COLUMBUS (COLUMBUS BUSINESS FIRST) — The Ohio Chamber of Commerce wants to expand the government’s stake as a limited partner growing venture capital and private equity to support in-state job creation.
New chamber CEO Steve Stivers advocates devoting a significant portion of an estimated $3 billion state budget surplus over the biennium – perhaps as much as $1 billion of it – to a “fund of funds” that would invest in VC and PE firms, he told Columbus Business First.
The proposal echoes longtime cries of startup founders and investors to increase available investment capital in the state by several multiples.
A record year for VC across the country brought new highs of more than $1.1 billion investment in Ohio with five months to go – but that’s still less than 1% the U.S. total, as I’ve reported.
“We have really good angel investment here,” Stivers said. “But before you get to profitability, and (public) listing where you have access to real capital in the capital markets, there’s this ‘valley of death’ for Ohio companies that either result in them outrunning their cash flow and not surviving, or being having a cash infusion from an out-of-state venture fund that then pulls them into that orbit, and forces the company to move outside of Ohio.
“We’ve seen that happen more than once – more times than I like.”
State backing “would be a terrific addition to Ohio’s capital infrastructure,” Tom Walker, CEO of Columbus VC and startup advisory firm Rev1 Ventures, said in a statement.
“It’s been a noted missing element for some time,” Walker said. “A fund of funds would allow existing fund managers to raise capital at scale and attract new fund managers to Ohio.”
The chamber has presented the concept to Gov. Mike DeWine’s staff and is seeking legislative sponsors.
DeWine “likes the idea,” Stivers said. “We’ll see if he is willing to put political capital behind it, but we’re trying to build consensus.”
The Office of Budget and Management in June estimated a potential $3 billion in excess revenue, boosted by federal coronavirus relief aid, for the state budget that runs through June 2023. The office still is calculating final projections, spokesman Dan Tierney said via email.
“In partnership with the General Assembly, we continue to evaluate many ideas for good use of the fund,” he said.
“Smart policy” is to use windfalls for a one-time expense rather than an ongoing program that encumbers taxpayers in the future, said Stivers, who resigned as a congressman this spring to lead the statewide business group.
Stivers envisions the fund of funds as supporting VC and PE firms that invest in multiple industries important to the state, such as technology, logistics and automotive manufacturing. The preference would be for Ohio-based firms, or at least those with a significant in-state office. A portion could be set aside to for funds that specialize in backing minority-owned businesses, he said.
A prime example, Stivers said, is Columbus-based Drive Capital LLC, the largest active VC firm in the Midwest with $1.2 billion under management and a few unicorns in its portfolio.
“I want more of that and more of those funds, and accessible all around the state,” he said.
Drive’s partners had not yet heard of the chamber’s proposal, a spokesman said. Co-founder Mark Kvamme frequently says that Ohio needs many more Drive-sized firms.
Lawmakers established the state’s first fund of funds in 2003, issuing $150 million in bonds backed by state tax credits until investment returns cover principal and interest on the debt. Some of its investments represented the first institutional backing that helped a VC firm kick off a new fund. Those firms in turn invested in more than 100 Ohio technology companies that combined attracted more than $1.3 billion in total investment and created some 3,000 jobs.
“We know it works,” said Steve Baker, head of private equity for Cincinnati-based Fort Washington Capital Partners Group, which manages the fund for the state Department of Development.
However, subsequent administrations and General Assemblies have declined to expand the Ohio Capital Fund.
Fort Washington also was not aware of the chamber’s proposal, Baker said.
“If this project were to move forward, honestly I think it would be a good thing for the state,” he said.
“The state does have an opportunity to continue the momentum,” Baker said. “There does need to be more professional venture capital and private equity investors, feet on the ground, looking for opportunities.”