- Associated Press - Sunday, January 3, 2016

NASHVILLE, Tenn. (AP) - After six years, an investment program in Tennessee has become a sparkplug for startups and spurred job creation. It has put private investors on track to make millions and yielded millions in tax savings for insurance companies.

But the TNInvestco program is a long way from repaying taxpayers, The Tennessean reported (https://tnne.ws/1NYNJ7I).

In 2009, Tennessee lawmakers approved $200 million to fund TNInvestco. By enlisting private fund managers to invest the state’s money and insurance companies to help pay for the program, TNInvestco would support small business growth and create jobs.

There was also the expectation the state would recoup its investment. If the program fails to live up to expectations, it could impact the ability to pass other investment programs, which entrepreneurs and investors say the state needs.

Tennessee is in a better position than it was six years ago, with more private sector funds created to help fuel capital investment. But without a new mechanism in place to incentivize investments in Tennessee companies, the state’s startup engine risks losing momentum.

“We will be at a disadvantage to peer states,” said Brian Laden, investor at TNInvestco fund TriStar Technology Ventures. “It’s important the state thinks about this proactively and does something, and not nothing.”

Meanwhile, the $200 million TNInvestco program appears to be nearly out of money. Just $17 million remained as of 2014 - the most recent year financials are available, the newspaper reported.

The state’s $30 million INCITE program, a federally funded initiative run by Launch Tennessee, is down to $2 million as of 2015.

TNInvestco and INCITE have been critical drivers in developing the state’s startup growth, helping to build accelerator programs and attract more private capital to Tennessee companies - more than $325 million to date.

It was the $1 million that caught the attention of Molecular Sensing’s investor Bill Rich.

The drug discovery tool company was located in California, but the seven figures that Tennessee’s investment program offered was enough to sway Rich to take on the CEO role and move the company to Nashville in 2012.

“Without it, it would have been very difficult to progress as far as we have,” Rich said of the combined $4 million he has raised from the state’s TNInvestco and INCITE programs.

Molecular Sensing has since grown locally to a staff of six and has attracted another $4 million in private investment. It has contracts with pharmaceutical companies, and its annual revenue is close to $1 million.

As of 2014, 10 of the 175 companies that received TNInvestco funds sold for a profit, and if returns were distributed, the state would lose money on all but four of those deals, the newspaper reported. Fifty more companies have closed or sold at a loss.

The reinvestment period extends until 2017, which means the TNInvestco investors’ early returns still have the potential to strike gold in a new investment or to fizzle in a failed company. But, if the 10 funds had to distribute returns in 2014 on those 60 company sales or writedowns, the state would gain close to $10 million on $21 million invested, booking a more than $11 million loss, the newspaper reported.

Later sales are likely to be more profitable, but for the state to be repaid, the funds would have to more than triple their original capital. The multiplication is possible but unlikely as it would require top performance by each fund, according to venture capital experts.

“It’s totally unrealistic,” said Diane Mulcahy, senior fellow at the Kauffman Foundation in Boston. “The minimum venture rate of return that most fund managers and most (limited partners) would say they look for is two times. . Very few venture funds in the nation do that.”

The fate of at least 115 companies receiving TNInvestco capital is still up in the air. Several fund managers and those who wrote the law remain hopeful the state can be repaid in full.

“This was an effort to make capital available for new and startup businesses,” said state Sen. Doug Overbey, R-Maryville, who sponsored the TNInvestco bill. “We knew there would be some companies that didn’t make it, but if you are able to invest in the next Federal Express or Apple computers, the state would stand to recoup its investment.”


Information from: The Tennessean, https://www.tennessean.com

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