The State of Colorado is restructuring its subsidized venture capital initiative, and will soon be utilizing professional fund managers to deploy investments in seed level and early stage companies.
The state had a previous structure in place, called the CAPCO program, which was complicated and expensive to operate. Under the former program, the state provided premium tax credits to insurers, and insurers in turn provided cash to qualified for-profit entities (called “Certified Capital Companies”). These companies must have been in the business of providing venture capital to other operating companies. Essentially, it was a subsidy arrangement. A new investment fund could be formed, and regardless of the money they raised from upper-tier institutions, could supplement pools with the insurer’s “free” funds – insurers often invest small portions of their portfolios in venture capital anyway. The original arrangement provided for up to $200 million in premium tax credits, and was later adjusted down to $100 million when funds were redirected to other programs.
Under the new arrangement, the Colorado Venture Capital Authority (Colorado’s first state backed venture capital fund), will be leveraging the services of High Country Ventures LLC (a unit of Tango Colorado LP – started by Boston Market founder Scott Beck). The new fund will push half of the CAPCO tax credits to High Country, and High Country will initially provide up to $25 million to start-up and early stage businesses.
There are a few caveats. First, roughly half the funds will be dispersed in economically disadvantages rural and urban zones. Second, the investment philosophy will follow parent company Tango’s traditional lines – concentration will be in the life sciences, information technology, and retail sectors.
While I do not know the details regarding the fund manager’s carry, fees, and expense reimbursements, the deal was subject to a competitive bidding process. And with pressure over cost surrounding the previous CAPCO arrangement, including criticism from Governor Bill Owen, it is likely the arrangement lacks of serious padding. With a single professional firm now the focus, this new fund should be able to make prudent investments in Colorado businesses, without costing taxpayers an arm and a leg. The real issue as I see it is timing and need.
Venture capital is already bloated, with a substantial amount of funds sitting on the fence and an environment that seems more suitable for bootstraps. Will the money actually get used by firms poised for success, or does it become charity? Furthermore, part of the enticement for using venture capital is getting connections to exit strategies (i.e. bankers for IPOs). I am not sure how that might work here, and/or who will reap the benefits.