By the end of 2016, the North Carolina Treasurer's office plans to have its own VC fund pouring $40 million over the next five years into companies headquartered or with large operations in North Carolina.
Its purpose—to provide competitive returns back to the state while supporting further development of North Carolina's entrepreneurial activities and funding sources.
It's the latest in a series of initiatives by the state to better support innovation and entrepreneurship. The existing Innovation Funds have invested North Carolina Retirement System pension dollars in venture capital funds (like BCVP) and companies with operations or headquarters in the state. Fund one did 12 deals with a 21 percent rate of return over six years, and fund two launched last year with $250 million to invest. One company and a fund are already in the portfolio.
The Legislature recently re-started a co-investment program in federal SBIR and STTR grants too. And the NC Biotech Center has $13.6 million in state money to invest in local companies.
The new fund was created, Cowell told the crowd, because her office kept hearing about a need for more early stage capital. That will be the focus of the new fund. Besides getting good returns for the state, she hopes to grow more businesses and create more jobs.
It isn't unique for states to make venture capital investments. According to a report for the U.S. Department of Treasury in 2013, federal State Small Business Credit Initiative provided funding to 30 state venture capital programs in 2011, funds which were projected to help spur $4 billion of private capital investments between 2012 and 2016. That's about 8 percent of total venture capital funding during the same period.
Most of the funds were created to help fill a funding gap that existed after the last recession, when venture capital funding declined 32 percent from 2006 to 2011 and was still mostly concentrated in California and Massachusetts. There was also recognition that new companies, and especially venture-backed ones, cause large percentages of new job and wealth creation.
That continues to be true, helping to explain the boom year of venture capital funding both nationally and in the state in 2015. It's clear North Carolina wants a piece of all that activity.
Vetting fund managers
Before you wonder what role a government could play in your company's growth, know that there are some tough guidelines for the prospective fund manager to ensure they are qualified and capable of vetting deals and assisting portfolio companies. Existing state Innovation Funds are managed by GCM Grosvenor
, one of the world's largest asset management firms with experience managing public investment funds in several states.
According to an RFP issued in December and due January 22, any manager must have at least $50 million in total assets under management or capital commitments worth as much over the last decade, along with at least eight years of experience managing either venture capital, growth capital, private equity, co-investment or debt funds. Three years of live returns are also required. There's also consideration to the number of investment professionals and back office staff, the qualifications of the team and length of time in partnership as well as investment philosophy, due diligence and research strategy and a plan for how to build the program.
They must project achievable returns and share exit strategies, and have experience implementing those strategies. The entity also must explain how it will collaborate with local governments, universities, capital sources and research institutions, and give examples of how that's happened so far. Also, what resources it provides besides funding.
An application requires managers share contact information for both existing and lost clients. The winning manager will be chosen by a committee of representatives appointed by the Governor, Treasurer, Speaker of the House and President Pro Tempore of the Senate. The firm will begin in the third quarter, Cowell says.
Fund details, according to the RFP
The state expects the prospective manager to help determine whether the fund will have additional limited partners and whether it will co-invest or syndicate with other funds to "multiply" the effect of a VCMF investment. Regardless, the fund is expected to make one-time investments in companies or portfolio funds and its focus will be in growth-oriented capital investments into medical, life science and technology companies, as well as early stage deals in technology transfers from state universities.
Funds will be invested over five years. No more than a third of the funds may be committed in a single year. And less than 35 percent of the fund can go to businesses outside medical, life science and technology. The fund is expected to close in about a decade.
An interesting provision involves protections for portfolio companies under the state's Public Records Act. According to the RFP, companies are protected only if the information provided is not known publicly and if the following applies: documents satisfy the state's definition of a trade secret, involve the property of a private person or are designated as confidential when disclosed to the fund.
Still, the Treasurer's office hopes to be as public about its investments as possible. The RFP states:
"We understand that, in certain circumstances, making information held by the State about a VCMF portfolio company public may interfere with portfolio company operation, may allow others to "front-run" potential investments and raise the price, or could cause potential partners (such as sponsors for a direct investment) to be less interested in working with the VCMF. However, in many circumstances making information about VCMF investments public would have little or no impact on operations."
It will be interesting to see how that plays out in practice.
What we will definitely know in the months to come is a more clear investment strategy of the fund, as well as the state's capital commitment, contributions and management fees that will be paid to the chosen firm. Over time, the state will share the aggregate performance of the fund as well as any incentive payments or compensation to managers, carried interest, distributions, gains and losses as well as the market value of the state's interest.
The big takeaway for companies seeking investment, is that by year's end, you'll have another local VC to add to your pitch list.