By Scott Meacham
My mantra of investing, as any regular reader of this column knows, is capital begets capital. That’s why Oklahoma’s unique, pre-seed capital fund, Technology Business Finance Program (TBFP), is so critical to Oklahoma’s innovation economy.
TBFP deploys state funding to provide equity-free capital for startups at such an early stage that there are virtually no other sources of capital available. TBFP is not intended to grain a percentage of the entrepreneur’s company in return for capital. Its sole purpose is to help entrepreneurs fund the first milestones toward building and de-risking their companies with the aim of attracting additional capital from equity investors as milestones are met.
And this is exactly what TBFP does. How do we know? Metrics and data.
Twenty years ago, in legislating TBFP, Oklahoma became the national leader in state-funded early-stage capital for entrepreneurs. We didn’t know whether this idea would work or not. There weren’t examples from other states that that we could look to for best practices or lessons learned.
But we knew what we wanted to accomplish—increase the sources of private capital for entrepreneurs and create new high-technology jobs for Oklahoma. We were bold, and–from the beginning, we held ourselves accountable for delivering the intended results. We transparently reported the state’s investment and the programs’ impacts every year. (We also carefully assessed and delivered on the venture services entrepreneurs need. Building sustainable companies isn’t all about capital.)
Awardees have gone on to raise more than $159 million in additional private capital and have created more than 1,140 jobs. And for the last seven years TBFP has been self-funding. (The legislature voted additional funding last year.)
In the search for economic diversification and job growth, tax credits can be another lever states can use to prime the investment capital pump.
Over the last 10 years, as reported by the Angel Capital Association, at least 29 states have provided tax credits to angel investors. Results have been mixed.
The most important metrics for tax credits are the same as with TBFP. How much additional investment capital is raised and how many new jobs (and their average salaries) have been created.
The potential unintended consequence of creating a tax advantage for investing in startups, no matter how well-intended, is materially lessening the market discipline that would otherwise exist. Startups require multiple investments from TBFP pre-seed, to angel investors to Series A venture capital through growth. Successful venture capitalists do not invest in shaky deals.
To quote from Robert Louis Stevenson’s Treasure Island, a story of pirates and plunder, “Sooner or later everyone sits down to a banquet of consequences.”
When it comes to stimulating investment capital, Oklahoma has proven with the TBFP that we know how to establish best practices and measure results. With future policy—whether it be angel tax credits or something else—we should be sensitive to creating state-level incentives that support the attraction of additional capital and safeguard against unintended negative consequences.
Scott Meacham is president and CEO of i2E Inc., a nonprofit corporation that mentors many of the state’s technology-based startup companies. i2E receives state appropriations from the Oklahoma Center for the Advancement of Science and Technology. Contact Meacham at [email protected]