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Money Troubles

The state’s angel investing fund gets hammered in Salem.
 
0915 spotlight02

State Treasurer Ted Wheeler was frustrated. His baby was suffering from malnutrition, and he wasn’t sure what to do about it. The baby’s name? The Oregon Growth Board, conceived by Wheeler in 2012 as a vehicle to stoke economic development in the state by funding the folks who fund Oregon startups.

The legislature had agreed to kick-start the board’s Oregon Growth Fund with $1.9 million in 2012 — less than the $5 million originally promised, but better than nothing when it comes to investing in newly birthed companies.

But when it came time this year to feed more tax dollars into the Growth Fund, the legislature ponied up ... zero.

A last-minute blitz campaign of the board’s supporters led to the legislature’s restoration of $500,000 of the $1.9 million the board expected to see in its budget for the next two years.

But the entire affair left Wheeler disillusioned and angry.

“Look, I don’t know what the legislators are thinking,” he says. “This is a subject that I know instinctively. I completely understand economic development and why the state needs to play a role. But that’s how I think. I just can’t put myself inside the heads of people who don’t understand the concept.”

Growth Board members — including financial all-stars like Oregon Venture Partners’ Gerry Langeler, Bank of the Cascades’ Patricia Moss and Zapproved CEO Monica Enand — acknowledge that they didn’t lobby hard enough for new dollars. Several say they had assurances from key legislators and the governor’s office that the full $1.9 million would be there, only to find the cash M.I.A. when the budget was released.

But, says board member and aspiring treasury secretary Rep. Tobias Read (D-Beaverton), when it comes to talking investment strategies with state legislators, it’s an uphill fight to get them to understand why the state should invest precious tax dollars in startups.

“We have work to do to make it more accessible to the legislature,” he says. “The Growth Board is an obscure thing that doesn’t lend itself to headlines. You can’t talk about it at a town hall meeting or on the doorstep of a voter. The payoff is way down the road. We need to make a compelling case that the state has a role in helping startups survive.”

Wheeler’s motivation for creating the Oregon Growth Board was to bring under one umbrella two agencies that invest in investment funds: the Growth Fund, newly created in 2012, and the Growth Account, which has been around for 15 years. The Growth Account was designed to take state lottery dollars and reinvest them with professional investment firms to generate returns that would then be kicked back to the state’s Education Stability Fund, created to assist public schools during hard economic times.

Down the road, the idea was, the returns on the Growth Fund’s investment in startups would be funneled into the Growth Account to allow for greater investments by that vehicle. Yet the bumpy ride the board encountered in the legislature this year illustrates the ongoing challenge state economic development officials face. Supporting efforts to provide capital for the state’s entrepreneurial community has simply never been a top priority for the legislature and other state government offices.

“Economic development dollars, particularly those targeting startups, are invested for the long term,” says Beth Cooke, former executive director of the board. “You don’t expect a return for years. Meantime, legislators are bombarded with budget requests to keep classroom sizes low, to fund fire departments, repair roads — immediate needs. Those are tough decisions to make, and frankly, we need to do a better job of explaining why economic development matters.”

Adam Zimmerman of Craft3, a nonprofit lender to entrepreneurs and others with limited access to capital, says the Growth Fund, while small, plays a crucial role with early stage companies. It provides precious dollars that can be used to attract matching private funds and fill in funding “gaps,” such as a badly needed loan that banks aren’t willing to risk.

“It’s hard to get access to debt if you’re a business that doesn’t have a solid financial performance over the last couple of years, which many didn’t in the recession,” Zimmerman says. “The Growth Fund was set up to provide that kind of debt that can mean survival to a startup.”

Other states are further along. Wheeler points to states like Ohio as examples where investing in startups is paying huge dividends. There the legislature committed hundreds of millions to supporting entrepreneurs, and the results were so successful that voters approved a billion dollars in bonds to the program.

The Oregon Growth Fund relies entirely on funding from the legislature and invests those dollars in other venture capital firms that then reinvest them in Oregon startups. Part of its mission is to invest in diversity: It partners with angel and venture firms that invest in companies outside of the Portland area, as well as those run by women and minorities.

Growth Board members insist that the fund and the account are performing well and are playing the role that Wheeler and other Investment Act supporters envisioned for it in 2012.

“We did everything the legislature asked of us,” Langeler says, noting that the $1.9 million was invested with angel investment firms that reinvested the money as the legislature requested. Among firms that have received Growth Fund dollars: Cascade Angels, Women’s Venture Capital Fund, Seven Peaks Ventures, Oregon Angel Fund, Albina Opportunities Corporation.

Not everyone is so enthusiastic. The Cascade Policy Institute, a conservative think tank, criticized the Growth Board in a July 2015 blog post, citing a 1.5% return on its Growth Account investments over its first 15 years.

“State legislators don’t recognize the irony of using profits from the Oregon Lottery to gamble in high-risk investments to benefit an education stability fund. Perhaps the Oregon Growth Board would have a more reasonable ROI if they just flew to Vegas and put our education money all on red,” wrote blog author Thomas Tullis.

Langeler says the account’s early investments were hammered by the dot-com meltdown in 2000, a beating the account’s returns are still recovering from. Returns are much stronger today, he says

All parties acknowledge there was no organized opposition within the legislature to funding the growth board. And Langeler, Wheeler and members of the board aren’t about to give up on their baby. “We need to do a better job in educating the legislature about the vital role the Growth Board plays in incubating startups,” Enand says. “We’re addressing underserved communities, income, ownership and geographic inequity. We’ve planted those seeds — now we have to water the plants. But we can’t do that without the legislature’s support.”

“The legislature has a very incomplete picture of both the goals and the operational activities of the Oregon Growth Board,” agrees Betsy Johnson (D-Scappoose), a member of the joint ways and means committee that oversees the budget process.

Will the economic development pros, the Oregon entrepreneurs and their early stage funders step up to the challenge of framing their argument for support in a way that elected officials can understand? “If this state wants to be economically competitive, we need to have a robust environment for entrepreneurs and business development,” Wheeler says. “We must ensure that viable companies have access to growth capital.”

Clarification:  The original version of this article included a rendering of the Business Oregon logo.  The image was removed because it did not align with the theme of the article.

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