Lawmakers back state-supported fund for startups

In this time of budget cuts and repudiation of anything that remotely smacks of government intervention in the private sector, how is it possible for the New Hampshire Legislature to pass a law creating a new government program that will pump $2 million to $6 million into risky, high-tech startups?
The goal is for the New Hampshire Innovation Business Job Growth Program to help create at least one new venture capital fund that would pick which New Hampshire startups are most likely to succeed and benefit the public good. And the fund not only hopes to leverage millions of dollars of private capital, but also would be able to draw millions of dollars from state retirement funds – at the same time the state is cutting retirement benefits for future state and local workers.Yet the both the House and Senate passed House Bill 605 to the governor without a peep of debate, partly because all of the money for the program comes from the federal government, and it would all be used to minimize the risk of any state and private funds that would be raised.And the funds would be funneled through though the tested and trusted New Hampshire Business Finance Authority.HB 605 is the brainchild of entrepreneur Mark Galvin, whose New Hampshire Innovation Commercialization Center at Pease International Tradeport in Portsmouth has been helping seed startups with advice, connections and occasional grants, but not what they need most – substantial financing.Indeed, Galvin originally hoped to raise a $10 million equity fund, but quickly downsized that idea to about $1 million. Some of the money has come from other groups that are facing the state budget knife, like the New Hampshire Innovation Research Center.Thanks to the recession, venture capital and angel financing has just about dried up for seed, startup and early-stage business development, although some has returned in other parts of the country.Last year, $17 billion went to seed and startup financing nationwide, about half of what was spent before the high-tech crash at the beginning of the millennium, but four times as much as during the low in 2002. Meanwhile, in New Hampshire, startup funding – about $22 million in 2000 – only climbed back up to $6 million in 2008, and has been essentially zilch in 2009 and 2010.Galvin maintains that this is the funding that produces the most jobs, and he points to statistics that show that during their first year of funding, startups produce a net gain of 3 million jobs nationwide, while in later stages, companies shed jobs.In the bankWhile some dispute Galvin’s interpretation of those statistics, no one disputes that early-stage investment is needed. But the fiscally strapped state can’t really spare a dime to help out.Enter the federal government. The Small Business Jobs Act, one of the few post-stimulus Obama administration programs, included $1.5 billion to support small-business lending programs. The state is eligible for $13.2 million, and – according to Business Finance Authority Director Jack Donovan – that money is practically in its bank.Much of that money is going to the BFA’s existing programs, but Donovan agrees with Galvin about the importance of funding startups and has set aside $2 million to start with – and perhaps as much as $6 million, if justified by demand – to help create a new venture capital fund for that purpose. But the BFA could not do this without the blessing of the Legislature, thus the introduction of HB 605.Here’s how the New Hampshire Innovation Business Job Growth Program would work:The BFA would guarantee investment in one or more new startup funds, guaranteeing a percentage of losses – say 50 to 80 percent (or, if all else fails, the Senate amended the bill to allow the BFA to match private contributions and directly invest in the funds). Donovan says he prefers the guarantee over a match, since it would leverage more private capital.Once the BFA commits the money, the fund will have five years to invest, under the Senate version. (The House version would only give it a year).The bill requires that at least some of the funds would go to “companies establishing their first payroll accounts” and that those companies would be based in New Hampshire. But there are other criteria. The investments have to “serve a public use and provide a public benefit.”They would have to “preserve or increase the social welfare or economic prosperity of the state.” They would have to “promote the orderly development of business activities, create or preserve employment opportunities or protect the physical environment.”The ICC would like to start up such a startup fund, Galvin says, but others are welcome to try as well. The funds could even compete in trying to lure some investors, or a venture capital fund or an institution, which have been heretofore reluctant to put money in startups, by alleviating some of the risk.‘Swimming against the market’?One such institution is the state Retirement System, which has about $4.9 billion in investments. The system’s investments have been under a lot of scrutiny lately, as it has underperformed other such funds over the last few decades. In addition, there was the controversy a few years back after former Chair Ed Theobald stepped down following reports that the Retirement Board was investing in some firms that he had an indirect interest in without the proper disclosure.The Retirement Fund’s performance has become all the more crucial, as the Legislature seeks ways to cut future benefits in order that the fund become more viable.You would think that the Retirement Fund would steer away from the riskier “alternative” investments, but those are just the kind of investments that could produce a greater return. And the Retirement Fund does have room to grow in that direction. Last year, the fund invested about 1.9 percent of its money in such investments – or $94 million, according to spokesperson Marty Karlon – but its goal is to invest about 10 percent, and even as much as 15 percent in alternatives.However, in the past, these investments went to venture capital funds that were not limited to startups, and were not tied to a specific geographical area, according to Karlon.”We want to have diversity in that funding,” Karlon says. “It’s not to say we wouldn’t consider it, but traditionally we are looking for the best return.”Donovan and Galvin hope to make such investment more attractive by taking some of the risk out of the equation, but if the Retirement System doesn’t go for it, there are other institutional possibilities, such as the University of New Hampshire’s endowment or the New Hampshire Charitable Foundation.And then, of course, there is private investment. No one can say what will loosen the change in a venture capital fund’s – or an angel investor’s – pocket, but Jeffrey Sohl, who heads the Center for Venture Research at UNH, said that he thinks it will help.”Any program that could alter that risk award equation will be welcome.”Even Sen. Andy Sanborn, R-Henniker – who has been skeptical about almost any government program to help business – is supportive of the idea. This raised the eyebrows of Sen. Matthew Houde, D-Plainfield, the only Democrat on the Senate Commerce committee, which held hearings on the bill.Houde asked Sanborn if he was being inconsistent by supporting the startup fund.Sanborn said this fund was different, because it involves “lending money, rather than giving money. It’s not capitalization.”Indeed, nobody really opposes the idea though there are some groups that would like to see it extended beyond startups.Jeff Pollock, of MerchantBanc, invests in companies beyond the startup stage – companies that are still too small for most traditional venture capital firms to bother with.”It’s a great thing. It will send the right message that New Hampshire is proactive,” Pollock says, but he took issue with the idea that investments in the early stages result in more jobs than those down the road. Most startups fail, Pollock notes, but they usually fail after the first year. So statistically, those job losses are coming from many of the very same firms that were started up during the first year.”That’s the problem if you narrow it to just startup companies,” Pollock says. “That’s why in the market the money is going to the later stage. I absolutely believe in funding startups, but that’s why you have to support companies a little down the road who have made it past the startup stage and are still successful. Otherwise you could be wasting money.”Restricting the fund to startups is, in essence, “swimming against the market,” says Pollock.Vested for Growth’s John Hamilton echoes the sentiment. VFG invests in mature companies that are reorganizing and going to the next level, usually with the support and participation of the company’s workforce. While Hamilton emphasizes his total support for the startup program, there are “also opportunities for growth in existing businesses.”Donovan said that any venture fund would be flexible enough to consider any kind of investment, but this fund is focused on seed money, startup and early-stage growth. He did note that much BFA money from the Small Business Jobs Act would go to small businesses.Bob Sanders can be reached at bsanders@nhbr.com.