O'Malley's venture capital fund a bet worth taking

February 28, 2011|By Jay Hancock

It may or may not pay off.

That's the beauty and the problem of investing in start-up companies. But Gov. Martin O'Malley's plan to add state money to Maryland's venture capital pool seems well-designed and well-timed for a number of reasons.

First, in the middle of what's still a bad economic slump, the $100 million Invest Maryland plan stands a better chance of boosting employment than, say, last year's tax credit for hiring unemployed Marylanders that fell far short of expectations.

That was window dressing for an election year. This is about the long term. Although Invest Maryland would give Democrats investments and new companies to show off in the 2014 elections, the true payoff might not come until later. Good governors think decades ahead.

Also, with Washington's decade-long spending binge drawing to its bitter end, Maryland needs to remember that it has employers known as "businesses," a few of which even manage to do business without attaching themselves to the federal udder.

All of the 40,000 jobs the state added in the past decade were government jobs, partly financed by federal taxpayers in other states or by our grandchildren, who will receive the bill in 2030 or so.

I'm no Carnac the Magnificent, but it's safe to say that this kind of stimulant will not be in Maryland's economic diet for a long time. Even the boost from defense-base realignment will start fading by the time O'Malley has completed his second term.

Invest Maryland would put $20 million a year into a $250 billion state economy — a drop in the bathtub, basically. But venture investments can deliver big returns.

They're aimed at innovation and entrepreneurship, the stem cells of any economy. Venture investment delivers more "spinoff" effects than, say, corporate welfare to lure a few hundred Northrop Grumman executives. (Virginia was reported to have given Northrop as much as $15 million in incentives to win the company's 300-person corporate headquarters.)

Successful start-ups breed chain reactions and become talent magnets. Employees peel off to start other companies, recruiting smart people from elsewhere and creating a cluster of creativity.

"It's not the guys who make $20 [million] or $30 million from their stock options" who deliver the most creative juice, says Roger Novak, co-founder of Novak Biddle Venture Partners in Bethesda. "It's the engineers who make $200,000 and can take a year off to write a business plan. You need a few of those types of winners to energize a community."

The suits call it leverage. One selling point for O'Malley's plan is the state's status as a partner making potential profits. If the investments pay off, Maryland taxpayers get some of the action. But even investments that fail — and there will be plenty — would generate positive returns for the business climate if they add to the ambient innovation or enhance Maryland's reputation as a technology cluster.

Dollar for dollar, no other investment is as likely to increase the state's chances of kicking its federal habit and adding private-sector jobs over the next decade.

And finally, the current investment cycle is a good time to expand Maryland's venture ventures.

Launching a fund in, say, 2000, when venture investment in Maryland peaked at $1.6 billion, according to Thomson Reuters, would not have been the greatest idea. Too much money chased too few opportunities, overpaying for good deals and financing too many losers.

That's not the case now. Start-ups, especially the early-stage companies contemplated by Invest Maryland, are hungry for capital. Competition among investors is less intense.

Venture investment in Maryland last year involved 58 deals and $358 million, according to Thomson Reuters. That was the lowest number of placements and the second-lowest dollar investment since 1998. The odds of an added $20 million per year from the state paying off seem greater now than they did a decade ago.

And the decline in investment here doesn't mean venture capital is fleeing the state, Maryland's (perhaps) temporary millionaire's tax notwithstanding. Venture deals are down everywhere.

"There are still plenty of deals to do in Maryland," says Frank Adams, founder of Grotech Ventures in Hunt Valley. "If a venture capital firm is interested in early-stage technology, there are plenty of opportunities."

Investing public assets in selected private ventures is always dicey. But the money involved is not make-or-break for the state budget, tight times notwithstanding. Maryland authorities have shown themselves to be professional and competent, for the most part, in running these kinds of programs in recent years.

"I'm usually a private-business, free-enterprise guy," said Douglas Schmidt, CEO of Chessiecap, a Bethesda banking and venture firm. "If you had asked me five years ago, I probably would have been in the camp of 'What is the government doing in this business?' Now I'm in favor of it. Because I don't see a lot of other choices."

Maryland also should cut its personal income tax to spur nongovernment job growth. But O'Malley's venture plan addresses the private sector at far less expense. As corporate welfare goes, it's the best of a dubious category.


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