Seed and Venture Capital State Experiences and Options

Executive Summary

Entrepreneurs always have led in building the United States economy. But never has the pace
of new business development been so fast or the competition so intense. To win in the race for
wealth and jobs, the 50 states have been called upon to serve entrepreneurs and help create an
environment where new business ventures can thrive.

Part of this challenge is ensuring that
entrepreneurs have access to the seed and venture capital they need to launch and grow their
companies. This report is a survey of the status of seed and venture capital in the states. We
discuss the objectives of state programs and current sources of capital, with a focus on
state-sponsored and state-facilitated funds.

The report encompasses the reported experiences
of the NASVF members with state government operated or state sponsored funds and includes
examples of both successes and failures. In addition to surveying our members’ programs, we
have reached out to all program managers in each of the 50 states who run programs that
provide innovation capital, and the preliminary results of the state-by-state survey of programs is
provided along with this report. We also provide examples of the kinds of initiatives that state
governments can undertake to facilitate access to equity capital for small- and medium-sized
businesses.

Finally, we address the lessons learned over more than twenty years of experience with
state-sponsored or state-facilitated capital programs. This experience has led to some clear
indicators of success for state government in the design and implementation of seed and
venture capital programs.

These are:

∞ Strong Leadership – In the best programs, state leaders take the initiative in getting a
program launched, and ensure a long-term direction.

∞ Private Sector Management – The best programs rely on carefully selected private
managers to make the day-to-day investment decisions.

∞ Focus on Knowledge – Money is not enough to create strong companies. Investment
happens in communities where both entrepreneurs and investors know how to structure
world class companies, how to invest, and how to attract others to invest. Where this
know-how is lacking, good investment seldom occurs.

State and Venture Capital – State Experiences and Options

∞ Long-Term Focus – The best programs are long term in perspective. They expect no
measurable impact, in terms of investment returns or significant job creation, for a bare
minimum of five years, and do nothing that would short cut the integrity of the investment
process. Venture capital must be patient capital to yield good results. In the private sector
of venture capital, investment exits sometimes take as long as 12 years, particularly in
dealing with early-stage companies.

∞ Financially Fair – The best programs treat the state as a valued financial partner, not as a
source of “easy money.” States that seek financial returns commensurate with their support,
beyond economic development returns, help reinforce the intent of the program to produce
high quality business development.

∞ Profit Motivated – The best programs seek to make money. They adopt the philosophy
that the best economic development is produced by those firms that are growing most
rapidly and are likely to be the most profitable.

∞ Focused Purpose – The best programs are careful not to oversell. They recognize that the
expectations of the various stakeholders may be at odds, and that not all can be satisfied.

∞ Effective Scale – The best programs are large enough to make a difference.

∞ System of Evaluation – The best programs establish outcome measures from the
beginning, keep track of program results, and evolve according to changes in conditions.

∞ Discretionary – Finally, the best programs are governed not only by encoded rules, but by
the exercise of discretion by trained professionals and experienced laypeople.

This report serves as a starting point for more in-depth evaluation and design of state capital
programs. Looking at current and former state programs, it is clear that a wide range of
experiments have been conducted. We should learn from their successes and failures and
adapt them appropriately to serve state and regional capital needs. A good number of these
programs are still quite new and it is too early to judge their performance. Going forward,
studies are needed of the specific results of these programs to identify the “latest and greatest”
design and implementation. NASVF will continue to study these programs.

Full Report: http://www.nasvf.org/web/nasvfinf.nsf/pages/svcp.html/$file/Seed%20and%20Venture%20Capital%20Report%20-%20Final.pdf

By:
The National Association of Seed and Venture Funds
Susan P. Strommer, President and CEO
George Lipper, Director of Publications
With contributions from:
Daniel Sandler, LL.B., LL.M., Ph.D.
Faculty of Law, The University of Western Ontario