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David L. Barkley is a professor of agricultural and applied economics and co- coordinator of the Regional Economic Development Research Laboratory, Clemson University. His research interests include rural financial markets, regional economic development policy, and urban-rural economic linkages.

Deborah M. Markley is principal of Policy Research Group, a Chapel Hill, North Carolina, consulting firm specializing in economic development research and policy analysis. She is chair of the Rural Policy Research Institute’s Rural Equity Capital Initiative.

Julia Sass Rubin is completing a Ph.D. in organizational behavior at Harvard University. She advises the Small Business Administration on the New Markets Venture Capital Initiative and the Appalachian Regional Commission on its efforts for increasing the supply of venture capital in the region.

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Barkley et al. / CERTIFIEDECAPITALRCOMPANIESember 2001

Certified Capital Companies (CAPCOs): Strengths and Shortcomings of the Latest Wave in State-Assisted Venture Capital Programs

David L. Barkley Clemson University

Deborah M. Markley Policy Research Group

Julia Sass Rubin Harvard University

Certified Capital Companies (CAPCOs) are state-certified venture capital companies funded by insurance companies. As an incentive to invest in CAPCOs, insurance com- panies receive a $1 credit on premium taxes for each $1 invested (tax credits are spread over a 10-year period). The CAPCOs must invest in specific types of businesses according to an established time schedule to ensure the availability of tax credits to the insurance companies. Legislation authorizing CAPCO programs has passed in five states (Louisiana, Missouri, Florida, New York, and Wisconsin) and has been consid- ered in eight other states (Iowa, Illinois, Arizona, Texas, Kansas, Vermont, Colorado, and North Carolina). This article summarizes the characteristics and experiences of CAPCO programs in the states that have passed enabling legislation. Lessons learned from the experiences of the state programs are provided, and the advantages and dis- advantages of CAPCOs as compared to alternative state-sponsored venture capital programs are reviewed.

Access to venture capital is recognized as critical for business start-ups and expansions and, conse- quently, important for state and local economic development prospects (Bingham, Hill, & White, 1990; Federal Reserve Bank of Kansas City, 1999; Florida & Kenney, 1988; Florida & Smith, 1990; Leicht & Jenkins, 1994; Parker & Parker, 1998; Timmons & Bygrave, 1986). Yet, the supply of venture capital is concentrated geographically, and venture capital investments are focused on a relatively small number of regions and industries (PricewaterhouseCoopers, 1999). The geo- graphic concentration and industrial focus of venture capital investments have contributed to the perception that specific regions of the country (the more geographically isolated and/or sparsely populated) and certain industries (traditional, non–high tech) are underserved by private venture capital firms. A common response to this perception of a venture capital shortage is the initiation of public programs to enhance the availability of equity capital for local entrepreneurs and businesses.

AUTHORS’NOTE: Funding for this research was provided by the Rural Policy Research Institute, Columbia, Missouri. This research is a component of a larger research project funded by the U.S. Department of Agricul- ture Fund for Rural America.

ECONOMIC DEVELOPMENT QUARTERLY, Vol. 15 No. 4, November 2001 350-366 © 2001 Sage Publications

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