By Milt Capps Last Updated July 17 10:40 a.m.
Published Thursday, July 16, 2009 3:13 pm

NOTE: At 10:40 a.m., VNC corrected a significant typo in the 18th graf of this story. - MFC

Tennessee's recently enacted venture-capital initiative to stimulate funding for high-growth companies will probably be "oversubscribed."

That's the assessment Tennessee Technology Development Corporation President and CEO Eric Cromwell provided his board of directors this morning, during their regular meeting.

Cromwell (at left) stressed that the impact of the new Tennessee Small Business Investment Company Credit Act (TNSBICCA) will be largely determined by the effectiveness of fund managers who are ultimately chosen to lead the expected six Tennessee investment companies (TNInvestcos) that win the right to manage funds that will be produced, in part, by allocations of premium tax credits the state accords qualifying insurance companies.

Cromwell said that based on the interest TTDC has seen demonstrated thus far by executives within the venture sector, he believes no fewer than 22 and perhaps as many as 30 investment companies will apply for TNInvestco certification by the Oct. 1 filing deadline.

The applicants already know the law will produce just six certified funds, each eligible to leverage a state allocation of $20 million in tax credits, drawn from a pool of up to $120 million in authorized credits. The net effect will be direct investment of an estimated $84 million of new venture capital in homegrown Tennessee companies, plus attraction of capital from other funds.

The application window opens Aug. 1, when the state's Department of Economic and Community Development is authorized to begin administering the program, in collaboration with TTDC and others. Cromwell said this morning that he hopes to share the application form and details with TTDC's Tennessee Capital Formation Board (TCFB), which meets July 23.

A number of Tennessee fund managers seem inclined to try to secure one of the coveted six TNInvestco billets. The following is a sample of comments from VCs, provided in response to a recent VNC request:

► Eric Mathews, co-founder of Mercury Labs in Memphis, said he thinks the new program "can help us get early-stage investment and risk-taking back into the business culture of our state."

► Solidus Co. Partner Vic Gatto said the program "properly aligns the competing interests of venture capital firms, entrepreneurs and the state, itself." He added that Solidus is "assessing how best to apply..." Gatto was heavily involved in analyzing the TNInvestco bill in collaboration with members of the TCFB.

► Gary Stevenson, co-founder of MB Ventures in Memphis, had earlier in the year said his firm was resistant to the original bill, which gave way to TNInvestco. Now, he believes the program represents a "more efficient way to...provide much-needed funding for start-ups." In other reports published this week in Memphis, Stevenson said his firm has a "compelling" story to tell about financing startups, creating jobs and attracting capital from outside the state.

► Council Ventures Denny Bottorff told VNC the TNInvestco program is supported by "landmark legislation that will be followed by many states, as it helps to fulfill a critical need for capital for small businesses."

► Nashville Capital Network Executive Director Sid Chambless said, "This is great news for entrepreneurs in the state of Tennessee. There are many promising companies that are poised for growth that haven't been able to accelerate as a result of the lack of early-stage capital. From what I can tell, this legislation will promote early-stage investment in the types of companies that have the greatest impact on economic development in the state."

Some players are still reviewing their options: Innova Memphis President Ken Woody told VNC earlier this summer that the TNInvestco program should promote "outside investing into small and early-stage TN companies, providing a real economic-development boost over the short and long term." However, the Memphis Daily News reported yesterday that Innova has not yet decided whether to apply for a TNInvestco slot.

Mark Heesen (at left), president of the National Venture Capital Association, told VNC in a recent interview that, while he knew nothing at that point about the Tennessee initiative, it is in his view far too early to tell whether either TNInvestco or the more established CAPCO model of funding will prove sufficient to attract capital to under-served states in the South and Midwest.

In fact, Heeson cautioned, "you have to attract the entrepreneur, before you attract the venture capitalist." Heesen stressed that states with underdeveloped infrastructure must also develop adequate supplies of executives willing to embrace risk and deferred compensation, as well as lawyers, strong educational institutions, accountants, mid-management talent and other resources, if they are to attract "fast gazelle-like companies."

As it happens, the pro-entrepreneurial objective is next-up on TTDC's agenda: a TTDC-driven entrepreneurs network, which has been contemplated a year or more, will soon be launched.

Cromwell told his board this morning that TTDC's intense involvement in shaping the new VC program has left the nonprofit economic-development organization needing to regroup and pickup its longer-term agenda, particularly: developing new partnerships; activating a network for entrepreneurs; pursuing federal grants; launching state and regional innovation programs and events; and, rekindling later this month a task force that will examine Tennessee's strengths and weaknesses in research, development and technology commercialization.

The TNInvestco abruption, which at this point is viewed as a boon by TTDC and most other observers, was initially viewed by TTDC as, at best, a distraction from TTDC efforts, then underway, to devise the best possible statewide capital-formation initiative.

During several months of relatively superficial public debate and intense behind-the-scenes activity - ranging from collaboration to skirmishing - Bredesen Administration Cabinet officials, House and Senate leaders, a bipartisan cluster of legislators, TTDC and industry representatives produced a program that all parties now say is a "model" for other states.

The new program bears little structural resemblance to legislation originally introduced by lobbyists for investment firms based in New York and St. Louis.

Enhanced Capital Partners President and CEO Michael Korengold (at right), the New York City-based leader of companies that lobbied for the original capital-company ("CAPCO") legislation, told VNC in an interview following TNSBICCA's passage that he quickly came to believe the original "CAPCO" bill was doomed; and, that a much-improved bill emerged only because of the involvement of legislators, the Bredesen Administration - particularly Revenue Commissioner Reagan Farr and ECD Commissioner Matt Kisber, as well as TTDC and the state's indigenous venture-capital community.

While a number of observers, including those close to TTDC, have consistently told VNC over the months that advocates of the original CAPCO had sought to undermine TTDC's standing as the legislative process unfolded, Korengold told VNC a month ago, "I never felt it was anything but civil," even though there was certainly a gulf between the parties at the outset.

Public demonstrations of civility seemed to flow steadily after CAPCO advocates accepted the reality that no bill would survive without support of the Bredesen Administration (particularly the endorsements of Farr and Kisber); and, after TTDC and other advocates for what eventually became TNInvestco were assured they would have a place at the table and opportunities to substitute a program with more in-state benefits and with management rigor that would ensure fund performance and actual investment follow-through.

While Korengold insisted the whole affair was polite, this morning TTDC board member Andrew Seamons (right), managing partner for Memphis-based Pittco Capital Partners, told the TTDC board that, in fact, the legislative battle "got really nasty and [CAPCO advocates unfairly] took out some of their frustrations" on Cromwell and on TTDC Vice President-Operations Dan Schmisseur, who, early on, played a key role in evaluating the original CAPCO bill pushed by Korengold and others.

TTDC's insistence that a bill could be crafted to provide more benefits for Tennessee was borne-out, but the board discussion this morning suggested that perceptions that TTDC was merely trying to take control of the program may persist. TTDC board members participating in this morning's discussion seemed unanimous in viewing such perceptions as wholly unfounded. Several board members suggested that TTDC staff do more to spread the word of Tennessee's new program among news media, economic-development counterparts in other states and other influentials.

Cromwell acknowedged to his board this morning his desire to remedy any lingering false impressions about TTDC's role and recommendations. However, Cromwell also noted that his response to such rumors has been to stress, as he did again this morning, that in his view TTDC was "just doing our job" as an advisor to the state on such matters. ♦