State Doles Out New Round of Venture Money to CAPCO Funds

The Texas CAPCO program is distributing millions of dollars to venture capital firms:

The State of Texas last month began distributing a new round of $200 million in state-backed venture capital to nine firms aiming to invest it in early-stage Texas companies.

Texas is one of at least 10 states that uses so-called certified capital companies, or capcos, to foster business development.

And a fledgling Houston venture capital company, Texas Ventures, has become one of the newest Texas companies to begin pursuing capco deals.

Of the 10 operations that took a share of the first $200 million set aside by the state in 2006, eight came back for additional capital this year.

Wilshire Texas Partners I LLC, an affiliate of New York City-based NewTek Business Services Inc., and LoneStar Capco Fund LLC, which had Dallas and Austin offices, dropped out. Texas Ventures is a capco newcomer.

Capcos operate like venture capitalists, with extra strings attached. The state makes it easier for capcos to attract investments, but the companies must follow rules set by the state.

State rules require capcos to invest in companies that have their headquarters or the majority of their employees in Texas. The capcos also must deploy 30 percent of their capital allocations in three years and 50 percent in five years.

Texas Ventures’ capco fund (the firm has other funds as well) focuses on venture debt, preferred stock and mezzanine investments, says Scott Crist, managing partner of Texas Ventures.

And although the firm will keep an eye out for technology investments, particularly related to the energy sector, Crist says the fund will be “opportunistic,” as well.

Like other capcos, Texas Ventures’ capco fund has between $20 million and $30 million of investable cash. The firm’s capco will invest about $1 million in early-stage companies.

Meanwhile, the Austin-based Whitecap Texas Opportunity Fund LP plans to look at old-line companies, especially those facing an ownership transition, as a big part of its plan to deploy the $27.4 million the state has allocated to it.

Whitecap, an affiliate of Sentient Ventures, aims to make investments in the $500,000 to $3.5 million range.

Also favoring the high end of that range is Houston-based Aegis Capital Group LLC, which operates the other Houston-based capco fund.

Aegis, which was Crist’s employer until he broke off to help start up Texas Ventures in the middle of last year, plans to invest in about 15 companies with the average investment ranging in size from $1 million to $4 million, with a preference toward the larger range.

Aegis Texas Venture Fund II LP has $28 million to invest in Texas-based companies. It represents Aegis’ second Texas-focused fund, according to Kevin Dragan, a partner in Aegis’ Houston office.

Aegis operates two Texas funds, one New York fund and a nationally focused small-business fund. The firm is continuing to grow outside of Texas as well, with a plan to raise more funding for investments in small and medium-sized businesses in the U.S. and Canada.

As with other capcos, Aegis’ capco fund is focused on investing in early- and midstage companies that will encourage job creation in the state. For Aegis, such companies include service, technology, industrial and manufacturing firms.

“We’re looking for companies that need growth capital that might not be able to source it from their local banks or have expanded past their early-round funding,” Dragan says.

Also, part of Aegis’ funding will focus on successful companies in state-defined Low Income Communities.

Deals might also include follow-on investments for companies as they grow.

Says Dragan: “We can also support larger deals with resources from our other fund partners and trusted syndicate relationships.”

Although many of the venture firms are ready to come out of the gate with capco funding, the state has not finalized the capco allocations this year.

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