State Venture Fund Established For High-Growth Startups

Gov. Phil Bredesen last week signed into law legislation that will provide venture money for new companies with high growth potential, such as those involved in biotechnology and other innovations.

The money will come from insurance companies that invest in the fund and then receive tax credits against their premium tax liabilities. The program could generate as much as $120 million.

The state will select six “TN Investcos” from established venture funds that apply to participate. Innova Memphis and MB Venture Partners are interested in being designated as one of six TN Investcos, the entities that will actually distribute the money.

Gwin Scott, president of Emerge Memphis, a business and technology-based incubator, said he hopes the program will identify small businesses and startups with the best growth potential. The program will be administered by the Tennessee Department of Economic and Community Development in conjunction with the Department of Revenue.

“From a high level, this is a big opportunity,” Scott said. “It’s important for the state to get this and to do this so that we remain competitive. Those funds I’m sure will be weighted fairly evenly throughout the state just for balance and for political purposes. … Just breaking it down by a fourth or fifth, I’m sure we’ll hopefully be getting our fair share, but companies have got to qualify.”

Sooner than you think

Venture funds interested in being designated as TN Investcos must apply by Oct. 1. Once the selected TN Investcos receive the the state seed money, they must have allocated at least 50 percent of it within two years, 70 percent within three years, 80 percent within four years and 90 percent within six years.

To qualify for an investment from a TN Investco, a business must be headquartered in the state, 60 percent of its employees must be state residents and have no more than 100 employees. Certain professional service businesses, such as banks, insurance entities, medical practices, accounting firms and legal offices are excluded. The money is also barred from going for direct gambling activities or oil and gas exploration.

That still leaves a lot of businesses with innovative products and high-growth potential.

“Our main charge will be to make sure that the people distributing these funds are aware that there are these companies out there looking for funding and, again, these guys need to be qualified and they need to be filtered so that the right companies are being presented and the right opportunities are being matched,” Scott said.

The Nashville-based legal firm Waller Lansden last week issued an information bulletin about the new program. The lawyers who prepared the bulletin said the Tennessee model is patterned after legislation in Alabama that has generated more than $32 million in new annual payroll for the state since it was launched in 2004.

The average wage of jobs created by the initial investment was $40,628, the bulletin states.

The two Tennessee agencies in charge of administering the program will work with the Tennessee Technology Development Corp. in choosing the TN Investcos that will receive $20 million credit allocations. The decisions will be made no later than Dec. 31, according to the bulletin. No more than two credit allocations will be made to any single TN Investco.

Professional jobs

Ken Woody, president of Innova Memphis, said he believes this Tennessee tax credit program is superior to those in other states. Although he has not made a final decision to apply to be a TN Investco, he said, “It seems like a really good step.”

“Innova was created to be an early stage growth engine to invest for economic development for early stage companies in West Tennessee,” Woody said. “We’ve made five investments so far and three loans, and we feel we’re doing a great job of honoring our charter. At least from what we’ve seen so far, this looks like a really good fit.”

Innova will apply if its board gives the go ahead, he said.

“We have made five direct investments and three loans,” Woody said. “Twenty-five percent of those have been to companies with an African-American founder or a female owner. I think that’s important, given where we are in Tennessee and our demographic makeup.

“Two of those have been biotech companies. Two have been medical device companies. Two of them have been technology companies, and two of them have (been) health service companies, so we think we’ve got a really nice, balanced portfolio representative of the high-growth companies we see in this part of the world. Frankly, right now, all our companies are doing extraordinarily well.”

Gary Stevenson, a co-founder of Memphis-based MB Venture Partners, said being a TN Investco would be a logical fit for the firm.

“Our history has been that we’ve invested in three companies in the state,” Stevenson said. “One in Memphis, which was GTx. One in Nashville, which is called Biomimetic Therapeutics. And then the third one is Protein Discovery, which is in Knoxville. Two of those companies have been successful in going public. The third, Protein Discovery, has done really well since we have invested as well.

“We really have through our investments in these three Tennessee-based companies have a pretty compelling story to tell about providing financing for startups that have created a lot of jobs, and along the way, have imported a lot of capital.”

TOM WILEMON | The Daily News