O'Malley's $100 million plan to fuel innovation economy

Despite budget shortfall, O'Malley would tap tax revenue to fund plan

January 21, 2011|By Gus G. Sentementes, The Baltimore Sun

Hoping to spur jobs, innovation and economic growth, Gov. Martin O'Malley wants to tap tax revenue to invest $100 million in fledgling technology, life sciences and other companies across the state.

O'Malley, a Democrat, plans to unveil details of the "Invest Maryland" program Monday as a centerpiece of his economic agenda in this year's General Assembly session. The state would invest in small businesses and start-up companies — partially through the dormant Maryland Venture Fund — and would reap both the risks and rewards.

Christian S. Johansson, secretary of the state Department of Business and Economic Development, which would spearhead the initiative if it becomes law, said the public is concerned about the economy and job prospects. The state needs to move beyond spending on one-time stimulus projects, he said.

"There's a climate of budget cuts and deficits," Johansson said. "But the bigger issue in people's minds is what are we going to do to create jobs that aren't gimmicks, jobs that will be here today and tomorrow."

Several states have adopted government-funded venture capital investment programs, some of which have been criticized as taxpayer-funded boondoggles. O'Malley's proposal also comes at a time of fiscal belt-tightening, and it's unclear whether legislators would support the investment program when budget deficits have dogged the state for several years.

But administration officials said the state has had past success with venture capital investing and that this program could fuel a cycle of reinvestment. And market experts who reviewed the Maryland proposal said it has been crafted to avoid pitfalls experienced by other states.

The venture capital industry in Maryland and the Mid-Atlantic region is improving, but it is nowhere near the high-flying years just before the dot-com bust, when the region attracted $5.2 billion in venture capital in 2000. In 2007, before the recession hit, the region saw a $1.2 billion infusion of venture capital, according to the National Venture Capital Association.

Desperate to create jobs, many states have enacted legislation that enables them to pump tax dollars into local businesses, usually technology and science-based companies, according to Jim Jaffe, chief executive of the National Association of Seed and Venture Funds, which represents investors.

O'Malley's plan would invest $20 million a year for five years. By comparison, the amount of venture capital invested in the Baltimore-Washington-Northern Virginia market topped $690 million last year — nearly $100 million more than during the previous year, according to the association.

Jaffe worries that O'Malley's proposal is too conservative. He pointed to other states that are spending more, including Ohio, which is in the middle of funding a 10-year, $1.35 billion investment in its state's technology businesses.

"There are a number of states who have taken a big gulp, looked around, and said the future is technology," Jaffe said.

The Invest Maryland plan is designed to address a need among start-up businesses, which have trouble luring deep-pocketed venture capitalists. Young companies need start-up funds to experiment, to patent technologies, do market research and perhaps clinical studies — and it could be years before many see profits, or even revenue.

So there's greater risk in investing in newer, unproven companies, but that's where the state can play a key role, said Douglas M. Schmidt, CEO of Chessiecap Securities Inc., a Mid-Atlantic investment banking firm.

"For this region and Maryland in particular, the future of the economy is not in large headquarter companies," Schmidt added. "The future is small new business."

O'Malley's plan, which would be funded through tax revenue from insurance companies, has been received with general support from the business and technology communities in Maryland, who have heard the outlines of the program, but not the details.

"We're very excited about the proposal and the fact the governor has his hand on this," said Renee Winsky, CEO of the Tech Council of Maryland, the state's largest technology trade association.

Under O'Malley's plan, half the money would be invested by the state's Maryland Venture Fund, a program with a track record of returns on investments, state officials note.

Since its formation in 1994, the Maryland Venture Fund has invested $25 million in companies based here and returned $61 million to the state, according to state officials. But the venture fund, which at one time was self-sustaining, was largely depleted during the recession as venture capital deals slowed to a crawl and the state didn't replenish the fund.

The other half of the money would be doled out to three or four private venture capital firms that would invest the money in Maryland businesses as well, according to state officials.

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