The Pennsylvania (Venture Investing) Put & P.J. O’Rourke

From VentureWire, it seems that Pennsylvania has given venture investors a “put” on investments in that state. If they lose money on venture investing, well … they can put 50% of the losses back to the state. Assuming I haven’t misunderstood, this is one of the nuttiest things I have read in some time.

Pennsylvania Lures Investors With Promise To Stop Losses
By Giada Cardoletti
12/2/2005

Early-stage investments in Pennsylvania companies come with a safety net these days for those venture capital firms who qualify.

The state of Pennsylvania will kick off in early 2006 a new program that will provide to eligible VC investors a 50% reimbursement on losses incurred on Pennsylvania-based investments, after seven years.

To qualify for the “Venture Guarantee” program investors must make a $15 million minimum commitment in a Pennsylvania-based business focused on technology or biotechnology and open a Pennsylvania office staffed by a partner-level employee. Other qualifications investors must meet include a demonstrated positive track-record and expertise in the proposed industry segment.

The program’s goal is to provide economic stimulus and job growth to the less metropolitan areas of the state outside of Philadelphia and Pittsburgh, by guaranteeing up to $250 million in losses of equity investments made in Pennsylvania companies.

To paraphrase writer P.J. O’Rourke, giving money and put protection to venture capitalists is like giving whiskey and car keys to teenagers.

Related posts:

  1. Cashing Out Founders in Venture Investing: A Trend?
  2. DFJ’s John Fisher on Venture Investing
  3. Venture Investing and Damon Runyon
  4. Does Price Matter in Venture Investing?
  5. Shotguns & Rifles in Venture Investing

Comments

  1. We’re based in Lancaster. Our last company, ChiliSoft, sold for $70 million to Cobalt after we moved it to Seattle for venture capital. We’re trying to stay in Lancaster this time and starting to raiuse money (proven model, 1200 customers, etc).
    There are a few venture firms about 40 miles away. Firms from Boston and New York typically don’t like to travel for board meetings, though we haven’t presented yet so I’m not sure that will be the case.
    So why is it nutty? If you would invest in a company like ours anyway, wouldn’t you want to have some downside risk mitigated? Because of your fiduciary responsibility to your LPs and goals of liquidity at high rates of return, you certainly wouldn’t be inclined to loosen up your investment criteria. But you might look at us or other cool companies around here if you knew your downside was limited a bit.
    How else will PA attract venture capital? We’ve got the companies, the innovation, the talent. We just don’thave the free flow of capital.

  2. Paul K. says:

    I’m sure there are many great Pennsylvania companies (and I’m actually somewhat familar with Chilisoft). But that said, venture capital increasingly travels, with national and regional borders less of an issue than they used to be, certainly much less than the prospect for outsided returns.
    Sure, it helps to have local capital, no question, but giving VCs downside protection is, to paraphrase P.J. O’Rourke, like giving whiskey and car-keys to teenagers. If you have the companies, the innovation, and the talent, as you say, then the capital will come — venture markets are just too fluid and too competitive these days for anything else to happen.

  3. I am not in PA, but not sure it is that nutty. Way too much money flows from PA and other states to CA VCs and then they expect enterpreneurs to move West. So capital and talent and jobs move out – as I wrote in my blog “Californifaction” a few months ago.
    http://dealarchitect.typepad.com/deal_architect/2005/05/californization.html#
    If this can encourage some to stay at home, why not? I bet there is plenty of fine print on how the program works…

  4. Andrew says:

    The VC has a “$15 million minimum commitment.” Make that $7.5, since the other half is covered.
    I can think of two bright sides to this story: first, I don’t pay PA taxes; second, if I need a great current example of moral hazard, I now have a winner.

  5. Do you have a direct URL link to this?
    Tx

  6. We’ve actually got a paper out on the topic of equity guarantees. The Germans, Austrians, and now the French are getting in on the act. In those cases they are either trying to build a VC industry where none exists (Austria) or attract interest in specific sectors among existing VCs and help offset the learning curve by altering the risk/reward ratio.
    These strategies are similar to trying to start a fire by pouring gasoline on a bunch of logs – they will attract VC interest, but they can grow out of control. There’s anecdotal evidence from German experiences that VCs have been taking long-shots and ditching companies that hit hurdles. After all, why invest time to rescue an investment when you can just get a refund from the government?
    I think this is a bold, and potentially very wise, strategy for PA. The challenge will be to make sure it’s properly administered and discontinued when no longer necessary.