TNInvestco, the State of Tennessee's unprecedented capital-formation program, is perhaps mostly widely appreciated for the buzz it created for the state upon its debut in 2009.

Those most involved in the state's surging entrepreneurial sector also recognize that the program has galvanized startups, attracted investors and contributed to a newfound sense of confidence among innovators in many quarters, from research university campuses, to co-working and garage spaces statewide.

Yet, uncertainties regarding the program's funding and, for some, its legitimacy are also widespread.

Now, based on numerous interviews for this story, it is clear there is also deep uncertainty regarding whether the issue of replenishing the TNInvestco program will get any serious discussion before early 2016, seven years after its founding.

With parties pro and con calling for definitive data, and with the TNInvestco funds' annual reports for their fifth year of activity (2014) not due for release til late 2015, it seems likely that legislative review of the program's value might not occur before the General Assembly convenes in Spring 2016. (Background: 200+ TNInvestco mentions here.)

Though no one interviewed by VNC for this story flatly predicted catastrophe if the debate remains on the backburner that long, the mix of commentary leaves plenty of room for doubt about the timeliness and methodology of any future review.

Sen. Doug Overbey

State Sen. Doug Overbey (R-2-Maryville), who was one of the chief sponsors of the original TNInvestco legislation in 2009, told VNC Oct. 10 that, if warranted, "those conversations can take place at any time."

"On balance, it's been an extremely successful program," said the senator. "If there's still a market for it," he said, the state should not "automatically rule-out a second round," but should "take another look at it." The TNInvestco model calls for selling insurance premium tax credits to the insurance carriers that are obliged to pay such taxes in Tennessee.

Overbey said he would not argue that TNInvestco is "perfect," but he said he believes the program received "unjustified criticism" that may have taken root mainly during transition between the Bredesen and Haslam Administrations. He said he understands startups funded under the program are reaching "trigger points" and calling for capital.

Regarding the 2009 initiative, Overbey noted that the discounted sale of TNInvestco tax credits was viewed by proponents as timely, partly because premium-tax collections had risen dramatically in the years prior to the TNInvestco proposal.

The state's insurance premium-tax collections totaled $797.2MM in FY2014, up nearly 83% from 2009, the year TNInvestco was enacted; and, up 36.5% from 2010, the first year of TNInvestco activity, according to data provided this week to VNC by the Tennessee Department of Commerce & Insurance.

Sen. Overbey said those who want to see consideration of another TNInvestco round should "have some conversation with the Governor and ECD Commissioner Hagerty, to make sure they would be committed" to exploring a second round, said Overbey. Then, said Overbey, a legislative proposal should be introduced, followed by hearings on the matter.

A second prominent 2009 TNInvestco advocate, State Rep. Charles Sargent (R-61), did not respond to a request for comment placed with his office. He is running without opposition in the November general election.

Tom Rogers

Despite the atmospherics, Tom Rogers, chairman of the board of Oak Ridge-based Tech2020, seemed to express cautious determination to resolve the matter constructively, when contacted for this story.

Said Rogers, "Regarding a TNInvestco 2.0, I hope that the State can find a way to encourage the creation of new sources of early stage capital in Tennessee. We've made so much progress in this area over the past decade, that while I recognize and understand the budget constraints we face in Tennessee, I think it's important to find a way to continue our momentum. I hope there's an opportunity for the State, perhaps through ECD or LaunchTN, to convene a group of public and private stakeholders to explore creative options in this arena.

Whomever calls that meeting may need a very large hall, with ample room for both skeptics and advocates.

Larry Coleman

Larry Coleman, the venture-capital investor whose firm was unsuccessful in its bid for a TNInvestco allotment (a net $14MM), was telegraphic his opinion on a TNInvestco 2.0.

Said Coleman this week, "Without full public disclosure of performance data, it would be silly and negligent."

Equally direct, when asked about TNInvestco 2.0, Vanderbilt University economist Luke Froeb, who is on the faculty of the Owen Graduate School of Management, said venture investment such as that discussed here should be left to the marketplace, without State involvement. He then pointed us, once again, to his earlier comments regarding what he has termed TNInvestco's "perverse incentives" for fund managers.

The original TNInvestco program garnered almost universal bipartisan support. Rep. Susan Lynn (R-Mount Juliet), however, was among those raising questions in 2009, as previously reported by VNC.

Today, Lynn told VNC, "My thinking is that this is a total misuse of taxpayer money." Tennesseans, she said, do not pay premium taxes "so that venture capitalists can risk the tax moneys." She added, "I would hope the whole program would go away."

Rep. Susan Lynn

Asked about any distinctions she might draw between TNInvestco and traditional economic-development incentives, Lynn said she does see a difference, in that she views traditional incentives as more likely related to infrastructural and related improvements that, while often first benefiting the recruited company, are also likely to benefit surrounding communities, with assets that "are not depletable" and "in contrast to risk money invested in a new startup."

Some observers suggest, in effect, that without the longer-term commitment of a second round -- TNInvestco 2.0 -- the program could be reduced to, at best, the status of a noble-but-isolated experiment, with its ten funds viewed as financial petri dishes, full of undernourished startup organisms, squirming under the watchful eyes of well-paid attendants.

At least one venture-savvy executive holds a view that some will find discouraging. He told VNC, in part, that he anticipates "a drop-off in early-stage financing in the Nashville area and in the state. [Everyone is] very excited about the state's movement [upward in MoneyTree early-stage financing rankings], but to me a lot of that movement comes from inflated or non-recurring numbers around the TNInvestco program, which has come-and-gone, in terms of its cash inflows into the state, and a few large deals which got funded. The State wants to move to the Top 10, but to me [Tennessee] will struggle to keep its Top 20 ranking... Another pain point will be what happens to all the [accelerator] deals and Angel-backed deals which don't make it.... We are in a honeymoon phase and key will be how does the region [which has not previously experienced such inevitable venture cycles] deal with the fallout from a lot of deals not working... Other regions have decades on us and have lived through cycles, before."

Sam Lynch

Further clarity may soon be brought to the discussion: LaunchTN says is working toward possibly submitting in 1Q15 a strategic plan that is likely to address capital-formation priorities and policy proposals.

In addition, Life Science Tennessee (LST) conducts its annual meeting and venture forum next week in Nashville. Several sources say the nonprofit association will issue fairly weighty comment on capital formation in the life-sciences sector and Tennessee, generally. LST declined comment on particulars in its pending report.

However, LST President Sam Lynch, responded to our query for this story, with comments that reflect LST's concern about the program's fate.

Lynch first set the stage, saying, "Tennessee is fortunate to have a vibrant life science industry contributing significantly to the state's economy by employing more than 41,000 citizens with an average salary of more than $75,000 a year. Successful growth of the life sciences in any region requires long-range planning and collaboration between governmental policymakers, academic research institutions and private industry. These stakeholders each play a major role in developing technology from the first steps of development in the lab to bedside or home front.

Lynch added, with portent: "The continued growth of the industry in Tennessee however has several challenges, of which one of the most important is access to capital to grow the small, emerging life science companies that often serve as the engine of growth for the larger companies. Both the TNInvestco and INCITE programs have positively impacted the formation and growth of emerging companies in Tennessee. The full allocation of these programs, and the next steps to maintain the momentum they have established, should therefore be a significant concern to everyone seeking to create high-quality jobs in Tennessee.

"Given the potential for the winding down of TNInvestco and INCITE funding to negatively impact the growth of all enterprises engaged in life science research, development and commercialization," Lynch said, the association has conducted "extensive research, including surveying of best practices by other states in the Southeast and dialogue with stakeholders throughout the state, to develop a plan that assures sustainable growth of the life science enterprises in Tennessee. We anticipate publishing this plan, which we believe will make the greatest contribution to the growth of the life science economy in Tennessee, within the coming weeks. We look forward to the opportunity to discuss its recommendations with Tennessee policymakers and other interested parties at that time."

VNC notes that, with equal caution, Lynch's predecessor as LST chairman, Joe Cook Jr., addressed related matters in 2011, as previously reported by VNC.

Dennis Bottorff

Caution indeed abounds: Dennis Bottorff, co-founder and managing general partner of Council Capital, which has a TNInvestco affiliate, told VNC, "I think it is very beneficial to have had this pool of capital available for investment. I think it has helped to stimulate company formations and growth. However, it is still early to assess the financial returns to the state. As the program becomes more mature we will need to assess it based on the jobs it created , the costs to the state of each of those jobs( if any) and the additional capital that was attracted as a result of having these funds available."

Consistent with years of previous ECD statements on the subject, Laura Elkins, spokesperson for ECD's Hagerty, told VNC, "The TNInvestco program was created during a time of enormous economic stress in an effort to use all tools available to help jump start the state's economy. The department has repeatedly made its position clear that these investments need time to mature before we can fully answer the legislature's questions regarding the effectiveness of the program. Meanwhile, the INCITE fund has made a second source of capital available to further strengthen Tennessee's entrepreneurial ecosystem. The department will continue its dialogue with the venture community and the legislature within the context of the current budget environment."

Charlie Brock

With similar tone, LaunchTN CEO Charlie Brock, whose board is chaired by ECD's Hagerty, replied to a query in the matter: "We believe that the TNInvestco program filled an important gap that existed in the state's early stage investment landscape following the financial crisis. Since [TNInvestco] investments have not had adequate maturation periods, LaunchTN cannot comment for or against a second iteration of the program. However, we are encouraged by the significant amount of early-stage private capital that has occurred in the state over the past two years as well as the investments of the INCITE fund in TN-based companies. LaunchTN defers to the process in state government for a final assessment and the appropriate direction in which to take the TNInvestco program." [Added 17 Oct.: VNC research produced this April 2009 LaunchTN (TTDC) memo on its role in capital formation.]

Meanwhile, it should be noted that, with no obvious debt to TNInvestco, the State's traditional industry-recruitment efforts have thus far in 2014, alone, yielded nearly $3.1BN in capital investment and more than 21,000 new jobs, according to figures recently provided by ECD, which administers the TNInvestco program.

Likewise, ECD's INCITE Co-investment Fund, administered by LaunchTN, recently reported that since the program was created (using a U.S. Treasury grant), it has completed $21.6MM in matched investments, attracting nearly $61.2MM in co-investment, through 58 transactions involving 36 unique portfolio companies, a number of which previously received TNInvestco investments.

As of Dec. 31, 2013, after four years of in operation, the TNInvestco program funded by foregoing $200MM in state premium-tax revenue, had generated 1,605 jobs, according to ECD reports online. VNC notes that while TNInvestco funds have for some time been characterized as fully allocated, ECD has continued this month to post online additional notices of the funds' trailing investments.

Many of those interviewed for this story expressed concern about unrealistic pressure for short-term results and what some see as an antithetical jobs-creation criterion being applied to the program, from the outset.

Grady Vanderhoofven

Grady Vanderhoofven, co-founder of both Meritus Ventures and Southern Appalachian Fund, said, "It will be years before we know what dollars come back into state coffers, and we definitely should manage dollars. But, one thing that's obvious is the activity in the investment community: The number of people, the number of funds, the knowledge and sophistication of the investment community across the state has been dramatically elevated, and that's a tremendous benefit. Most of us are very aware that we have a rising tide, right now, in terms of the capacity of the investment industry in Tennessee, relative to what we had five or ten years ago.

"During the past five years," Vanderhoofven said, "there may be angst or broken eggs around, but making TNInvestco a one-shot deal is not really leveraging it as much as we could. With one round done, we have the opportunity now to take everthing we've learned -- from concept to implementation -- and feed that back into the decision-making process. There are a lot of ways to make it even more attractive for the state, keep incentives for fund managers and provided needed funding for these companies.

"One of the keys will be to prevent the discussion and the process from being politicized. The program may be less likely to be criticized if the selection of participating funds is made on the basis of recommendations from experts who are not in state government," said Vanderhoofven.

James Stover

James Stover, Ph.D., CEO of life-sciences startup Diagnovus, said, "I'm an advocate for a second round of TNInvestco. I believe that early- stage high-risk capital, including contributions from state entities, would be impactful when allocated and invested correctly."

"The program may need tweaking and adjustments, here and there. But, particularly in diagnostics and medical devices, TNInvestco's impact in the startup space has been a positive," said Stover.

"Particularly given the progress of the state's accelerators, and things like [Nashville Entrepreneur Center CEO Michael] Burcham and other leaders have done, it's had a huge beneficial effect and I'd like to see another round made."

As previously reported, since its founding in 2011, Diagnovus has raised about $2.3MM -- including multiple investments from TNInvestcos Limestone Fund and TriStar Technology Fund and their affiliates -- and its workforce is likely to pass the 20 milestone in 2015, up from 15 now, with breakever or better projected for next year.

One TNInvestco stakeholder, speaking on condition of anonymity, said, "Another TNInvestco round would be great and we would definitely apply. I think TNInvestco has done a really good job, as a program that is building a startup and innovation ecosystem in Tennessee, with direct investment and by helping to create more opportunities to raise additional capital, besides TNInvestco. The state's reputation for startups and our rankings as a place to start a business have been helped by this program. The [legislated] short-term emphasis on jobs is not helpful," he added, given that TNInvestco and most other economic-development initiatives are longer-term propositions.

Another TNInvestco stakeholder said, "A lot of folks keep talking about the need for continued access to capital in Tennessee. I think [TNInvestco] will prove-out to be a success. It has stimulated entrepreneurship throughout the state and attracted a lot of attention from outside the state... I'm skeptical the state will do another TNInvestco, but do see the clear value for additional follow-on capital for some of these great companies that are gaining momentum."

The fact that eight of the ten TNInvestco funds are located in Middle Tennessee, with two others in Memphis, inevitably left some residue in East Tennessee.

Eric Dobson

Eric Dobson, CEO of Knoxville-based Angel Capital Group, said that -- provided benefits of TNInvestco 2.0 flow equitably to all regions of the state -- he would "absolutely" support a second TNInvestco.

Unfortunately, Dobson said, any attempt to measure TNInvestco portfolios' ROI at this point would probably show the weak returns that are typical at the earliest stages. Funds "ripen in the four- to five-year timeframe," he said, with improved results more likely to show-up in the fourth to seventh years. The lack of meaningful ROI data, plus reports of the state's strained finances, mean "the timing now is terrible" to attempt an assessment of the program, said Dobson.

The startup lifecycle waits for no one: Dobson emphasized that the "big explosion of startup companies" triggered by TNInvestco, and by the creation of nine state-sponsored accelerators and other initiatives between 2010 and 2014, means that many startups are reaching critical junctures, and very much need additional capital. (Formation of the accelerators was a byproduct of Gov. Bill Haslam's Jobs4TN initiative, shepherded by ECD's Hagerty.)

Jeff Brown

It's not just Eastern Tennessee that would need more love from TNInvestco: Rural areas need greater consideration, too.

Jeff Brown, chief of the BizFoundry in Cookeville, says capital-formation and economic-development programs must be viewed as requiring 10 to 20 years to gain deep traction.

"It has always baffled us," Brown said, "that state, federal, and local governments are willing to invest [e.g.] $40 million in industrial parks that are then practically given away, along with five to 20-year tax incentive packages. The developments then take years to sell out, resulting in a very low ROI. Yet, the same people cannot understand why they do not get immediate and huge ROI with small businesses and entrepreneurs. I have no financial data to back this up, but I am willing to bet that the ROI on venture funding and entrepreneurs is much better than traditional industrial development."

"We all know [TNInvestco is] doing some good, but can we throw a number at it, right now, not really," Brown added.

Brown told VNC that he believes a second TNInvestco round should be considered to support thoroughly vetted startups and for follow-on capital for early-stage companies, helping them grow and possibly averting their relocation to states with stronger venture-capital communities.

However, Brown made clear, as a leader of a rural accelerator, he has greater need to be able to provide grants in the $5K to $20K range that can be used to examine and partly de-risk entrepreneurs' business concepts, rather subjecting everyone to months of accelerator-cohort training and pursuit of investment. Small grants go a long way for entrepreneurs living in lower-cost rural communities, he added.

TNInvestco can help keep local startups in Tennessee, but without small exploratory grants in rural areas, Tennessee will continue "losing the ones that never even get started." To avert that, Brown said, "we need to throw a lot more seeds and quit trying to decide which ones are going to live or die." He cited NetworkKansas as a possible model for a NetworkTennessee initiative.

It is very much worth noting that, whether or not it's out of an abundance of caution regarding the future of TNInvestco, INCITE, the state's regional accelerators and other actors, Tennesseans who have long plied the state's entrepreneurial waters have not been simply waiting on the outcome of the TNInvestco debate, but are exploring other innovative initiatives, over which they might have more control.

Under consideration are new privately driven funds, including one or more proof-of-concept (POC) funds to pick up where federal commercialization grants end. In addition, statewide funds that might target individual industry verticals -- Agriculture, Digital Media, Healthcare, Manufacturing, Automotive, Life Sciences and others -- are back on the drawing-boards, as they have periodically been since economic-development studies were conducted in the 2005-2012 timeframe, as well as earlier. Those initiatives are likely to surface gradually during the next six to nine months, as the State grapples further with the FY 2015-16 budgets.

Eric Cromwell

Former LaunchTN CEO Eric Cromwell, Nashville-based and now both an entrepreneur and a consultant on capital-formation issues for Maryland and other governments, told VNC that, whatever the outcome for TNInvestco, if a state government can afford to fund economic development efforts, then "it has to be investing in the innovation side of the economy."

Cromwell went on to say that TNInvestco could have been refined to produce greater long-term returns for Tennessee taxpayers; and, all parties should be reminded that "doing a one-off capital program is not a viable approach, particularly when there is a case to be made here for public investment in a best-practice follow-on capital program."

At the same time, he said, with or without another TNInvestco program, the state should also look at a wide range of options, perhaps including sponsoring the creation of a fund-of-funds program to build institutional investment capacity as other states have done like Utah, Pennsylvania and Maryland. Such a fund of funds could also be instrumental in recruiting institutional investors, family offices, high net-worth individuals and others who seek higher investment returns, said Cromwell, who partners in consulting with former LaunchTN VP Dan Schmisseur.

Cromwell continued, noting that while State and regional leaders in Tennessee can continue to improve Tennessee's reputation for entrepreneurship and as fertile ground for investable high-growth companies, to ensure the greatest actual returns from its efforts, the State should enlist "skilled investors in a fund-management relationship, much as is done by the state's retirement system."

Eric Matthews

Others elsewhere have come up with innovative solutions to similar knotty problems.

Eric Matthews is Co-founder and CEO of Memphis-based Start Co. and Seedhatchery, both closely aligned with Memphis Bioworks, the nonprofit that runs the state accelerator program in the Memphis area. Mathews addressed the matter, as follows:

Said Mathews, "TNInvestco was a catalyst for the growth of Statewide accelerator programs many of which are just now hitting their stride. The need for capital for maturing accelerator programs will only increase as their portfolios develop further, and more startups are produced. For the State of Tennessee to realize a long term return on investment from the prior program as well as the investment in acceleration via LaunchTN, a renewal of TNInvestco is likely wise.

Mathews then offered to document his point: "Looking to other states that have made such a commitment, the returns are pretty striking. The Third Frontier program in Ohio started by issuing $700 million in general obligation bonds. Ohio's return on investment has been considerable. In 2003 you wouldn't have found 15 VC funds in Ohio now there are more than double that (with 8 establishing offices from outside of Ohio). For each $1 placed into a startup company through the program an additional $4.76 was attracted to those companies. That's more than $4B for startups that resulted in 55,000 direct and indirect jobs, created by over 600 startups to rekindle Ohio's economy by investing in technology and innovation.

"For Start Co. specifically," he continued, "the TNInvestco program partners invested by our estimate approximately $1MM into our portfolio which as led to an additional $8.4MM in investments, and over 200 new jobs in Memphis in just 3 short years. And that's just Start Co. -- MB Ventures and Innova have made other placements to support job creation and economic growth in Tennessee. The TNInvestco investment has led to more economic opportunity for Memphis and beyond. TNInvestco 2.0 would support the State of Tennessee to go from good to great on entrepreneurship, said Mathews.

Memphis Bioworks Foundation President Steve Bares declined to comment. As previously reported, he is leading a very high-profile push to recruit $100MM in new funding for venture-development in the Memphis area. VNC