State’s CAPCO Program Generates Follow-On Funds

Small businesses in Texas look to their state’s CAPCO program:

In this time of unprecedented job losses, we are in need of economic development programs that can create jobs in the state of Texas.

When thinking of how best to address this problem, it’s important to note that according to the United States Small Business Administration, small businesses have created 60 to 80 percent of the net new jobs in the U.S. over the past dozen years.

Small businesses, however, are finding it tougher than ever in today’s lending environment to raise the necessary capital to sustain and grow their businesses. In fact, the National Venture Capital Association reports that venture investing in early-stage businesses is down 71 percent over the last 12 months. This has created a funding “gap” that is preventing the growth of small businesses, and subsequently hurting job creation.

Historically, state economic development efforts have focused mostly on attracting large-scale manufacturing projects. Unfortunately, small businesses have not traditionally experienced the beneficial impacts of large-scale public incentives, as states have targeted these resources toward retaining and attracting larger companies. Therefore, these smaller businesses have struggled to grow and compete due to the lack of resources and assistance available to them.

Enter the Texas Certified Capital Company (CAPCO) program. In 2005, the state Legislature passed an innovative new economic development program to foster the development of an in-state venture capital infrastructure to help provide the necessary funding for innovative local companies that are without the means to obtain financing from traditional sources.

The Texas CAPCO program has created a beneficial public-private partnership that has helped level the playing field by funding numerous small and early-stage Texas-based businesses, allowing the state to reap the benefits of job creation, expansion of the tax base and retention of the most promising companies.

Critics of the program will point to a few other states where similar, older CAPCO programs had limited success. When examining the programs more closely, however, one realizes it’s similar to analyzing state lottery systems — some states do it well, some states do it poorly. And Texas has a stellar CAPCO program that has worked exceptionally well.

Since the Texas program’s inception in 2005 the results have been impressive. According to the state comptroller’s report to the Legislature — and additional data encompassing 2008 — certified capital companies have invested $122,158,000 in small Texas companies. In addition, follow-on private capital totaling $108,267,035 has been invested in these companies, creating or retaining 1,743 jobs, a figure expected to grow significantly as these companies mature and attract additional investment. (Incidentally, in today’s economic environment a retained job is as valuable as a job created).

Another benefit is that Texas CAPCOs must invest at least 30 percent of their capital in “Strategic Investment Areas,” generally urban core and rural communities — places that receive no attention from traditional venture capital investors.

The success of the program is ultimately measured over the long term and is based on the amount of additional follow-on venture capital it attracts, which can multiply the number of jobs created. A great example is Sweet Leaf Tea, an Austin-based CAPCO investment that just received a $15 million follow-on investment from Nestle to allow it to double its distribution capacity over the next 24 months.

The lifeblood of sustained economic development and competitive advantage remains long-term access to capital for our entrepreneurs and emerging companies. Particularly in this economy, public-private collaboration through programs like CAPCO will continue to provide the foundation for Texas’ long-term economic success.

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