O'Malley's venture fund draws tough questions

Lawmakers concerned Maryland would lose money

  • Gov. Martin O'Malley, left, joined the panel testifying on behalf of the Invest Maryland Initiative before the Senate Budget and Taxation Committee.
Gov. Martin O'Malley, left, joined the panel testifying… (Amy Davis, Baltimore Sun )
February 16, 2011|By Annie Linskey, The Baltimore Sun

The $100 million venture capital fund at the center of Gov. Martin O'Malley's legislative agenda faced tough questions Wednesday from state lawmakers, who worried about the risk to taxpayer money.

The Democratic governor took the unusual step of testifying personally before Senate and House committees in support of Invest Maryland, a fund that he says would help Maryland entrepreneurs across the so-called Valley of Death they face when trying to find seed money to start a business.

Most of the tough questions went to aides and others who defended the signature legislation to skeptical lawmakers. O'Malley sat through some of the testimony in both committees.

"What if it does not work out?" asked Sen. Nathaniel J. McFadden, a Baltimore Democrat.

"We are all a little jumpy about fund performance," said Sen. Roger Manno, a Montgomery County Democrat. "What assurances do we have … about fund track record and return on our investment?"

O'Malley said Invest Maryland would spur more startup companies in the state by giving local researchers and entrepreneurs access to the capital they need to turn their ideas into viable businesses.

Though the state is home to the Johns Hopkins University, the University of Maryland and other research institutions, the culture of startup companies has yet to take hold here. The idea of Invest Maryland, aides say, would be to follow the model of Silicon Valley in California or the Route 128 corridor outside Boston, where ideas spawned at top universities have fueled the creation of billion-dollar companies.

Under O'Malley's proposal, the money would come from insurance companies choosing to pay their taxes early at a deep discount. Half would be invested by a panel of participating venture capital firms; half would be invested by a state agency.

Successful companies would pay the state back with 80 percent interest after going public or being sold. Those proceeds would be plowed back into the venture fund to make up for losses and keep the fund running.

The heads of Hopkins and the University System of Maryland urged lawmakers to pass the bill. They said Maryland is not producing enough startup firms, given the hundreds of millions of dollars the state receives for research and development.

"It is a very important step that does address one of the state's shortcomings," said William E. Kirwan, chancellor of the University System of Maryland.

Hopkins President Ron Daniels spoke of a researcher at his university who developed a promising drug to suppress allergens.

"They required early stage funding," Daniels said. Unable to find money here, the group moved to Pennsylvania, which provided seed money.

O'Malley administration officials laid groundwork for the hearing by meeting individually with all 13 of the members of the Senate Budget and Taxation Committee and all 23 members of the House Ways and Means Committee to answer questions.

But lawmakers still found the idea confusing — particularly how the $100 million would be raised. Only insurance companies can request the discounted tax credits, which they could bid on at auction.

"I'm still trying to understand all this," said Sen. George C. Edwards, a Western Maryland Republican.

Christian Johansson, Maryland's secretary of business and economic development, told lawmakers that the state already has a similar program.

Created in 1994, the Maryland Venture Fund has invested $25 million in companies based here and returned $61 million to the state, he said. He estimates that the fund has created 2,000 jobs.

Half of the $100 million from Invest Maryland would be used to replenish that fund, which has been cut during the past several years of tight state budgets.

The other half would be turned over to a group of private venture capital firms, selected by a third party outside of government.

The arrangement drew questions from Del. Kathy L. Afzali, a Frederick County Republican.

"How are these venture capital companies going to be chosen?" she asked. "Can you promise me there will not be any favoritism or cronyism?"

A similar fund in the District of Columbia cost taxpayers about $50 million to create 31 jobs, according to a legislative analysis.

The O'Malley administration sought advice from a critic of such funds. Julia Sass Rubin, a professor of public policy and planning at Rutgers University, told lawmakers that O'Malley's proposal is "model legislation" that addresses problems that have cropped up elsewhere.

Her only criticism was that the discounted tax credits that the state would make available to insurance companies should be open to other industries and individuals. Stacy Mayer, a legislative staffer for O'Malley, said the administration has approached leaders in other industries but they have not been receptive to the idea.

It would be highly unusual if the governor's key bill did not pass in both chambers — but he said there hasn't been a vote count and that his staff will continue meeting with members until they feel comfortable with the legislation.

"There is skepticism everywhere in the world," O'Malley said. "In a time when 'austerity' and 'cuts' are the words of the day, we also have to invest to keep our competitive strength."

annie.linskey@baltsun.com

twitter.com/annielinskey

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