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HOT ISSUE
Venture capital proposal
could pay off for state
By
Andy Brack
SC Statehouse Report
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MARCH 23, 2003 - - Any angler will tell you the way to catch big
fish is to have the right bait.
Now years after a national high-tech boom fueled by venture capital,
the state is poised to catch up by creating a $100 million venture
capital fund for investment in potentially lucrative, but risky
start-up companies.
For about a year, SC Sen. Jim Ritchie (R-Spartanburg) has been
working on legislation to create the fund as an engine to help generate
high-paying jobs and cut a wage gap in South Carolina. In the 2002
State of the State address, former Gov. Jim Hodges called for a
venture capital pool to help new technology businesses develop and
grow.
"By investing in knowledge-based businesses, we'll develop
broad applications that will create more jobs for people in manufacturing,
distribution and other sectors," Ritchie said.
On Wednesday, every state senator signed on to Ritchie's bill,
which proposes using state tax credits as guarantees to encourage
banks and financial institutions to pool private money into the
state fund. Use of tax credits puts state tax coffers indirectly
at risk, but only if investments in startup projects don't pan out
after as much as 10 years.
The bill calls for a seven-member board appointed by the Senate,
House and governor to administer the fund by doling out dollars
to professional venture capital firms, which will make investment
decisions in startup companies. To qualify for money, venture capital
firms will have to put up at least three times the amount of money
offered by the state, which is capped at $5 million for any single
investment.
The bill also calls for investors to agree to spend the state's
portion in South Carolina-based companies, a caveat that could make
the investment less attractive, according to a 2001 report by the
Southern Governors' Association.
"Fund managers often find their hands tied to rules restricting
the placement of public funds to in-state opportunities, which may
be few and far between, that may compromise the return on investment
to the investors, including the state," according to the report
on spurring the New Economy in the South.
The report also encouraged states to review instate investment
restrictions to allow employee pension funds to be used partially
for venture capital purposes. South Carolina, for example, does
not allow pension funds to be invested in venture funds, but it
does make investments in out-of-state public equities.
"It would make better sense to require state pension fund
investments into the VC funds of the host state, thereby advancing
the presence of venture capital for the benefit of the people whose
salaries generate the pension fund," the report noted.
Ritchie's proposal to create a state-backed venture capital fund
begs the question about whether South Carolina is too late to achieve
big successes through it. Last year, for example, venture capital
accounted for more than $21 billion in U.S. investment. Only $4
million went to South Carolina, according to published reports.
But Ritchie is convinced the market and ideas in South Carolina
exist to make the fund viable and a success, particularly because
of the state's expertise in several clusters of expertise - - biotech,
hydrogen and automotive industries.
"The market is here in South Carolina, but there haven't been
the resources to meet the demand," he said.
One thing is for sure. If South Carolina doesn't at least try to
attract more investment through something like a state-backed venture
capital fund, it won't get much at all.
In other words, you can't drop a baitless hook in the water and
expect to catch anything. First, you've got to bait the hook.
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