Pennsylvania to Pass VC Program

Though it’s currently caught up in the traditional political morass of passing the state’s budget, the government of Pennsylvania is likely to approve a compromise version of a $250 million program to encourage venture capital investment in the state.

Initially, Pennsylvania Gov. Edward Rendell proposed a plan to raise $250 million in bonds for a fund to be matched by private investors and would have a mandate to invest in Pennsylvania. The plan by the Democrat met resistance from the Republican-controlled legislature.

Legislators were wary of the plan in light of the recent efforts to turn $60 million in tobacco settlement money into a VC fund that would invest in state businesses. The plan came with a lot of restrictions, requiring firms to set aside 70% of their investments for Pennsylvania-based businesses. “When you set those kinds of terms, while they make sense politically, it doesn’t make sense economically,” says State Representative Steven Nickol, a Republican from the 193rd legislative district. “When you require all the investment in Pennsylvania, the top quartile funds won’t even look at you.”

The tobacco settlement fund failed to generate any private backers, attracting only the Pennsylvania State Employees Retirement System (SERS) and the Philadelphia City Board of Pensions and Retirement. So after the governor released his initial plan in March as part of his overall economic stimulus package, the State Senate took it out.

Now a new plan, proposed by Rep. Nickol, is on the table. “We met with some VC people and we tried to backward engineer what might work. This proposal stems from that,” Nickol says. “Our goal is to attract out of state money, private money, not just Pennsylvania public funds.”

Under Nickol’s plan, the state would guarantee up to $250 million in investment in the state, making the state government absorb losses on investments from venture capital funds. The Pennsylvania Department of Economic and Community Development would help oversee the fund. Venture capitalists would have to commit a minimum of $15 million with a limit of $75 million per investment. The investment guarantee would be collectible after seven years. There will also be clawback provisions along with the guarantees.

All four caucuses in the state legislature agree on the plan, but the plan is part of the state’s economic stimulus package that is stalled in the ongoing state budget battle between the Democratic governor and the Republican controlled state Legislature. The two sides have yet to reach an agreement on the education component of the budget as well as other aspects of the economic stimulus package. This leaves the venture fund as somewhat of a hostage.

“It really hasn’t been much of a bone of contention, it’s been a chip in play,” says Nickol. “This is something the governor very much wants, and to some extent it’s being held out as leverage for him to come to agreement on the budget.”

Still, Nickol is confident that the stimulus package will pass before the end of the year and the $250 million venture fund program will be in place in 2004.