By Milt Capps
Published Friday, January 15, 2010 10:28 am
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A Chattanooga executive says there's probably more demand out there for the TNInvestco tax-credit allocations that are funding new Tennessee investment funds.
The state's new TNInvestco capital-formation initiative recently generated a net $85 million for six new venture-capital funds, including five funds based in the Nashville area. The capital was produced by leveraging $120 million in state premium-tax credit allocations.
Based on VNC interviews with State and TNinvestco executives in recent weeks, it seems likely that investments in one or
more TNInvestco portfolio companies will be announced during the current session of the General Assembly.
A year ago, lobbyists for out-of-state private firms hoping to lead a Tennessee public capital-formation initiative obtained initial legislative support for what mutated into TNInvestco. Gov. Phil Bredesen signed the bill in June, after dispatching Economic Development Commissioner Matt Kisber and Revenue Commissioner Reagan Farr to see if they could improve on the legislation, which threatened to become mired in controversy.
Andy Stockett, managing partner of FourBridges Capital, which runs a consortium designed to support firms bidding for TNInvestco allocations, told VNC Tuesday that prior to the recent closing of the inaugural round of TNInvestco investment, his firm contacted "more than 90" insurance companies about their possible participation.
Stockett indicated some of those companies whose executives wanted to invest with TNInvestco funds found themselves crowded-out, and, as Stockett put it, "did not get to participate in funding the six winners."
"We suspect," he added, "there is untapped market demand for TNInvestco tax credits if the alternate candidates should receive allocations."
Asked his opinion by VNC this morning during a local business breakfast meeting, Solidus Co. Partner Vic Gatto (left) said he, too, believes there is "strong demand" still unmet for TNInvestco funding by both insurance companies and entrepreneurs.
State TNInvestco officials, legislators and others have indicated they'll pursue additional TNInvestco capital-formation authority after this week's special legislative session on education ends.
Priority for any additional funds seems likely to fall to two "alternate" TNInvestco companies that were not among winners announced Nov. 5, but which have gained the support of Bredesen Cabinet officials.
Two additional funds that finished out of the money have apparently also attracted some support for funding, which would require – based on the current gameplan – legislative approval for at least $80 million in additional credit allocations. If all those petitioners won funding, ten new venture funds would have been created in Tennessee in less than a year.
Stockett indicated that winning participation in the unprecedented TNInvestco program required surmounting some hurdles.
Stockett explained that insurers' caution about joining the unprecedented TNInvestco program was apparently satisfied as
prospective investors came to "understand the unique features and benefits of the TNInvestco program (especially relative to CAPCO programs), and once certain tax and admissibility issues were uncovered and addressed..." At that point, he said, "the program seemed to be received favorably."
FourBridges' contacts with dozens of insurers may have led to investments in TNInvestco funds that aren't members of the TNInvestco Consortium.
FourBridges succeeded in securing a commitment for funding Memphis-based Innova Fund LP, one of the six winners. Beyond that, Stockett said, "Some of the insurance companies with whom we held significant discussions did eventually participate in funding the other five winning applicants, though their agreement was not through FourBridges."
FourBridges characterization of its experience in helping to broker the TNInvestco program suggests that one or more middlemen helping the newly formed TNInvestco funds secure insurance-industry commitments may indeed have been crucial to the programs initial success. Earlier, State officials running TNInvestco had gone to some lengths to ensure certified TNInvestco companies they did not need to work through any brokers, including the consortium managed by FourBridges.
Over at Innova Fund, Innova president Ken Woody (left), who is also a vice president of Memphis Bioworks Foundation, recently told VNC that while he would not discuss the terms of the transaction that funded his new organization, he would say "I can state that we are pleased with the terms of our transaction and believe the state did a great job of managing this process."
Each new TNInvestco fund started life with authorization to sell to insurance companies up to $20 million in premium-tax credit allocations each. As expected, after negotiations, the aggregate yield was $85 million, or an average of a little more than the $14 million minimum yield for each fund required by state law enacted just last June. By some estimates, that $85 million fund could translate into 60 or more investments by the new TNInvestco funds, within roughly the next four years.
The winning TNInvestco funds, not surprisingly, have been bullish on the odds for their success in picking investments that will help transform the Tennessee economy – potential high-growth seed- and early-stage companies that will probably possess important intellectual property, disruptive business models or other strategic advantages in proven markets.
For example, Jim Phillips (left) of XMi told VNC his fund "exceeded the minimum [insurance-industry participation] required by a healthy margin."
Phillips added, "No surprise, we already have a great deal of momentum in terms of deal flow, and we will continue to exercise a highly disciplined approach to investing behind transformational Tennessee companies that have the greatest chance of generating many high paying jobs and advancing the goals and mission of the TNInvestco program."
Phillips also confirmed that XMi is considering ways to get Tennessee corporations to participate somehow in advancing new ventures, perhaps by adopting what XMI Founder Mike Shmerling has sometimes referred to as an "Idea 67" strategy, in which companies team with venture funds, MBA students and others to launch ventures that may have been aging on a large corporation's to-do list, but which are unlikely to see the light of day, without outside impetus.
Also responding to a query for this story, Tennessee Community Ventures Fund (TCVF) chief Eric Satz (at left) told VNC, in part, "TNCV will continue executing the same investment strategy that has been successful for its partners to date by capitalizing on “ground floor” opportunities with companies developing visionary new products and services and category defining and disruptive technologies across industry sectors, a few examples of which include: American Made, Currenex, Mapquest and Zappos.
Satz said TNCV investment managers "have invested across industry sectors, including technology development, e-commerce, digital media, manufacturing, advanced materials, specialty food products, ethnic products and services, and business and retail services. TNCV will pay particular attention to leading edge technology enabled products and services that we believe will ultimately improve or transform their industries."
Satz further explained, "TNCV will always be alert for special situations that our experience tells us will result in the kinds of returns we seek, usually driven by our attraction to a particular factor or circumstance – an entrepreneur known to us, a unique market, a unique technology or the existence of circumstances that would cause many investors not to commit. These opportunities may or may not be technology related."
The FourBridges-led Consortium served seven firms, only one of which – Innova – has thus far won TNInvestco funding; Stockett this morning listed his seven members in this manner:
- Innova Fund II (Ken Woody) - [a TNInvestco winner-Ed.]
- Memphis Biomed Ventures (Gary Stephenson/MB Ventures)
- Solidus-TNInvestco LLC (Solidus)
- Southern Appalachian TNInvestco Management Company LLC (Grady Vanderhoofen/ Meritas)
- TCB Early Stage-B, LLC (Addison Capital/Andrew Forsdick)
- Tennessee Angel Fund (Sid Chambless/NCN and other partners)
- Pointer Capital Partners Reural TNInvestco Fund, LLC (Stuart Brunson)
Stockett made clear FourBridges would welcome more TNInvestco assignments. Said he, "In the event that additional allocations are available through expansion of the program, we feel our work to date could benefit the added firms and in turn the State of Tennessee by conducting an efficient, competitive process." ♦