New funds, legislation boost Iowa venture capital pool

Back in the 1990s when he was president of the Iowa Seed Capital Corp., Emerging Growth Group founder and president Gregg Barcus watched start-up after start-up
leave the state.

By:
Beth Dalby
Des Moines Business Record

He was disappointed when Pioneer Hi-Bred International spinoff ProdiGene, a biotechnology company that produces protein products from plants for the
bio-pharmaceutical and industrial protein industries, exited Iowa in 1997. ProdiGene, now one of the top 50 biotech companies in the United States, needed millions of
dollars in venture capital. It found a home – and investment capital – in College Station Texas.

It stung more when NewMonics Inc., founded in 1996 by Kelvin Nilson through the technology incubator program at Iowa State University, left the state. Now a recognized
world leader in the embedded real-time Java marketplace, NewMonics needed only a few hundred thousand dollars to remain in Iowa. Barcus worked that deal hard, but
the Iowa Seed Capital Corp. couldn’t amass enough cash to keep the software company here.

There are other examples. "You can go on and on, and it’s the same story," said Barcus, whose for-profit technology business incubator and development company at
300 S.W. Fifth St. is developing a $3 million capital fund that will make investments of $100,000 to $300,000 in entrepreneurial businesses. "When we leverage that with
other private capital, they can get one-fourth to a half-million dollars.

"If we have any hopes of competing in the new economy, we have got to be able to provide funding."

Hopewell Ventures plans Iowa presence

The Emerging Growth Capital Fund, is a piece of the puzzle. So is Chicago-based Hopewell Ventures, a new venture capital fund that will invest in technology-based and
other high-growth businesses in Iowa and six other Midwest states.

The goal of Hopewell Ventures is to raise at least $150 million from institutional investors, at least half of it by summer’s end, said Thomas Parkinson, managing partner
of its central management team. The fund will invest in early-, mid- and late-stage ventures in a wide range of agriculture-related technology, financial services and other
high-tech opportunities.

Investors in the fund will be allowed to target their investments in Iowa. "We’ll commit to that for the life of the fund and invest an equal amount that they invest in Iowa,"
Parkinson said.

Hopewell Ventures plans to have a presence in Iowa, a move that solves one Iowa’s problems in attracting venture capital. "Venture capital is one of the most
geographically concentrated industries in the country," Parkinson said. "For a fund that’s based in Boston to come to Iowa and spend a significant amount of time trying
to invest in the state isn’t realistic. It’s too expensive and too time consuming. It’s a main reason why most venture capital funds prefer an investment closer to home.
Deals are easier to find and easier to manage."
Jude Conway, a former manager of the Iowa Seed Capital Corp., will be Hopewell Ventures’ Iowa manager. "It allows us to have a fund where larger investments can be
made," Conway said. "Most of the funds that get raised in Iowa have $5-, $10- or $15 million and can make an investment of $500,000 in a company that really needs
$4-$5 million.

"It’s one of those chicken-and-egg things," he said. "Part of the reason there aren’t enough deals is, there isn’t a venture capital culture to support it.

"But success breeds success, and when they get some money, I think more deals will come."

Both the Emerging Growth Capital Fund and Hopewell Ventures are going after the estimated $60 million Iowa insurance companies agreed to invest in venture capital in
exchange for a multimillion-dollar cut on insurance premium taxes.

"The savings for insurance companies is huge," Barcus said. "And it’s a huge shot in the arm for what we are doing here."

Barcus said a couple of insurance companies already have shown interest in investing in his company’s fund, which will target emerging technology companies in the
Golden Circle area of Central Iowa and the Cedar Rapids/Iowa City/Waterloo/Fairfield corridor of Eastern Iowa. He said both areas have substantial potential for
successful business development.

He said there’s no shortage of companies looking for investors. Emerging Growth Group, the only business of its type in Iowa, already is assisting three companies after
only about a year of operation, and agreements are close on three more. The investor-backed, for-profit limited liability company provides technology infrastructure and
tools, corporate development assistance, and higher-level business development assistance to its client companies with a goal of allowing them to exit the Emerging
Growth incubator within two to five years of their inception. Emerging Growth Group does not charge fees, but receives an equity position in the companies, tying its
financial interests to those of the company.

"We can make money by helping others make money, and that’s a resource that hasn’t been available," Barcus said.

Private initiatives dovetail with state legislation

The private venture capital funds dovetail well with three venture capital initiatives approved earlier this year by the Iowa Legislature, Barcus said.

The largest piece of the legislation, the "Iowa Fund of Funds" bill, guarantees investments with up to $20 million annually in tax credits up to $100 million over the life of
the fund. The tax credits cannot be redeemed for five years. Another bill guarantees 20 percent tax credit for investors providing early-stage seed capital, and a third one
offers a 6 percent tax credit for any investment in a venture-capital fund.

"It’s great that policymakers, for the first time, really acknowledged the seriousness of the problem," Barcus said. "I don’t think for a long time they felt a sense of
urgency, but that really changed in the past nine to 12 months. The first bill signed by the governor was a $100 million venture capital bill in tough economic times. That
takes a lot of guts."

Barcus said that though the legislation is vital to improving Iowa’s dismal venture capital profile, it could be two years before the Iowa Fund of Funds is ready to make
investments.

"Anything that increases the availability of venture capital in Iowa is a good thing for Iowa," Barcus said of Hopewell Ventures’ plan.

"Investing in venture capital deals is not a natural act for most Iowa investors," he said. "It’s a stretch. There’s a lot of money coming from agriculture, which is very
conservative; financial services, which is also very conservative; and mutual financial services, which are the conservatives of the conservatives."