The Illinois Venture Capital Association strongly supports enactment of legislation authorizing a second Treasurer’s Technology Development Fund with the potential for $150-$200 million in new venture capital investments in Illinois
Issue Summary
TDA I – A Model of Successful and Prudent State Investment in Venture Capital
Recognizing the need for increased capital to the high technology and venture capital sectors in Illinois, IVCA actively lobbied for legislation creating TDA I in 2003. This legislation allowed the State Treasurer to diversify the Treasurer’s investment portfolio by authorizing up to 1% of that portfolio to be invested with Illinois-based venture capital/private equity funds focused on technology development. Several IVCA members serve on the Advisory Board to TDA I and several other IVCA member firms have received funding (Advisory Board members are prohibited from receiving TDA funding).
This innovative investment program serves as a model for successful and prudent state investment in venture capital. It required no new public funding nor does it pose any future spending liability. Both the current and former Treasurer have maintained good governance criteria for the Fund and are assisted by an outstanding, professional Advisory Board comprised of leading members of the venture capital/private equity community and academics. Additionally, it is well served by an experienced, local investment advisor.
The Fund is basically fully committed (approximately $75 M). As of March 30, 2009, TDA I has made commitments to 16 funds, all of which are located in Illinois. To date, these funds have invested in 110 companies, about 25 % of which are headquartered in Illinois. These companies compete in a wide range of information technologies, life sciences and other technologies that are so critical to growing the technology sector in the State.
TDA II – Meeting the Need for New Venture Capital
To maintain the momentum of TDA I, the Treasurer has proposed new authorizing legislation to provide a new larger pool of private equity/venture capital investment dollars by:
- Allowing up to 2% of the Treasurer’s investment portfolio to be invested in venture capital funds (up from the current 1%). Although the Treasurer’s investment portfolio size can be expected to change over the next several years, it is reasonable to assume that an additional 2% of the portfolio would equate to roughly $100 - $150 million in the near term; and
- Establishing a new public/ private partnership with the Treasurer’s capital being invested side-by-side with capital from a number of private institutional sources—in particular—corporations that have a logical interest in creating a robust venture capital and high technology sector in the State.
In total, between the Treasurer’s capital and private capital, it is expected that TDA II will be between $150 million and $200 million.
TDA II would also strengthen the effectiveness of the program by: (1) increasing the percentage of TDA investment in any one fund to 15% (from the current 10%) which should help cultivate smaller Illinois VC funds that tend to concentrate their investments in Illinois (in effect, becoming the anchor investor that provides the base to attract other investors); (2) providing more flexibility regarding the amount of money that may be invested in any one year (TDA I can only invest 1/3 of available funds), better capitalizing on good investment opportunities as they arise; and (3) expanding the pool of quality investments by allowing a limited number of investments in non-Illinois-based funds but with a track record of investing in Illinois-based companies.
The Treasurer’s Office, Advisory Board, and a Due Diligence Advisor would continue to direct the affairs and investment decisions of the funds.
The need for additional early stage venture capital and private sector involvement
The venture capital/private equity community in Illinois has long expressed its concern about the paucity of local corporate venture capital investing. Corporate support of new company formation through investing in local venture capital funds one of the key variables in a building strong and growing private equity/venture capital industry in any region, leading to the creation of new companies, increased employment and economic growth. In many other states with robust venture capital investment, most notably California, corporate venture capital investing has been and continues to be strong. In comparison to these states, Illinois corporate investment in venture capital has been low.
IVCA believes that the successful implementation of TDA I and the public/private partnership program of TDA II will help spur local corporate venture capital investment. At a minimum, the partnership can help reduce some of the risk and due diligence work required for successful venture capital investing by corporations by providing them with a successful investing infrastructure and good governance structure already in place under TDA I.
Additionally TDA II can help address the growing concern about significantly diminished early stage capital available to local venture capital funds that invest primarily in the Midwest (as opposed to predominantly on the coasts). One local investor has said that she has been in this business for 23 years and has never seen the supply of local venture capital money so tight. She cites a number of reasons for this:
- Because of the size of investments, the larger local fund of funds have been trending towards bi-coastal investment.
- State and local pension funds tend to split between those that will not do venture capital investing at all and those that put together such large blocks of capital to invest that they can effectively only invest in large (coastal) funds or fund-of-funds.
- Many local private equity/venture capital firms that used to be active in venture capital investing are now focusing only on buyout funds, often where they can invest between $20 and $100 million.
- There is a clear lack of state programs to support early stage venture investing as compared to those in surrounding states (most notably Indiana, Ohio and Michigan and Wisconsin).
She notes that the largest venture capital fund raised in the Midwest last year was not in Chicago but in Madison, Wisconsin and further adds that this lack of local institutional support for local venture capital funds does not bode well for a robust local VC community given that without local support it becomes almost impossible for these venture capital funds to go out nationally to raise additional funds.
The facts support this concern. The size of the venture capital market in Illinois lags behind many other states. Perhaps more telling is a comparison of the average annual growth rate over the past several years. Between 2003 and 2006, venture investments in Illinois grew about 7.7% per year versus 10.6% for the United States. Illinois also lags behind many other states in venture capital investing when measured as a percentage of state GDP. For example, in 2006 Illinois’ GDP was more than $100 million greater than North Carolina’s or Maryland’s, yet the dollar value of venture investments in both these states were greater than that invested in Illinois.
Enactment of the TDA II proposal will help level the playing field for prudent state support for venture capital investing in Illinois as well as provide additional much needed early stage venture capital to local investors.
