Venture capital partnerships expand Penn. economy

DCED’s John Sider spearheads a Pennsylvania initiative meant to push innovative companies through their early stages of development with venture capital partnerships. The financing program has only one-quarter of its original funds left, but according to Mr. Sider, the positive affects of the program have just begun.

Governor Ed Rendell recently announced a shot of venture capital funding for early-stage life science companies in western Pennsylvania. Through a program managed by the Commonwealth Financing Authority, the New PA Venture Capital Investment Program will provide $5 million to Pittsburgh-based Corridor Ventures to invest in Pennsylvania-related companies within the life sciences sector.

The New PA Venture Capital Investment Program was created by Governor Rendell’s 2003 Economic Stimulus Package after he first came into office. The stimulus package passed the state legislature in 2004, clearing the way for the Venture Capital Investment Program along with other financing programs meant to jumpstart the Pennsylvania economy.

Last week, CivSource sat down with John Sider, Deputy Secretary for the Technology Investment Office within the Pennsylvania Department of Community and Economic Development. In this role, Mr. Sider oversees operations of the Technology Investment Office, which serves as a catalyst for growth and competitiveness for Pennsylvania companies and universities by financing innovation, creating partnerships and providing support services through technology-based economic development initiatives. Mr. Sider spoke about the Venture Capital Investment Program – its role within the larger financing picture in Pennsylvania and what affect the program has had on the state’s entrepreneurial landscape.

The Capital Investment Program was allocated $60 million in the state’s stimulus package. And in 2005, funds began to find their way to Pennsylvania venture capitalists. “The idea,” Mr. Sider said, “was to have a ‘fund of funds’ approach. The state would not directly invest in companies, but instead invest with venture capital partners who met certain criteria.”

According to Mr. Sider, the Commonwealth saw opportunity in courting venture capitalists who focused in seed and early-stage investments, and those who were first time funds. Not only would seed money-focused investors help local businesses get a start, new investors to the state would provide an additional level of economic development. “We wanted to attract VC [venture capital] funds to Pennsylvania that had not necessarily included it in their geography before. We felt that as a limited partner, the Commonwealth could jumpstart those relationships,” Sider said. The program also sought to place money with current Pennsylvania venture capital funds that could support the existing investment infrastructure.

Investing in Pennsylvania companies statewide

In an effort to spread the regional impact of the investments to all corners of the state, 50 percent of Venture Capital funds are required to be invested in Pennsylvania-related companies located outside the Philadelphia Metropolitan Statistical Area, and that have a population of one million people or less. As part of that effort, the Ben Franklin Technology Partners (BFTP) operates through four independent, nonprofit organizations established in different regions to best serve companies across the state.

“These two programs are complementary,” Sider said. “Ben Franklin centers are step one of the process and the Venture Capital program is step two.” These four state funded, regional seed funds are generally some of the first money into a company, according to Sider. “They [BFTP] are really the riskiest capital that we have in our continuum. But they help to progress a company far enough that private investors will pick up the ball from there.”

However, Mr. Sider and his colleagues at DCED saw a need to fill a gap in the continuum of financing and services available to startup companies, above the $500,000 level available to companies through BFTP. “We needed VCs who wanted to put money in those companies who are past the beta product, who are ready to launch, but need that extra influx of capital to get them going.”

Venture Capital Program loans require a match by the VC of three-to-one. For every dollar the Commonwealth provides to VCs, they are obligated to provide three dollars of investment into PA companies. But according to the latest bi-annual report, the state is on an even better heading.

“Most venture capital funds have a ten-year lifetime and we just started in 2005, so it’s too early to assess the complete financial performance of the program,” Sider said. “But we’re pretty pleased with the progress so far. We’ve made some very good partnerships with some very responsive VCs.”

According to a report compiled by DCED and the twelve closed venture capital fund investments through in June 2009:

  • PA company investments: 45
  • Jobs created at those companies post investment: 485
  • Jobs retained at those companies: 1095
  • Total invested by 12 partner VCs in PA companies: $117,430,628
  • Total other dollars invested on or after VC investment: $240,227,320

Mr. Sider pointed out that despite their aggressive target, Pennsylvania is on track to meet its goal of $4 to PA companies for $1 the state put into venture capital funds. He also said that five of the twelve were first time funds that probably would not have closed without the state’s upfront commitments. “The $16.45 million we put into those five funds was matched with $87.5 million in private dollars – all new risk capital for PA entrepreneurs,” Sider said in follow-up e-mail.

Another encouraging statistic for the state comes from the National Venture Capital Association (NVCA) and PricewaterhouseCooper. In 2008, NVCA and PwC’s MoneyTree Report ranked Pennsylvania first for the category “Growth in VC Investment” and second for “Growth in number of VC-funded companies.”

A study released by the Pennsylvania Economy League in early 2009, found that BFTP investments grew the Pennsylvania economy by $9.3 billion from 2002 through 2006. Pennsylvania also received more than $517 million in additional tax revenue as a result of BFTP programs during that time, indicating a 3.5-to-1 payback ratio to the state on its $140 million investments.

Lasting affect of state-partnered investments

The Corridor Ventures deal ratchets up the investment program’s totals to $45 million, three-quarters of the program’s totals already spent.

But as the Pennsylvania Economy League report showed, the money comes back in the form of increased tax revenue so it can be put out into the street again. “We’ll be able to continue the activity with the original $60 million, but there will be a lag of maybe two or three years,” to realize tax revenue generated by an expanded economy, Mr. Sider pointed out.

Corridor Ventures is expected to leverage an additional $15 million in private funds towards six to eight early-stage life science companies in western Pennsylvania, Gov. Rendell said last week. And for Mr. Sider, the deal continues to illustrate the value of limited partnerships in creating long-lasting development for Pennsylvania’s economy.

“Limited partnership thinking is based on the idea that partner funds will be more responsive to the kinds of deals we’re asking them to look at and create long-term relationships. And ultimately, those are the kinds of people we want to be close to – those funds who make their living by placing capital in Pennsylvania.”