Gov. Owens: Colorado CAPCO law must change

Program supporters find new opponents at task force meeting

By David Milstead, Rocky Mountain News

It was supposed to be the day participants in the state-backed venture capital program told their side of the story to win over skeptical Colorado policy-makers. Instead, they found they have two powerful new opponents: Gov. Bill Owens and state Treasurer Mike Coffman.

Owens said the state’s certified capital company, or CAPCO, program "must be restructured . . . I am suggesting we significantly reform the program."

The statement was in a letter Owens sent Monday to Senate President John Andrews, R-Centennial, and revealed at Tuesday’s meeting at the state Capitol.

Coffman, who presided over the second meeting of his CAPCO task force Tuesday, announced his view at the conclusion of the industry’s presentation.

"Colorado went down the wrong path when they adopted the CAPCO program," he said. "This is a textbook case on what not to do with economic development."

Colorado lawmakers’ concern with the CAPCO program has been growing all year, even as the CAPCOs have made 15 investments totaling $13.1 million in Colorado companies.

The legislature established the program in 2001 to deliver venture capital across the state. Under the CAPCO law, insurance companies, rather than pay $200 million in taxes on premiums to the state over time, instead can divert the money to CAPCOs. The CAPCOs then make venture-capital investments.

Critics say CAPCOs and the insurance companies that fund them get wealthy while taxpayers lose out.

Bob Lee, director of the state’s Office of Economic Development, said the CAPCOs, which his department regulates, collect high fees, are never required to invest all their capital, and will never have to share profits with the state, based on the way the law is written.

The CAPCOs, however, say their program is an effective job creator that has provided a significant new source of venture capital in a dry Colorado economy. The CAPCOs also say Lee and his staff are either misinterpreting the statute in some cases or assuming worst-case scenarios that simply haven’t played out in states such as Louisiana and Missouri, which have had the program for several years.

Tuesday’s task force meeting featured presentations from a range of CAPCO supporters who tried to counteract the criticisms that have come from Lee, his staff and other opponents.

Jim Conboy of Wolf Ventures, a local venture-capital firm that has partnered with St. Louis-based CAPCO Advantage Capital Partners, told the task force that Colorado venture funds formed as part of the CAPCO program represented 75 percent of all new fund formations and 60 percent of new capital since 2001. And he said the Colorado CAPCOs, by so far investing 13.1 percent of their total commitments, are deploying capital faster than the average VC fund started in 2002.

John Neis, a Wisconsin venture capitalist, told the task force success stories from his state: One CAPCO investment in a business with just enough cash for two weeks’ payroll kept it alive long enough for Cardinal Health, a Fortune 50 company based in Dublin, Ohio, to take a stake in the firm and create a Wisconsin presence.

And Rob Kilgore, chief financial officer of Classic Events LLC, said the $1.24 million investment he got from Stonehenge Capital helped build his business and add 55 permanent jobs as well as up to 50 or so seasonal workers. It’s already meant $250,000 to Colorado in additional payroll and sales taxes, he told Coffman’s task force.

These presentations did not sway Coffman, who said he backs CAPCO changes, which will now be discussed at the September task force meeting.

The timing is critical, as another $100 million in tax credits will be allocated to the insurance companies in April. Owens, in his letter to Andrews, said reform should occur before then. Owens was unavailable for further comment Tuesday, his spokesman said.

Owens’ concern is that "our restructured program should place investment emphasis on new and growing Colorado companies." Owens said, "I am also concerned that the costs associated with this program are excessive and believe that they can be lowered and more investment capital provided by selecting managers based upon a competitive process."

He added, "I am concerned that rural Colorado is not receiving the benefits originally intended in this statute" and that the definition of rural must be clarified.

Owens’ comments seemed, in part, directed at Wilshire Colorado Partners and its parent company, Newtek Business Services. The publicly traded, New York-based Newtek uses CAPCO programs across the United States to find entrepreneurs and startup businesses with the Newtek trade name to sell the company’s services, including computer consulting and small-business loans.

In Colorado, Newtek/Wilshire has invested $4.2 million in two startups, locating them in an office park in Clear Creek County a few hundred yards from the Jefferson County line. Those investments represent nearly 90 percent of all the money invested in rural Colorado in the CAPCO program.

Newtek CEO Barry Sloane, who flew in from New York to attend Tuesday’s session, has told the Rocky Mountain News his company does exactly what the CAPCO program intends: generate economic activity in Colorado.

Sloane said Tuesday his company is "willing to work with the legislature, and the (Office of Economic Development) and the governor’s office to make the program better."

That sentiment was echoed by representatives of Stonehenge and Advantage Capital after the task force session.

The CAPCOs also will try to convince Coloradans that their state officials are unusual in their opposition to the program; CAPCO supporters provided copies Tuesday of letters from the lieutenant governor of Missouri and a state senator in Wisconsin in support of the program.

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