$100M VC fund for Ohio object of new legislation

Jeff Armbruster says that in his three years as a state senator, he hasn’t been
involved in economic development legislation more important than Senate Bill
180.

Laura Newpoff Business First

The legislation, sponsored
by Armbruster, would pave
the way for the Ohio
Venture Capital Fund, a
$100 million pool raised
from the private sector and
state pension funds. The
money would be given to
venture capital firms in the
state to invest in young
Ohio businesses.

"Here we are coming out of
a recession and we’re going
to have, very quickly, $100
million of new investment to
go into these seed and
early-stage companies," said Armbruster, R-North Ridgeville. "Everyone agrees in
the state … that most of the venture capital we’re putting in companies is
middle-stage or later-stage."

The bill, unanimously passed by the Ohio Senate in March, will be taken up by
the House Ways and Means Committee on April 24. If it gains passage in that
chamber, the program could be running by mid-2003.

No Taft endorsement ­ yet

The legislation has received bipartisan support but not an endorsement from Gov.
Bob Taft. Armbruster thinks the legislation meshes with Taft’s Third Frontier
proposal that would invest $1.6 billion in new companies and technologies in
Ohio.

Joe Andrews, a Taft spokesman, said the
administration supports developing venture
capital in Ohio but thinks it is too early to
take a position on Armbruster’s bill.

Pat Valente, deputy director of the state
Department of Development’s Technology
Division, said he is following Taft’s lead.

"I don’t anticipate the governor vetoing it,"
Armbruster said. "We’re ahead of the curve.
This was prior to the State of the State
address. We’ve been assessing this issue
and holding meaningful discussions with the
venture capitalists and the Department of Development. This does not in any way
hamper the efforts of anyone when it comes to the Third Frontier."

Todd Ritterbusch said the Technology Leadership Council backs the legislation.

"We’re very supportive of the development of venture capital in the state," the tech
council president said. "This is one of several alternatives being considered which
could help do that."

A rallying cry

This isn’t the first time legislation aimed at spurring private equity investments for
Ohio businesses has been considered by lawmakers.

Former state Sen. Charles Horn, R-Kettering, sponsored a similar bill several
years ago, but to no avail.

"When I sat on economic development and technology ­ I was vice chair of that
committee ­ when (Horn) introduced the bill, I said, `Chuck, this absolutely has
merit. I promise you I will take it to the next step when you’re gone.’

"So, we got the venture capital firms in the state and asked for their input,"
Armbruster said. "We said we wanted to look at private money in order to invest
in these seed and early-stage companies, so how do we get there?"

Steve Baker, vice president of private equity for Cincinnati-based Fort Washington
Investment Advisors, which manages $700 million of venture funding, said
passage of the bill would give Ohio’s VC industry a rallying cry.

"The southern Ohio region imports 91 percent of our capital," Baker said. "I don’t
think it’s too dissimilar in the balance of the state. In northern California, Austin
and New England, what those places provide is between 20 and 40 percent of
their own capital.

"What we’d like to see is an increase in the number of people that invest the
capital and the number of organizations that manage the capital," he said.
"There’s a good chance 20 different venture capital funds might benefit from this
pool of capital."

Tax credits offered

The fund would be run by a state VC authority, which would consist of members
of the private sector appointed by the governor, the Ohio Senate president and
House speaker. A fund manager would administer the money.

Investments in out-of-state ventures wouldn’t be ruled out, but the fund’s
emphasis would be on businesses with Ohio operations.

Armbruster’s bill includes a tax credit mechanism in case a 9 percent guaranteed
rate of return to investors is not met.

The senator insists his bill is not a so-called CapCo, where insurance companies
receive tax credits for money they loan to or invest in what is called a certified
capital company. This investment structure has been widely criticized because
the CapCos are too expensive and don’t invest heavily in local ventures.

With Armbruster’s legislation, no tax credits would be issued during the first four
years of the program and he doubts credits ever would be necessary. Venture
capital on average typically has a rate of return of at least 33 percent.

The goal is to provide young companies the money they need and to give Ohio’s
larger corporations a strong investment opportunity.

"The large institutions are going to look for some secure investments because
they got beaten up in the stock market," Armbruster said. "This is an opportunity
to give them security and to have them invest back into the state where they’re
operating."

Rich Kiley, a member of the Ohio Technology Partnership, a group of regional
technology leadership councils, said the organization has studied S.180 and
thinks it’s an "excellent solution to meeting the need for seed and early-stage
capital." Kiley also is the director of Procter & Gamble Co.’s Venture Fund in
Cincinnati.

"It’s critical because at those early stages, companies frequently can be asked to
relocate to where the capital is," Kiley said. "If we don’t have that capital here, the
companies ­ and we’ve experienced this in Cincinnati ­ end up moving to
Minneapolis or Boston or the Bay area. What’s great about S.180, it’s unlikely to
ever cost taxpayers any money."

Copyright 2002 American City Business Journals Inc.

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