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Oregon Hopes Venture Capital Will Jump-Start State Economy

At a time when Oregon has the dubious distinction of holding the nation’s highest unemployment rate, politicians are scrambling to jump-start the state economy.

By:
Paula Stepankowsky
Wall Street Journal

One potential spark is a new law mandating that $100 million from the state’s public employee pension fund be invested in venture capital projects inside Oregon.

While the investment is bound to be helpful, its impact will be long term and do little to help the state through its current troubles, say Oregon economists and venture capitalists.

"There is something we can do to try to help the economy, but it’s obviously not a short-term thing," said John Mitchell, Pacific Northwest regional economist for U.S. Bancorp.

But with an unemployment rate at 8.5% in June, compared with the 6.4% national average, Oregon will take any economic development it can get, said Rep. Patti Smith, chair of the Oregon House Trade and Economic Committee.

"What we are trying to look for is economic development and some way to contribute to the formation of our knowledge-based companies here in Oregon," Smith said.

The new law, signed last week by Gov. Ted Kulongoski, will place $100 million of the state’s Public Employees Retirement Fund in venture capital projects specifically tied to Oregon over the next 4.5 years. A clause says the investment can fall short of $100 million if it can’t be invested prudently in that time period.

Oregon’s economic slump after years of strong growth comes from recessions in its two major industries: forest products and high-technology. The state won’t see much job growth until 2004 and 2005, said Tom Potiowsky, Oregon’s chief economist.

"We’re looking for more signs that a recovery is moving from a jobless recovery to a job gaining recovery, Potiowsky said. "We still have a lot of excess capacity that needs to be absorbed before we’re going to see a better chance for employment growth."

Oregon One Of Original KKR Investors

At least Oregon is no novice to venture capital investing. Various state funds, including the public employees pension fund, were among the initial investors in the firm Kohlberg Kravis Roberts, said Randall Edwards, the state’s Treasurer.

"The space of private equity is something we’ve been in a long time," Edwards said.

Edwards sits on the Board of the Oregon Investment Council, the state entity that will actually invest the venture capital money and oversee its performance.

Most states invest some money in venture capital , but it is less common for states to set in-state investing as a qualification, said Ralph Shaw, a long-time Oregon venture capitalist and partner in Shaw Venture Partners. Some that do include Ohio, Virginia and Montana, Shaw said.

Excluding a handful of large deals, most of the venture capital money at work in Oregon today has come from out of state, Shaw said.

The $100 million the bill makes available is "enough to make an impact. If it’s properly handled, it could be quite significant," Shaw added.

The level of Oregon’s venture capital investing has long been dwarfed by its two neighbors, California and Washington, said Mitchell of U.S. Bancorp.

In the year 2000, the cyclical peak of venture capital investing, Oregon saw $805.2 million of investment, compared with $2.75 billion in Washington and $43.8 billion in California, Mitchell said, citing statistics from a Pricewaterhouse Coopers survey.

In 2002, Oregon’s venture capital investment totaled $190 million, compared with $590 million for Washington and $9.4 billion for California, Mitchell said.

Despite the relatively small amounts of venture capital in Oregon, past venture investing has helped new companies spin off from such Oregon stalwarts as Intel Corp. (INTC) and Tektronix Inc. (TEK), said Rep. Mitch Greenlick, the Portland Democrat who sponsored the bill in the House.

"The main thing this bill requires them to do is look first in Oregon, and I think that will stimulate Oregon spinoffs even more," Greenlick said.

Finding Good In-State Deals Biggest Challenge

The biggest challenge will likely be finding enough deals inside Oregon, Oregon venture capitalists and economists say.

"We want to make sure we’re not just spending money in Oregon to spend it," Potiowsky said. "We want to make sure there are worthwhile firms and ideas that are going to be receiving this."

The most frequently mentioned investment possibilities are the biotech and high-tech sectors, but competition is among cities and states around the country for these kinds of companies is fierce, said Mitchell of U.S. Bancorp.

"There’s a lot of interest in that, and clearly, we’re starting from behind," Mitchell said.

While the competition for biotechnology investment is strong, Portland does have an advantage in Oregon Health & Science University.

OHSU, which employs 11,500 people and attracted more than $250 million in research grants last year, has committed to building a research and clinical building of up to 400,000 square feet over the next four to five years.

"I encouraged the state to find venture funds focused on that world who would spend more time walking the halls of OHSU if they had some money," said Gerry Langeler, a partner in the Portland office of OVP Venture Partners.

Another gap in Oregon venture capital is middle-stage financing – that stage beyond start-up but before profitability.

"We have to fly elsewhere to get that," Langeler said. "The fact that we have to do that shows there is an opportunity."

It’s difficult to predict how much job growth might come as a result of new venture capital spending, economists and venture capitalists say.

But while specific job growth figures are hard to come by, there’s no question there is an economic benefit, Langeler said.

"If you can create not only more small companies, but particularly the kinds that venture investors go for, you have the potential for explosive growth," said Langeler, whose company has invested other money on behalf of the state. "It only takes a couple to really get going."

Edwards, the state treasurer, said while it may be a challenge to find good in-state investments, working with good fund managers will help Oregon place better bets – and perhaps help it ride out the next recession in better shape.

"In investing, you should be planting in good times and in bad," Edwards said. "Just because times are bad doesn’t mean you shouldn’t be doing something."

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