An interesting model for technology companies

Maine is looking to set up a $100 million VC fund. Here’s the summary:

Technology advocates in Maine want the state to set up a $100 million venture capital fund. To support this endeavor, Sen. Peter Mills, (R-Skowhegan) is sponsoring a bill that would set up a complex financial arrangement designed to stimulate new economic activity.

To launch the fund, the state would first invite a major funder — say, a bank like Deutsche Bank or Merrill Lynch — to provide the initial multi-million-dollar line of credit. Mills explains that several banks would likely bid on the program by offering competitively low interest rates, probably somewhere around seven percent. (The state will guarantee to repay the loan, even if the fund of funds tanks.)

After an investment loan is secured, an independent fund manager would then be hired to turn that money around and feed it to a diverse spread of venture capital firms. The selected venture capital firms would then bear the responsibility of picking companies to back financially. If the investments, which will inevitably be somewhat risky, pan out, the firms will pull in high returns, often 16% or more, according to Joe Kumiszcza, executive director of TechMaine, the Westbrook-based group that spearheaded the fund of funds proposal.

Now, let’s turn our attention to the New Brunswick Innovation Foundation for a moment. When Bernard Lord set the NBIF up, it was to be the catalyst that would help New Brunswick reach Lord’s goal of being in the top three for R&D spending in Canada. We are still dead last.

When you review the NBIF activities, you see they have made only a handful of actual placements in the private sector and spend much of their time putting on contests and ‘boot camps’. They have a staff of seven.

I am not complaining about the NBIF but it will never be the catalyst for massive new R&D spending. Never. It doesn’t have enough money. It doesn’t have the resources.

Before on these pages, I said that if Lord wanted to get to the top three in Canada for R&D, we need at least another $100 million per year in spending. The NBIF’s $25 million over a multiyear period – is laughable – if that is your goal. I have said that they should have used that $25 million to catalyze private sector funding activity.

I don’t have the links close at hand, but several months ago I provided examples of other states that attracted VC companies – similar to what Maine is proposing. In some cases, the VC actually works with its clients to encourage them to set up in Iowa or wherever.

For me the NBIF is just another example of smoke and mirrors economic development. It is now talking the language of self-sufficiency in order to endear itself to the new government but it is very simplistic effort. If I was advising the province, I would put that stuff inside UNB or somewhere and have a real strategy to bring VC to New Brunswick entrepreneurs.

I welcome opposing opinions on this. I could be wrong.

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0 Responses to An interesting model for technology companies

  1. Anonymous says:

    David –

    NBIF is a good example of attempting to get R&D and investment money in the hands of business.

    Yesterday, the Feds released their R&D expenditure forecast.

    Now we all know how they have beat the innovation drum claiming business must spend on R&D to compete.

    Too bad the government does not put their money where their mouth is:

    Total R&D spend $ 9.5 B
    Spending on Universities $ 2.9 B
    Spending on business $ 1.1 B
    The remainder is spent on government departments like NRC.

    We need to get the resources into the hands of business.

    Consider what NBIF could do with $60M from the Caisse bail out, the annual $100M for RDC, the $100M for northern tourism or the $80M for a yarn factory.

    We have the money; we just need to spend it wisely.

  2. David Campbell says:

    Anon, I don’t understand your point. You say the NBIF is a “good example of attempting to get R&D and investment money in the hands of business”. How many placements have they made? From their press releases, it looks like just a few a year. If you are saying the NBIF is underfunded, that may be a fair statement (I don’t know). My point is that if you want $100 million more each year in R&D (which was what Lord needed to reach his target), you need to spend $100 million. Either government or business – preferably business. So instead of farting around with student competitions, maybe the NBIF should be going out and finding private VC and matching it with company needs – unless our guys in Freddy pony up another $100 million per year for the NBIF to dole out, I don’t think there is a better way. So, the NBIF should look at the models in Maine, Oklahoma, Iowa, etc. and try and figure out how to attract private investment into our start up tech firms.

  3. Anonymous says:

    That was rather confusing wasn’t it?

    A few points:

    1) Governments (federal and provincial) talk about the importance of R&D for business but tend to invest it in themselves or in to universities. Very little government R&D money makes it to business

    2) NBIF is focused on growing or being a catayst for NB business; a rare example where money does make it into the hands of business

    3) Funding for NBIF is inadequate and grossly out of proportion with what is spent on the initiatives mentioned (e.g. $100M per year for RDC)

    How’s that?

  4. David Campbell says:

    Using the government spending on R&D to leverage private sector spending on R&D is a good idea. I don’t disagree about NBIF focusing on being a ‘catalyst’ but the lack of results may be tied to your point three. In a health technology environment dozens of companies would be receiving VC and incubating neat ideas. It could be there are no good ideas here but it could also be (more likely) that the structures are not in place to incubate those good ideas into products/services and then into the global market.

  5. Interested Party says:

    Interesting thoughts, but the big question is who would manage the fund? What is NBIF’s track record after being an investor for 5+ years? What about the results of Growthworks after having their management team being significantly supported by grants ACOA?

    What about the results of these State funds referenced? Are they all run by real VC managers / investors as evidenced by their return experience?

    Creating another quasi government backed group is just going to confuse the local market more than it already is.

    Putting this type of money in the way will do more harm than good in terms of creating a real VC marketplace. There already is a tremendous amount of capital out there from real VC investors looking for good opportunities, and they have been matched up in NB in a number of cases.

    On separate note, losing our local logistics infrastructure like the Boston Delta flight to F’ton is however not going to help however.