Sidebar: Opinions on CAPCO vary among VCs
By Milt Capps
As previously reported by VNC, venture capitalists, particularly those who want state incentives managed by Tennessee firms, have differing opinions on the legislative proposal to create the Tennessee Small Business Investment Company Tax Credit. See our accompanying story today on the progress of that bill.
Jackson also observed that needlessly worrying that legislative options are "mutually exclusive" is "something that I think has bogged a lot of people down" during the current debate.
In contrast, Jackson explained that he and his colleagues at Council were quick to scrutinize the bill, their curiosity having been attracted to some extent by the "dramatically different" and occasionally "emotionally charged" opinons voiced at the outset of the debate. The wide divergence of opinion, Jackson said, suggested to him that "neither of the extremes are reality," and the matter warranted deeper study.
"The way we look at it, nothing's perfect; but, CAPCOs, if structured correctly, fill a specific need." He noted that over the years it has been his impression that government initiatives - lotteries and economic-development incentives, for example - start out flawed or dysfunctional, but are often improved over time. He indicated that the early history of CAPCOs may have unduly prejudiced some stakeholders.
The CAPCO option, Jackson continued, ensures that capital is invested within Tennessee, ensuring some "level of job creation" and essentially allowing the state to pay for the program in out-years by foregoing some future insurance premium-tax revenue. Meanwhile, he said, the state is free to create other programs to support investment in companies at various stages of development, latitude that is difficult to find in other models.
In a similar vein, ConduIT Corporation CEO Ray Capp (at left) told VNC, "Provided that all the constituencies are heard out and work in good faith to create outcomes that are good for the citizens of the state, we believe that efforts like these to prime the entrepreneurial pump all contribute to a cultural tide which eventually will help to raise all boats. Additional initiatives are needed, but in concert with other public and private efforts to encourage enterprise development, this could be helpful, provided that the real concerns of the realists in the community...are addressed cleanly and squarely."
Holding what might now be termed the middle ground among locals, Petra Capital Partners' Mike Blackburn (at right) told VNC this week he's happy the state is looking at capital-formation initiatives, but explained he wants something that fits better into his current business model.
"At Petra," Blackburn explained, "we have capital invested in our funds which has an economic development motive in addition to a profit motive. This capital comes from the U.S. Small Business Administration and the states of California, Arkansas and Iowa. However, in each case, this capital fits into our traditional fund structure and is easily pooled with other investors whose interests may be purely economic. That said, I think the structure of the proposed CAPCO legislation should be changed, so that the dollars raised by the State could be invested either directly into the equity of companies which meet the State's economic development agenda or pooled with fund managers who have a proven track record of successfully investing in Tennessee-based businesses in a traditional fund structure."
Mike Collins (at left) of 2nd Generation Capital rejects the CAPCO bill as well-intentioned, but misguided. He told VNC this week, "CAPCOs are one more in a long chain of well-intentioned efforts to promote venture investment through some sort of government redirection of tax resources. I am not aware of any real success stories from other states who have tired it. In the end far too few dollars are actually employed. CAPCO fund sponsors rarely reach any reasonable size. Without adequate sums under management, you simply cannot support the necessary infrastructure needed to manage the venture cycle from studied origination to exit. Our tax burden is likely to increase and I believe there are better uses than CAPCO."
Similarly, Michael Devlin (right) of Pharos Capital Group told VNC, "We don't have a dog in this hunt, given [the legislation] is for earlier-stage investing -- different than what Pharos does. However, we would like to see the State have a successful VC program to give us a pipeline of local companies to back when they get more mature. The Capco to us seems like a product that is economically great for the sponsors, but is the least interesting VC state program, since the companies that will receive funding will be less hyper growth oriented and more cashflow-oriented."