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State seeking venture capitalists to fund cluster growth
By Dan McCue
Staff Writer
The South Carolina Venture Capital Authority has a readily understandable goal for the remainder of the year: identify promising potential investors with “wallets full of money” to help fire the state’s various economic engines.
In order to do that, the seven-member authority board has solicited a request for proposals to identify qualified professional investors and top-rated investment managers to participate in the state’s new venture capital program.
The request for proposals mimics a traditional due diligence questionnaire commonly found in the institutional investment arena.
“Although I’m obviously speaking colloquially when I talk about wallets full of money, the plain truth of the matter is we want venture capital funds to take the lead on investment in new and emerging businesses in the state,” said Ian M. Forbes-Jones, the authority’s venture capital development manager.
Created by the passage of the Venture Capital Investment Act in 2005, the authority consists of a board of governmental appointees from all parts of the state. The Governor appoints three members; the speaker of the House, Senate pro tem, chairman of Senate Finance Committee and chairman of the House Ways and Means Committee each appoint one.
Its power stems from its access to $50 million in South Carolina tax credits, which will serve as collateral for private institutional lenders. The law requires that any investments stemming from the program be made in businesses within the state.
No strings attached?
Forbes-Jones joined the authority’s staff in February and spent the next several months networking heavily with the private equity community to get a read on what the managers of venture capital funds thought about participating in a program like the one adopted here.
“South Carolina wasn’t the first state to establish a program, and it quickly became evident in my conversations with fund managers that they cite stipulations and in-state investment restrictions as being very intrusive,” he said.
Because historically strong funds don’t need to raise capital that comes with strings attached, they tended to opt out of such programs, Forbes-Jones said.
Instead of simply promoting the availability of collateral, he decided to promote the activity of the state’s burgeoning industry clusters.
“The state has a lot to offer that’s cutting edge—automotive in the Upstate, alternative fuels in the Midlands and certainly defense, aerospace and medical devices coming out of the Lowcountry—so we decided to market our program in terms of the potential deal flow it offered top-tier funds in the state,” he said.
Encouraged by the response to the altered marketing of the tax-credit program, Forbes-Jones and other authority staffers designed the due diligence questionnaire that is the basis of the current RFP.
“It asks about their experience in private equity, their experience in creating deal flow and experience in our existing industries,” Forbes-Jones said. “For instance, if you’re a venture capitalist and want to focus on biosciences, we want to know what you know about the industry, the really nitty-gritty things. Explain to us that you have what it takes to be a private equity investor in that arena.”
Fifty funds had responded to the authority’s RFP by mid-July, and the requests at that time were continuing to come in at a healthy clip, Forbes-Jones said. The deadline for responses to the RFP is Aug. 8.
The funds with the winning proposals will be asked to make presentations to the full authority board in September and October.
Job growth, patents gauge success
“In an ideal world, we are hoping to get investors selected with capital ready to be drawn down by the end of the year,” Forbes-Jones said. “By December, we hope to have venture capital funds in the state, with that aforementioned money in hand, looking for young companies to invest in. We already have investment banks who’ve said they’ll change the entire $50 million into capital for us to dispense through the program.”
The lender, whom Forbes-Jones declined to identify, is a large lending institution that is willing to take possession of the tax credits—actually credits on the state’s bank tax—and exchange them for real dollars. As the investments made with those funds return a profit, the money is paid back to the banks before the tax credit is taken.
Since the money goes directly from the bank to the investor, the program removes public officials from the private investment equation and, in theory, assures that no conflicts of interest will arise.
Forbes-Jones said the goals of the program are consistent with the overall economic development goals of the state: to increase economic development, add jobs, increase the per capita income of the state’s residents and bolster businesses that provide services to capitalized industries.
“Of course, that’s a very difficult metric to get your hands around, so what we’re looking at in terms of measuring the return on investment is a couple of things in tandem: jobs created, an obvious sign of company growth and profitability, and patents filed,” Forbes-Jones said.
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
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