Rule to invest in Ohio slighted

Columbus Dispatch - June 11, 2012

This story in the Columbus Dispatch digs into what’s happening at the Ohio Venture Capital Program and looks at plans to invest another $100 million in the program, which passed the Ohio house in May. Policy Matters research director Zach Schiller recently testified on this issue, HB 511, and raised alarms that the funds were not being invested in Ohio as required by state law. One big question — why isn’t the state enforcing its own laws?

Here’s the context on the program, which started six years ago:

State leaders wanted to attract money for high-risk yet potentially high-growth startup companies and create jobs, so they put up $130 million backed by state tax credits for private venture-capital firms….

But Zach Schiller, research director for Policy Matters Ohio, sees a problem: Ohio taxpayers are being asked to take a risk on investments in companies, and “we have a significant number of funds receiving this money that are not investing at least half of it in Ohio.”

That’s a violation of state law. A third of the funds that have been given $84 million are not meeting state requirements.

Two funds, Columbia Capital Equity and Globespan Capital, got a total of $5.5 million from the state but are not expected to invest any of it in Ohio companies. Radius Venture has drawn down more than half of its $5 million and has not yet invested in Ohio and is unlikely to hit the 50 percent mark.

[Paul Cohn of Fort Worth Capital Partners, which manages the Ohio Capital Fund,] admits that in the first round of funding “there were a couple whiffs,” but said the overall fund performance is strong.

“At the end of the day, they are about making money,” he said, noting that those out-of-state investments are performing well. “They signed something saying they would do it, but they didn’t find any (Ohio) investments that fit their threshold. It was a little bit of a learning curve for us.”

But is making money the point of this program?

“The idea that we’re directly supporting companies taking this money and investing it elsewhere, how is that benefitting Ohioans?” Schiller said. “This is not a project to help the venture-capital industry. This is a project to help the industry invest in Ohio.”

In recent testimony, Schiller recommended that the state include a clawback in the HB 511, forcing funds to return state money if they do not invest 50 percent of it in Ohio. An amendment to do just that was rejected in the House.

The Dispatch article points out that Ohio funds are at risk if investments don’t pan out, and those investments would total $550 million if HB 511 passes. Oklahoma is shutting down a similar program after 20 years, and is potentially on the hook for $60 million.

It’s not clear what will happen next, according to the Dispatch. It does seem that our critique may have caught the Senate president’s attention:

The bill is now in the Senate, where President Tom Niehaus, R-New Richmond, is in no rush to move it this week — potentially the final session days until November. He called the program “an important tool that we use to encourage investment in Ohio,” but said he wants a better understanding of how it is working. He wants to look more into why some funds are not investing at least 50 percent in Ohio companies.

“For those people who are alleging the funds are not doing what they are, under law, required to do now, clearly that would be a problem, and there needs to be some mechanism of reviewing to see if they are fulfilling their commitment,” he said.

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