Everything is bigger in texas, specifically venture funds if a new proposal is passed

longhorn statue, originally uploaded by xgray

This week a gubernatorial request to the Teacher Retirement System (TRS) of Texas will be reviewed that would see up to $600 Million for direct venture capital investments into Texas-based companies.

Currently, the public pension system in Texas makes all of its venture capital investments as a limited partner in unaffiliated venture capital funds, as do most public pensions in Canada and the US. The Venture Capital Institute provides a great history of how a series of legislative and regulatory changes in the late 70s permitted risk-equity investment by pension funds, spurring on venture funds and providing the partnership capital that comprises both venture and buy-out investment we know today.

Though risk-equity investment by public funds has been a bonanza for venture capital, it still usually represents a very meager portion of their overall investment, TRS having invested only 3.3% of the $93.32 billion system.

However, with a few clear stats (Texas receives the third-most venture capital of any state, but this year will receive less than 25% from in-state investors), it is clear to Gov. Perry that changes are needed to boost the local VC funds to ensure their best companies aren’t poached to the coasts.

“We’ve had almost no new funds begun since the bubble because lots of angels or would-be fund managers only got into the market in 1998 or 1999, so their only experience with the asset class is of being burned…” Stephen Straus, a former Austin Ventures pro who currently is forming a new early-stage fund in Texas.

One solution being tabled by Gov. Perry is getting the pension fund to allocate up to $600 million in follow-on investments for its existing government sponsored fund.

Critics have attacked this for several reasons:

• Active management would require more staff and oversight, probably best left to general partners with experience in venture financing experience. Pension funds do not have the time or resources to handle the advisory services, due diligence, and other intricacies of venture financing.
• The mandate of the pension fund is to generate the highest possible returns for its members. Adding an economic development component, while it may be important for the community, does not reflect this mission. If the investment potential were that attractive, they would pursue it on their own accord.
• Others have argued that this smacks of throwing good money after bad. After all, if a company can’t get traditional VC funding in rounds B or C, maybe it doesn’t deserve the money.

While these points are valid, they don’t address the core issue:

“… this proposal is something I normally would take to the woodshed. And I really do want to. The problem is that the state really does have a venture capital shortage, and it would be irresponsible for the Governor to not address it,” said Dan Primack of Thomson Financial.

Fund shortage is certainly an issue we deal with here in Canada, and we have our own vocal critics of public funding initiatives. The problems that Texas-based companies face having to travel or even move to coastal US to raise follow-on rounds is a common problem faced by companies here as well. While it may have its critics, and there is no assurances it will come to pass, this is certainly an idea worth watching.

Primarily from the report by Dan Primack of Thomson Financial

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Tags: Kevin Downing, partnerships, policy, public sector