A venture-capital fund created by the state to nurture startups now needs a hand from Ohio taxpayers.
For the first time since its creation in 2003, the Ohio Capital Fund isn’t making enough money from its investments to cover payments on the money it has borrowed to finance its investments in startups.
The fund, managed by an affiliate of Cincinnati-based Fort Washington Investment Advisors, needed about $15 million in taxpayer money to make bond payments this year and may need help next year as well.
“This is the way the program is structured. No one thought it was going to be easy. No one thought there would be no risk,” said Steve Baker, head of private equity at Fort Washington.
The state set up the fund to help increase private investment in fledgling Ohio companies that one day could become the next Facebook or Google or Netflix. The thinking was that, without support, promising young companies would gravitate to the East or West coasts, where more venture capital funds are located. Or they might never get the money they need to achieve their full potential.
The fund doesn’t invest directly into companies. Instead, it has put the money to work with 27 venture-capital funds that turn around and, with other funds at their disposal, invest in the companies.
As of the end of 2016, investments totaling $294 million have been made in 91 companies, according to Baker. The companies also have been able to attract investments from other companies as well, raising $1.16 billion in total, he said.
While the fund invests in all kinds of companies, about half has gone to biotech and medical-device companies. Significant investments also have been made in information-technology companies.
The 91 companies have either hired or retain 2,500 employees, Baker said. Those workers also have paid state income taxes totaling $22 million.
It was expected that the fund’s investments would generate enough cash to pay off the interest and the bonds. The investments typically pay off when the company is sold or sells its shares to the public.
The successes from the investments have generated enough money to make payments that have consisted primarily mostly of interest on the debt that had been issued. But now the fund is paying principal and interest on the money that it has been borrowed.
“There was a clear understanding that tax credits could or may be needed in the future to facilitate the bond payments,” said Mark Williams, chairman of the Ohio Venture Capital Authority, the state agency that oversees the program. (Williams is not related to the author of this story.)
Williams said the program has been important because it has filled a void in providing funding for companies that might not get it otherwise.
“I’m a big proponent of how … we continue to make Ohio a competitive state when it comes to fostering and developing small business and high-tech businesses,” he said.
The fund has had some successes.
CardioInsight, a Cleveland-based medical device company, was sold to Medtronic two years ago. The technology was initially developed at Case Western Reserve University.
Columbus-based software company Uptivity was sold to inContact in May 2014, and Cleveland-based technology company TOA was sold to Oracle in 2014.
“We have a number of very successful exits in the portfolio,” Williams said.
The value of the Ohio Capital Fund’s investments totaled $80 million as of the end of last year, Baker said. The debt stands at $150 million with maximum annual payments of principal and interest at $20 million, ensuring that the debt can be paid while the state waits for the investments to pay off.
The fund has received $82 million on its investments so far.
“There is every reason to believe additional liquidity will come out of the fund as the companies mature,” he said.
The state wants to hit the pause button on new investments by the Ohio Capital Fund.
The Ohio Development Services Agency, which advises the authority, said the state had requested that no more debt be issued by the fund and that the proceeds from the investments that mature be used to pay down the debt, said agency spokeswoman Lyn Tolan.
“We’re trying to protect taxpayers as much as possible,” she said.
Others say the fund should continue to invest, despite the financial issues.
Funds like this are important to a state where there’s not a lot of venture capital available to begin with, said Tom Walker, president and CEO of Rev1 Ventures, a technology-business incubator in Columbus.
“We certainly have a gap in Ohio and in Columbus in early-stage capital. They are important programs,” he said.
Such funds need to take the long approach to investing, he said. At Rev1, the minimum investment length in a young company is 10 years before that investment is expected to pay off.
“Without the state support, (the fund) wouldn’t have happened,” he said. “That’s why the program existed. That’s why this program is important.”
