengthen a cadre of advocates who favor accelerated development of high-growth, venture-backed businesses in Tennessee.
During the conference, Petra Capital Partners Managing Partner Mike Blackburn was among those offering opinions on these issues, during a session that marked the first public gathering of TTDC's Tennessee Capital Formation Board.
Blackburn (at left)said he senses there are few, if any, Tennessee policymakers who "feel any real need to support" venture and private-equity funds based here. In his brief and pointed comments, Blackburn attributed the current state of affairs to policymakers' lack of awareness of the valuable economic role of venture funders; excessive emphasis on luring companies to relocate here from other states; and, failure to emulate practices that have led to expansion of high-growth industries in other states.
Those comments seemed reminiscent with a 2006 report from New Economy Strategies, in which the economic-development consultant said Tennessee is widely perceived as having "a shortage of entrepreneurial-minded people and an absence of an 'entrepreneurial culture'," with the state's current culture viewed as "parochial and conservative." The consultant also said the private sector must not rely on state government to fuel much-needed collaborative efforts.
Worth noting is the fact that earlier this year Blackburn's firm received a $4.5 million from the Arkansas Institutional Fund and $5 million from the Iowa Capital Investment Corporation, agencies that leverage a Small Business Administration venture-capital programs. Both the investments oblige Petra to explore possible investments in companies in those states, in the healthcare-business and information services sectors.
Those who manage Vanderbilt University's nearly $3.5 billion endowment were also the object of some VC frustration during the TTDC event.
Thus, it remains unknown whether or not Vanderbilt portfolio managers led by Chief Investment Officer Matt Wright(at left)currently deem Tennessee VCs up to the task of serving them. A comment in Wright's annual report regarding his strategy of "increasing the portfolio's global breadth within a risk-controlled construct" does not seem to increase the odds in favor Tennessee VCs.
Cromwell (at right) did state that, at least with regard to targeting high-growth industries, "when you look at intentionally designed development strategy...we [Tennessee] have not been a player."
Cromwell explained TTDC is working hard to create a network of unprecedented strength and complexity, to unite stakeholders in government, research and development, venture capital and entrepreneurship. When that "alignment" of groups and interests have been framed-out, Cromwell promised that TTDC will begin rolling-out a proposed state action and funding agenda for high-growth industries and overlal innovation.
Pension-fund officials have previously warned that if there arises pressure for TCRS to weight its decision to "earmark" funds for Tennessee firms or to support economic development, rather than keeping the focus on earning optimal returns on pension assets for the state and local governments and education customers served by TCRS, then TCRS might make in-state investments entirely off-limits.
Coleman Swenson Booth Managing Partner Larry Coleman (at left) echoed Blackburn's concerns, telling the task force that investors around the country "realize there's a lot of opportunity in the Southeast," but within Tennessee, itself, too few share that perception or are willing to act on it.
Several speakers agreed with Coleman and with Meritus Ventures Executive Vice President Grady Vanderhoofven (at right) who noted that while Mississippi, Arkansas and some others states "have less raw material to work with," those states have been "proactive" in supporting high-growth investment.
Coleman said his view of the matter was reinforced earlier this year, when the VC community and others successfully repelled an effort by State Revenue Commissioner Reagan Farr to remove franchise and excise tax exemptions currently allowed family-owned non-corporate entities.
Coleman and others say a repeal of the FONCE exemptions would make Tennessee venture funds and other businesses less competitive. During state budget hearings in November, Farr made clear he has resumed his efforts to close what he describes as a "loophole" in state law. Reports indicate Farr is supported in his perseverance by former healthcare entrepreneur and now-Gov. Phil Bredesen.
Coleman and other present noted that attracting limited partners and other investors from outside the state multiplies the economic impact of individual ventures. However, said Coleman, "retention" of high-growth ventures is key in the longer run, and companies that receive most of their funding from VCs and others outside the state are not as likely to remain in Tennessee. Moreover, he said, in-state investors are more likely to "take a flier on the science" on which a startup builds its products, because they can monitor their backyard portfolio companies more closely than if the VC is based, say, on the coast.
Underscoring the importance of imported capital, Chris Kyriopoulos (at left), recently founder of public-equities manager Compound Capital Management, stressed, as have others previously, that Hospital Corporation of America - credited as the flywheel of Nashville's healthcare leadership - started with venture-capital investment, and "the lion's share of investor capital came from NewYork." Kyriopoulos also stressed that HCA, which in 2009 will observe the 40th anniversary of its initial public offering, has spawned a huge pool of talent and spin-off ventures, during the 40 years since its founding with venture backing, in 1968.
Even so, Vanderhoofven noted that with so much buyout capital coming into the state from elsewhere, Tennessee's in-state pool of capital is growing only slowly, and is not being "recycled" within the state to strengthen the state's economy.
Blackman said the state should take display a greater sense of ownership of the sector, by taking a "portfolio" approach tocapital formation, devising initiatives that help spur investment in startups and early-stage companies. In addition, he said, high-growth stakeholders should do more to raise public awareness regarding the fact that venture and private-equity investment create valuable jobs and other benefits.
Andrew Seamons (left), managing partner of Pittco Capital Partners, agreed steps must be take by the industry to create understanding of private equity investments as a "valued asset class." Seamons added that VCs must also learn more about Tennessee research, development and entrepreneurial activity. He noted that TTDC's innovation conference led him to learn of some "centers of excellence" at Vanderbilt and at East Tennessee State University for the first time. (Conference agenda pdf, here.)
Wylly's NCN seems likely to play a key role in TTDC's increasingly aggressive work. During the conference, TTDC Vice President Dan Schmisseur several times referred to the acumen and network TTDC sees in NCN, which he said can help "illuminate the path" for venture-backed development.
The current harsh macroeconomic climate inevitably colored the capital-formation discussion, but in reality the credit crunch got no more airtime than federal Sarbanes Oxley regulations and the tightly closed window for Initial Public Offerings. (Without IPO options, said Pharos Capital Group Managing Partner Michael Devlin (at left), "The early-stage venture capital model is to some extent broken.")
In that broader context, the most confident comment of the day was probably offered by Seamons, who said he believes that, notwithstanding the current peril, the U.S. brand of capitalism represents "an advantage that will be hard to lose, anytime soon."