TechMaine, other Industry Groups and many individuals involved in the formation of new, high growth firms, support the proposed bill in order to strengthen Maine’s high growth economy.
Key Provisions of investment by the Fund of Funds:
The Maine fund of funds will invest in high quality, professionally managed venture firms who
have made a commitment to consider equity investments in businesses located within the state
and have committed to maintain a physical presence within the state. To help ensure maximum
investment in Maine ventures, the fund will give priority to investments that have demonstrated a commitment to the state as evidenced by the investments they have made in Maine-based entities and the number of office locations they have established in the state or the correspondent relationships they have established with Maine-based venture funds. In order to expand the number of investment themes available to Maine enterprises, existing Maine-based venture firms who receive these funds will demonstrate their commitment to the Maine community by adding additional "themes" (new areas of investment expertise such as consumer, mobile/wireless, broadband, semiconductor, photonics etc) to their investment capabilities, as demonstrated by the addition of one or more new partners or similar increase of skills.
Maine’s Opportunity:
To help strengthen and reignite Maine's high growth economy by stimulating the availability of venture capital and the range of “investment themes” to increase the number of young companies that will grow into large, vibrant businesses headquartered in Maine that will create jobs and help to diversify the state’s economic base.
Maine’s Challenge:
Maine’s young companies have seen available venture capital disappear, falling from a high of $27 million invested in Maine firms in the first quarter of 2001, to being labeled in late 2006 as one of the five worst states in the country for technology start-ups based on a report by PricewaterhouseCoopers.
Creating a Maine Fund of Funds:
This legislation leverages future “contingent tax credits” in order to attract investors in a Maine “fund of funds” who seek “money market” levels of return, such as power companies, banks, and other conservative investors. The professionally managed Fund of Funds would invest in a variety of experienced venture capital funds committed to working with and investing in Maine high growth ventures.
The 10-year average return for Venture Capital is 17.9% annually, and over the past 20 years is 16.7%. Investors in the “fund of funds” will expect returns in the 6% range, providing an expectation that the fund of funds will return sufficient funds to cover returns to investors, with the possibility of returning additional funds for re-investment or use by the State. The diversification among multiple venture firms, which invest in multiple enterprises, combined with professional management provides confidence that the Maine fund of funds should be able to achieve levels of return in excess of that promised to investors, while significantly increasing the number of venture firms active in the state and the amount of venture dollars available for investment in Maine firms.
Worst Case Draw on Contingent Tax Credits:
Only if all of the venture funds selected by the
Maine Fund of Funds returned a collective return less than the required return, would the
contingent tax credits be invoked to make up the difference. This legislation restricts the amount of credits that may be claimed in any year.
Other States Are Proactively Encouraging Venture Capital Availability for Economic
Development:
Maine entrepreneurs do not play on a level field – other states actively encourage
the development of venture capital, including Oklahoma, Iowa, Arkansas, Ohio, Maryland, and
New Mexico with non-pension state funds or fund of funds incentives. New Jersey, Florida and
California’s pension funds, CalPers provides significant support of the venture community.
Need and Opportunity to Encourage Availability of Venture Capital:
In 1999, Arizona commissioned a study of the impact of venture capital on the economy. “The
results of The 1999 Arizona Venture Capital Impact Study1 indicate that venture capital
investment activity results in significant economic benefits within the State of Arizona.
Specifically, the study indicates that as a result of the $122.2 million of venture capital invested in Arizona during 1997…The estimated company revenues generated from this investment activity will be approximately $800 million total through 2002. This economic impact
reflects a $6.54 revenue return over a five-year period for every $1.00 of venture capital
investment...”
In particular, “…for every $1.00 of venture capital invested in Arizona businesses, there is
estimated to be up to $4.45 of revenue generated directly by these venture-financed companies.
An additional $2.09 is estimated to be generated indirectly by other Arizona companies (e.g.,
Arizona based suppliers to the venture-financed companies)…over a five-year period.”
At the same time, the report finds that, “approximately 15 new permanent positions are
directly created in entrepreneurial companies for every $1 million dollars of venture capital
invested. An additional 12.6 jobs are indirectly created in other Arizona businesses. The
combined effect of a $1 million dollar investment constitutes 27.6 new jobs at the end of fiveyears.”
Oklahoma Offers an Example of Success:
Oklahoma was the first state to implement a Fund of Funds program and has served as a model
for this proposal with the establishment of the Oklahoma Capital Investment Board. In the
aggregate, the Board’s portfolio has attracted private equity investments in Oklahoma firms in the ratio of $3.3 to every $1 contributed by the Board. OCIB has, as of December 2002, invested $41.3 million in 11 venture firms now active in the state of Oklahoma.
