Barkley et al. / CERTIFIED CAPITAL COMPANIES
State programs to promote the availability of venture capital first appeared in the late 1970s, with early programs including the Massachusetts Capital Resource Company, the Connecticut Product Development Corporation, and Kansas Venture Capital, Inc. (Daniels & Lynch, 1998; Eisinger, 1991; Fisher, 1988, 1990; Thompson & Bayer, 1992; U.S. Small Business Administra- tion [SBA], 1985). Adoption of state-assisted venture capital programs spread rapidly across the states, and a recent survey of state departments of commerce and economic development identified 144 programs in 46 states (Barkley et al., 2000). These 144 state-assisted venture capital programs fall into five principal program types: publicly funded and publicly managed funds (17), public funding provided for privately managed funds (30), tax credits or incentives for individuals or busi- nesses making venture capital investments (22), state-sponsored or assisted angel networks (53), and state-sponsored or assisted venture capital fairs (22). The development of state-supported ven- ture capital programs was attributed by Eisinger (1991) to the reduction in federal revenue sharing in the late 1970s, which encouraged states to seek innovative methods for stimulating economic development using local resources. Leicht and Jenkins (1996) also suggested that “grow your own” entrepreneurial policies, such as publicly assisted venture capital, are more likely to be adopted in states “pressured by deindustrialization,” and these policies spread among states as a result of the movement of development professionals and the tendency for states to mimic success- ful programs in other states.
The type or organizational structure of the state-assisted venture capital program selected depends to a large extent on the availability and sources of funding and the goals articulated for the program. Public involvement can be viewed as a continuum along which the state makes trade-offs between control over investment decisions and a share in both the upside and downside of invest- ment returns. At one extreme, publicly funded and managed programs provide the greatest public control over investment decisions, thus permitting the targeting of investments to achieve explicit economic development objectives. However, the state also bears total responsibility for funding the program as well as any financial losses or gains that occur under state management. At the other extreme, the state may create enabling legislation that provides tax credits to encourage private venture capital investments. Public control is limited in this model to the restrictions placed in the enabling legislation. The state does not, however, share in the financial gains or losses these invest- ments may incur. The state also may take on a purely facilitative role by supporting networks of individual investors (angels) and venture capital fairs. Again, the state exercises no control over investment decisions and has limited financial responsibility and risk.
The success of state-sponsored venture capital programs (measured in terms of financial returns, economic development impacts, and sustained political support) has been quite mixed. In some states, public venture capital programs were criticized for one or more of the following rea- sons: inadequate public funding for capitalization and management, lack of needed expertise in fund management, perception of political interference in investment decisions, government regu- lations that impeded fund operations, and poor financial return on fund investments (Barkley, Markley, & Rubin, 1999). Concerns with previous state-sponsored venture capital programs and/ or changes in the fiscal and/or political environments encouraged at least 13 states to investigate Certified Capital Company programs (CAPCOs) as an alternative for increasing the supply of ven- ture capital and enhancing venture capital infrastructure and management capacity in the state. As of October 2000, legislation authorizing CAPCOs was passed in 5 states (Louisiana, Missouri, Florida, New York, and Wisconsin) and was considered in 8 other states (Iowa, Illinois, Arizona, Texas, Kansas, Vermont, Colorado, and North Carolina).
CAPCOs offer state tax credits to insurance companies to encourage private investments in pri- vate venture capital firms certified under the state enabling legislation. The certified private ven- ture capital funds (CAPCOs), in turn, must invest in specific types of businesses according to a specified time schedule to ensure the availability of the tax credits. The purpose of this article is to review the characteristics and experiences of CAPCO programs in the five states that have passed enabling legislation. Information on CAPCO programs was obtained from state legislation (passed and proposed) and on-site and telephone interviews with state officials and CAPCO managers.1 The lessons learned from the experiences of the five operating state programs are summarized in terms of the advantages and disadvantages of CAPCOs versus state-sponsored venture capital