An interesting model for technology companies

Maine is looking to set up a $100 million VC fund. Here’s the summary:

Technology advocates in Maine want the state to set up a $100 million venture capital fund. To support this endeavor, Sen. Peter Mills, (R-Skowhegan) is sponsoring a bill that would set up a complex financial arrangement designed to stimulate new economic activity.

To launch the fund, the state would first invite a major funder — say, a bank like Deutsche Bank or Merrill Lynch — to provide the initial multi-million-dollar line of credit. Mills explains that several banks would likely bid on the program by offering competitively low interest rates, probably somewhere around seven percent. (The state will guarantee to repay the loan, even if the fund of funds tanks.)

After an investment loan is secured, an independent fund manager would then be hired to turn that money around and feed it to a diverse spread of venture capital firms. The selected venture capital firms would then bear the responsibility of picking companies to back financially. If the investments, which will inevitably be somewhat risky, pan out, the firms will pull in high returns, often 16% or more, according to Joe Kumiszcza, executive director of TechMaine, the Westbrook-based group that spearheaded the fund of funds proposal.

Now, let’s turn our attention to the New Brunswick Innovation Foundation for a moment. When Bernard Lord set the NBIF up, it was to be the catalyst that would help New Brunswick reach Lord’s goal of being in the top three for R&D spending in Canada. We are still dead last.

When you review the NBIF activities, you see they have made only a handful of actual placements in the private sector and spend much of their time putting on contests and ‘boot camps’. They have a staff of seven.

I am not complaining about the NBIF but it will never be the catalyst for massive new R&D spending. Never. It doesn’t have enough money. It doesn’t have the resources.

Before on these pages, I said that if Lord wanted to get to the top three in Canada for R&D, we need at least another $100 million per year in spending. The NBIF’s $25 million over a multiyear period – is laughable – if that is your goal. I have said that they should have used that $25 million to catalyze private sector funding activity.

I don’t have the links close at hand, but several months ago I provided examples of other states that attracted VC companies – similar to what Maine is proposing. In some cases, the VC actually works with its clients to encourage them to set up in Iowa or wherever.

For me the NBIF is just another example of smoke and mirrors economic development. It is now talking the language of self-sufficiency in order to endear itself to the new government but it is very simplistic effort. If I was advising the province, I would put that stuff inside UNB or somewhere and have a real strategy to bring VC to New Brunswick entrepreneurs.

I welcome opposing opinions on this. I could be wrong.