The State of Georgia is undercapitalized for very early stage technology companies – particularly those with ‘big idea’ business models or deep technology bets that need $500k to several million in the seed stages. Last week, HB 718 was introduced to the Georgia General Assembly. It establishes a fund to invest up to $200 million in venture capital in Georgia. Stephen Fleming wrote a great summary of the bill on his blog. Here’s my thoughts on how to best utilize those funds:
- Invest in Venture Funds. They got this right. Privately managed funds will do a better job investing the money. If done right, it will also help them raise additional funds and attract funds from outside the state.
- Address the ‘top of the funnel’. To attract more investment into the state of Georgia we must increase the quality deal pipeline. That means starting with increasing capital for seed and early stage companies.
- Seed and early stage are the most difficult stages. Not only is this Georgia’s biggest shortage, but it is also the most difficult stage for a fund to be successful. Early stage investors take enormous risks and have a higher failure rate. When their investments are successful, the companies often go on to raise larger sums of money from later stage funds and the early investors are significantly diluted. Seed and early stage investments in successful startups can be virtually wiped out if the company stumbles on it’s way to success.
- Later stage ventures have an easier time attracting out of state funding. Seed stage investors need to be more hands-on during the formative stages of a company. This is difficult to do when you are a plane ride away. It takes too much time away from sourcing new deals and raising funds. The more mature the company is, the more likely they will attract funding from out of state ventures. The bigger the pipeline of these companies, the more likely out of state money will be invested in Georgia and more funds will locate here.
- Spreading the funds out over time will be more effective than a large short-term infusion. To put that much money to work quickly would mean a significant portion would need to go to later stage funds. Without an increase in deal flow to support it, the unintended consequence might be having the allocated money invested in Georgia while more money from other LPs is invested outside the state to meet the goals of the funds. If the money is invested over a period of say 5 years, it can follow the evolution of the pipeline with an increasing portion going to later stage funds. Early in the program a majority should go to closing the seed and early stage funding gap. This increases the chances of a more permanent increase in the deal flow rather than a one time bump. To make it more sustainable, have it be an ‘evergreen’ fund where the returns continue to be invested in local venture capital.
- Government should support investment in innovative startups. I believe government investment in innovation and startups is necessary for job creation. To find out why see my earlier post on startups and job creation. That investment is most appropriate in areas where it is less profitable and there is less incentive in the private market. That is why grants are so effective at spawning innovation by supporting early research. Since early stage investing is the most difficult, it is also the best target of government funded investing.
Do I support HB 718? Yes. I’d like to see the administration of the fund focus on seed and early stage initially and spread it out over more than 3 years. I don’t think that would necessarily alter the 30/70 split given the size of early stage investments. But overall, this will certainly help address the early stage funding gap in Georgia and enhance Georgia’s position as a technology startup hub – as well as lead to significant job creation.