What happened to Texas’ other state-run venture capital fund?
In 2015, the Texas Legislature shut down the state’s decade-old venture capital program, after high-profile bankruptcies and accusations of political favoritism sullied its reputation. But at the same time, another governmentfunded venture capital program was operating out of public view.
This one was composed of federal money rather than local taxes, which may explain why it got so little attention. Although it’s too soon to render final judgment, so far the fund’s investments appear to have lost money overall, again raising the question of whether government should be involved in the venture capital business at all.
The Jobs for Texas program, or J4T, was Texas’ $46.5 million chunk of the $1.5 billion that Congress parceled out to states in 2010 with the aim of boosting investment across the country at a time when the recession had made capital very hard to come by. Unlike former governor Rick Perry’s now-defunct Emerging Technology Fund, which invested directly in young businesses, J4T allocated money to venture capital firms that had to bring at least as much private capital to the table.
Joe Edgar, who set up and ran the program from 2012 to 2014, said that’s a better way for government to invest in startups, since venture capitalists are better equipped than state employees to pick deals and guide entrepreneurs. With their own money on the line, private investors also have an incentive to make sure the company succeeds.
“It created a program that was extremely accountable,” said Edgar. “In the world of venture, $50 million wasn’t that much. How do you make it have a big impact?” The Kauffman Foundation, which studies entrepreneurship, generally recommends that government entities not run their own venture funds — but Edgar’s idea was to have government be as small a part of the process as possible.
Data obtained from the state through a public records request show that about $43.6 million was invested in 36 companies (a few million dollars of the total budget went to small business loans through community development financial institutions). The money was co-invested with about $161 million from investors, and the companies received $284.9 million in subsequent financing.
All but three of the portfolio companies are still operating. That’s a pretty good record for a four-year-old venture fund, although the failures include some businesses that got the largest amount of public money: Glori Energy and EnerSciences Holdings, both oilfield technology companies that each received $5 million in J4T funds and went kaput during the oil bust.
Seven of the startups have already either refunded their investment or started delivering returns, including StoredIQ, an Austin data storage company that was acquired in 2013 by IBM. So far, the Department of Agriculture — which administers J4T — estimates that the investments have returned about $4.2 million to the program.
The state says its interest in the rest of the portfolio, a mix of medical, wireless infrastructure, data analytics, construction technology and other types of companies, is worth $31.9 million (down from $43.6 million initially invested). It will take a few years before it becomes clear if the public winds up profiting from the investment. According to the Treasury Department, the funding has supported 1,173 jobs.
It’s hard to say for sure, but Houston-based investor Andrew Clark, who manages J4T money as part of the Texas Halo Fund, says that public money does help shake loose private capital that might otherwise have gone somewhere else. “You’ve got to create some momentum around the investment,” Clark says. “Being able to drop a sizable amount of money into the pool always goes a long way towards bringing people in.”
Edgar, now at an Austin-based clean energy finance firm called Petros-Pace, thinks it had a better shot than the much-maligned Emerging Technology Fund, which invested $204 million in 144 startups, about a third of which had failed as of this time last year, and the overall proceeds of which have not been recently disclosed.
“I think the lessons learned have been that we’re not going to create a fund that’s administered by the state,” Edgar says.