It’s been called the “mother’s milk” of startup companies, but for years, many Georgia entrepreneurs have complained they’re starved for nourishment.
Venture capital, a high-stakes form of investor funding for young companies, has been rather scarce in Georgia compared to other startup hubs. But with attracting and retaining so-called “knowledge jobs” a top economic development priority, state leaders are poised to step into the breach in a big way.
A program called Invest Georgia could plow $100 million of state dollars over five years into Georgia startups. It would do it through investments in venture capital funds. The goal is to keep companies from fleeing to Silicon Valley or other tech meccas. It’s a path that also comes with risk.
Venture capital is by its nature a series of bets on unproven or adolescent companies with promising ideas. Early investors hope to nurture these firms into strong companies, and if lucky, into a Google or Apple.
But like in baseball, there are a lot of strikeouts between home runs. The Wall Street Journal reported last year on a study by a Harvard University senior lecturer that found three out of four venture-backed startups didn’t return their investors’ money. Industry figures put the failure rate at about 40 percent.
The hope for investors — be they large private or public pensions, university endowments or other investors — is a few big hits overcome the inevitable misfires and lead to big returns.
“Venture capital as a financial investment is about swinging for the fences,” said Yael Hochberg, a finance professor at the Kellogg School of Management at Northwestern University in Illinois. “In order to cover (losses), you’ve got to take risk to get returns.”
In Georgia’s case, backers predict the big returns would be in the form of strong new companies, job growth and a self-perpetuating fund to help birth new startups.
The venture capital industry has contracted following the tech implosion of the early 2000s, with Georgia firms getting a fraction of what they once received. About 30 states now have some form of venture fund, to coax investors into backing early stage companies that have been left in the cold.
“I think you have to start somewhere, and $100 million is a reasonable starting position,” said Tom Hawkins, managing partner of Forté Ventures, an Atlanta-based venture firm that is currently invested in three metro companies.
Supporters say Georgia’s program will help recruit private venture investment, create jobs and build on the state’s technology ecosystem. The programs have often attracted significant outside money to their respective states, but they’ve also courted controversy, with taxpayer funds being on the hook if investments fail.
In Utah, the state’s Fund of Funds investments have resulted in 3,500 new jobs since 2006, but a report by the Salt Lake City Weekly said the state could be forced to pay nearly $19 million to cover losses through 2021. That state’s program was initially funded by loans that must be repaid either by investment proceeds or the general fund.
The Oregon Investment Fund website said since 2004 it has helped create 1,936 jobs in the state, and invested $298 million in companies throughout the Pacific Northwest, with $425 million coming from outside sources.
The new Georgia program was approved last year with broad bipartisan support, though it is not yet funded. Lawmakers would have to approve funding next year, but the program could gradually grow to $100 million over five years.
For decades, Georgia has invested in economic development and in its research institutions where many of the state’s promising startups begin. But the state has missed out on the rewards of commercializing technologies developed at its universities when some startups incubated at the state’s institutions haven’t gotten funding, said Lt. Gov. Casey Cagle, a key supporter of Invest Georgia.
The Georgia program would invest in funds that target both very early stage companies and growing firms, and there are requirements for private investment as well. Georgia would reap 80 percent of any profits, plus the principal, and that money would restock the fund.
Gov. Nathan Deal, Cagle and House Speaker David Ralston would appoint a board of experienced venture capitalists, fund managers or entrepreneurs who would select an administrator that would pick venture funds in which to invest. Those investments, subject to the board’s approval, could go only to funds that invest in Georgia firms.
Cagle said skilled professionals will manage the investments, so the government won’t be picking winners and losers. And recipients of state funds would be required to stay in Georgia for at least three years or repay the money to the fund.
The board, which could be appointed later this year along with an administrator, will set policy for the program.
“This is a way to get some job creation. It’s certainly much, much better than a state becoming a direct investor in startups,” said Jeffrey Sohl, the director of the Center for Venture Research at the University of New Hampshire. But he cautioned that venture capital returns have trailed the stock market for the past 10 years.
“The (10-year) returns for the venture capital industry haven’t been stellar,” he said. “(The returns to Georgia) could be 80 percent of zero.”
And Hochberg, the Northwestern professor, said Georgia’s plans could be too restrictive. By requiring every dollar to be spent in Georgia companies, it might whittle down the number of venture capital funds to choose from, as many like to add geographic diversity to their investments.
Supporters of the new initiative say Georgia needs to take that risk. A state study found more than two dozen high-growth companies seeking capital left the state and took high-paying jobs with them in just the past few years. There are undoubtedly many more, they say.
Venture capital investing peaked in Georgia in 2000 at more than $2 billion during the tech bubble. It was about $262 million last year.
Georgia’s off to a better start at $322.7 million in the first half of 2013, according to data from the National Venture Capital Association. But Georgia still accounted for only about 2.5 percent of the U.S. total so far this year, and around 1 percent the past two years.
Tino Mantella, president of the Technology Association of Georgia, said venture funding in the earliest stage companies plummeted after the tech bubble burst. Georgia has a ripe community of health care IT, financial technology, information security and mobility companies deserving of support. The key, he said, will be picking a strong manager of Georgia’s fund to pick the right funds.
Georgia’s investment in venture capital will take time to pay off, investment funds usually run for 10 to 12 years, but the state’s initial investment could create a self-replenishing fund that cultivates companies for years, supporters say.
“It will take time,” Cagle said. “Doing nothing is not an option. We already have proven what happens when you don’t do anything.”
WHAT IS VENTURE CAPITAL?
Investment in startup companies seen as having high growth potential. Venture firms, in addition to taking equity in the company, also often provide key managerial or operational expertise to fledgling firms. These new companies usually can’t issue debt to finance their operations because of a lack of operational history.
WHAT IS INVEST GEORGIA?
A state-sponsored venture capital fund that could grow to $100 million over five years that would be managed by a professional administrator with the oversight of a state-appointed board. The fund would invest in funds that would in turn invest in Georgia startups, with 80 percent of the profits and the principal restocking the fund for future investments.