Prepared for:

Clifton Kellogg

Program Director,

State Small Business 

Credit Initiative

U.S. Department of the Treasury

Contacts:

Eric Cromwell

Founding Member

Cromwell Schmisseur LLC

eric@cromwellschmisseur.com

Dan Schmisseur

Founding Member

Cromwell Schmisseur LLC

dan@cromwellschmisseur.com

Information and Observations on 

State Venture Capital Programs

Report for the U.S. Department of the Treasury

and Interested Parties in the 

State Small Business Credit Initiative (SSBCI)

Prepared by:

February 2013
DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220 

February 15, 2013 

Dear Colleagues: 

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the Act), 

which created the State Small Business Credit Initiative (SSBCI) and provided almost $1.5 billion to 

support new and existing state programs that support access to credit for small businesses and small 

manufacturers. SSBCI is expected to help spur up to $15 billion in lending to and investments in small 

businesses by requiring states to demonstrate a reasonable expectation that they will leverage in aggregate 

$10 in private lending for each $1 in public funds. Participating states use the federal funds for programs 

that help finance small businesses and manufacturers that are creditworthy, but who experience difficulty 

accessing credit for the loans they need to expand and create jobs. 

Participating states could choose to design their individual SSBCI programs to support financial 

institutions’ lending or to support venture capital investing. In 2011 and early 2012, Treasury approved 

over 140 different SSBCI programs for 57 participants, including 47 states, the District of Columbia, five 

territories, and eligible municipalities in Alaska, North Dakota and Wyoming. Of the total, Treasury 

approved 36 state-run venture capital programs in 30 states. 

Under the leadership of Secretary Timothy Geithner, the Treasury Department undertook a series of 

initiatives to expand access to capital for small businesses. Treasury requested the enclosed report—

Information and Observations on State Venture Capital Programs—from outside experts for their 

perspective on the emerging best practices in this field. The report focuses exclusively on state-run 

venture capital programs and reviews the following areas: 

 The allocation of SSBCI venture capital funding by state; 

 The distribution of SSBCI venture capital deployment strategies by state according to fund 

structure and according to the stage of growth of firms targeted to receive investment; 

 The consultants’ perspective on the principles of well-designed state venture capital programs. 

Our hope is that this report will contribute to greater understanding of state venture capital programs and 

their potential as a tool to foster a vibrant small business financing market. 

Sincerely, 

Don Graves Clifton G. Kellogg 

Deputy Assistant Secretary Program Director 

Small Business, Community Development, State Small Business Credit Initiative 

and Affordable Housing Policy 
ii

ACKNOWLEDGEMENTS

The authors gratefully acknowledge the contributions made by many people in completing this 

work. We specifically wish to thank Clifton Kellogg, Program Director; Jeff Stout, Deputy 

Director; Maureen Klovers, Compliance and Awards Manager; Phyllis Love, Relationship 

Manager; Roberto Rodriguez, Relationship Manager; and David Rixter, Relationship Manager.

In addition, special thanks are due to Terry Valladares and the team at Federal Management 

Systems.

The authors would also like to thank the state venture capital program managers and their 

staffs, advisors and stakeholders who facilitated program site visits and participated in 

conference calls to describe their approach to the design and implementation of their SSBCI 

state venture capital programs.
1. Executive Summary

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Table of Contents

1. Executive Summary..................................................................................................................... 1

2. SSBCI Venture Capital Option ..................................................................................................... 7

Exhibit 1 ....................................................................................................................................................7

Exhibit 2 ..................................................................................................................................................11

Exhibit 3 ..................................................................................................................................................14

Exhibit 4 ..................................................................................................................................................15

Exhibit 5 ..................................................................................................................................................16

Exhibit 6 ..................................................................................................................................................17

Exhibit 7 ..................................................................................................................................................18

Exhibit 8 ..................................................................................................................................................19

3. Venture Capital as Economic Driver ......................................................................................... 23

Exhibit 9 ..................................................................................................................................................23

Exhibit 10 ................................................................................................................................................25

Exhibit 11 ................................................................................................................................................25

Exhibit 12 ................................................................................................................................................26

Exhibit 13 ................................................................................................................................................27

Exhibit 14 ................................................................................................................................................28

Exhibit 15 ................................................................................................................................................28

4. Principles of Well-Designed State VC Programs....................................................................... 30

5. Recommendations Related to SSBCI VC Programs................................................................... 33

6. Author Bios................................................................................................................................ 36
1. Executive Summary

Prepared by Cromwell Schmisseur LLC 1

1. Executive Summary

As the chief steward of U.S. economic policy, the U.S. Department of the Treasury manages a 

large portfolio of programs and fiscal policies intended to strengthen the U.S. economy and 

promote the conditions for stable economic growth by creating jobs and economic 

opportunities. Within this portfolio resides a new initiative for fostering innovation and job 

creation through a federal-state partnership that stimulates and leverages private sector 

investment in high-potential small businesses – “state venture capital programs” within the 

State Small Business Credit Initiative (SSBCI).

Congress created and President Obama signed into law the Small Business Jobs Act of 2010, 

which includes the $1.5 billion SSBCI, a credit support program established to address concerns 

that small businesses were having greater difficulty accessing financial capital in current 

economic conditions. An analysis of financial support programs at the federal level indicates 

SSBCI is unique as a federal program that provides funding and assistance for state-managed 

venture capital investment programs.

An important feature of SSBCI is the flexibility allowed by the Act and Treasury administrators 

for state program managers to assess market needs in their respective states and design 

customized program structures, including an opportunity to invest allocated capital in existing 

or new state venture capital programs. As such, SSBI empowers states to play an important role 

as “laboratories of innovation” for designing effective programs.

SSBCI should create both near-term and long-term benefit to state venture capital programs

and capital markets:

1. SSBCI represents a meaningful federal policy response that addresses inefficiencies in 

capital markets. States expect that total private investment stimulated by SSBCI VC 

programs will be at least $4 billion over the five years 2012 through 2016, equal to 8 

percent of the estimated $50 billion in venture capital investment in the participating 

states over the same period.1

2. SSBCI has the potential to improve the practice of federal and state involvement in 

capital formation by creating knowledge and facilitating information sharing among 

practitioners. There is a recognized need for clarity on what works and does not work in 

capital formation policies, and SSBCI offers a rare opportunity to evaluate a diverse set 

of program experiments.

For state policy leaders, VC program managers, and participants in regional networks of 

entrepreneurs and private investors who contribute to the formation and development of jobcreating, high-potential small businesses, SSBCI represents an opportunity to comment on the 

appropriate roles of government in addressing critical market inefficiencies. 

 1 This excludes venture capital investment in California and Massachusetts because they do not use SSBCI capital

for state venture capital programs. 
1. Executive Summary

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This report summarizes information about SSBCI-funded state venture capital programs and the 

diversity of strategies used by the 30 participating states. Because states received their 

allocation in 2011 and early 2012, it is too early to draw quantitative conclusions of program 

performances. However, this report includes the Consultants’ qualitative assessment of the 

principles of a well-designed state venture capital program. The authors encourage leaders in 

the “capital formation” industry to assist in the evaluation of the key attributes of state VC 

programs alongside the broad range of federal and state financial assistance programs for small 

business initiated in the past 20 years.

Initiative Context: Investment Environment Challenging for High-Potential Small Businesses

Venture capital (VC) is a category of financial capital invested primarily for equity ownership in 

private small businesses with the potential to grow substantially in size and value. VC 

investment activity in states and regions is often viewed as a leading indicator of future job 

creation, economic growth and competitiveness. According to a study by the National Venture 

Capital Association, companies backed by VC investments contribute disproportionately to job 

creation in the U.S., with 11% of U.S. jobs and 21% of GDP attributable to the companies that 

received VC investments at early development stages.2

Small businesses with the potential to grow rapidly and create high-paying jobs depend on an 

adequate and accessible supply of risk capital. When the supply of risk capital is too low, 

capable entrepreneurs developing fundable companies might be disadvantaged when 

negotiating deal terms and either move to a geography where capital is available or discontinue 

efforts to develop a high-growth business.

Since 2006, the national supply of venture capital has declined 32%, from $288 billion to $197 

billion in 2011.

3 Many institutional investors have reduced capital commitments to VC funds at 

the same time that firms began distributing capital to investors from large funds raised during 

the 1999-2000 bubble. Also, for five consecutive years beginning in 2008, the rate at which VC 

firms invested capital in high-potential companies has exceeded the rate of new capital 

commitments to VC funds, indicating that the amount of VC available for new investments is 

likely the lowest it has been since 1998.

4

Another concerning trend relates to the extreme geographic concentration of VC investment 

activity. Since 2008, companies headquartered in two states – California and Massachusetts –

received more than 60% of VC investments in the U.S., while these states represent 14% of 

the U.S. population. As for capital supply, VC firms in these two states manage 63% of the 

nation’s VC under management.5

 2 Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the U.S. Economy, published 

by IHS Global Insight and the National Venture Capital Association, 2009.

3 2012 NVCA Yearbook, p. 18, figure 1.04.

4 Ibid, p. 11, updated for recent press reports on data from 2012.

5 Ibid, p. 18, figures 1.04 and 1.06.
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Geographic concentration of VC activity results in part from the positive factors that make 

Silicon Valley and Boston leading epicenters for innovation. Excellent research institutions, a 

highly educated workforce, and a culture of risk taking draws entrepreneurs and investors to 

these regions that continue to prosper despite the substantially higher costs of doing business 

there. However, regional excellence and entrepreneurial culture alone do not explain the 

extraordinary concentration. For the U.S. economy as a whole, extreme geographic 

concentration of VC depicts capital inefficiencies that may inhibit the nation from realizing its 

full potential for innovation development and job creation.

By supporting state efforts to create and/or strengthen venture capital programs through 

SSBCI, the Treasury is a significant contributor to the widely embraced policy objective of

increasing access to capital for high-potential small businesses. Well-designed state VC 

programs can and should prime the pump for long-term private sector investment and improve

the overall business environment for small business to start and grow. Furthermore, state 

venture capital programs should not discourage or displace private sector activity, but instead 

should demonstrate that good investment opportunities exist in often-overlooked regions. 

Ultimately, state financial assistance programs for small business should reduce market

inefficiencies so that private sector investment takes the lead in capital markets and innovation 

ecosystems. 

Snapshot of SSBCI VC Programs – Program Structures and Business Investment Characteristics

As of September 30, 2012, thirty states6 had VC programs approved by the U.S. Department of 

the Treasury (Treasury), representing a total of $403 million of SSBCI funds allocated to venture 

capital. Many states allocated funds to existing state-sponsored VC initiatives. Other states 

created new VC programs or launched previously designed programs that were dormant due to 

challenging state budget environments. 

Direct investment funds and fund-of-funds programs were the two most commonly selected 

program structures for capital deployment, each representing just over one-third of the total 

SSBCI capital allocated to VC programs. Two other investment structures, 3rd-party managed 

funds and co-investment funds, collectively represent just over one-quarter of the SSBCI VC 

program option funds.

• In direct investment funds, state program managers serve in the role of VC fund 

managers; they actively network with entrepreneurs, source deal flow, perform due 

diligence, assist in the recruitment of co-investors and may set terms of the investment 

transaction.

• In co-investment funds, state VC programs invest alongside private sector investors in 

deals meeting certain requirements, and the state program manager’s role focuses on 

compliance rather than actively performing subjective evaluations of a company’s 

investment potential.

 6 “State” is used to describe all SSBCI allocation recipients, including municipalities and territories
1. Executive Summary

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• In fund-of-funds, state VC program managers allocate capital to more than one VC fund 

that manages the processes of investing in businesses while monitoring compliance with 

SSBCI program restrictions. 

• In 3rd-party managed funds, the state contracts with a single external firm to manage 

the investment process using a single fund structure that may or may not comingle 

private funds. 

State programs also vary in the stage of company development targeted for capital investment.

• Pre-seed describes “proof-of-concept” capital for entrepreneurs developing an 

innovation and working through the company formation stage; 

• Seed/early describes capital investments used to form a company or in companies 

already formed but with insignificant revenues and no profits. 

• Expansion or growth capital investments are made in small businesses with revenues 

and perhaps even profits that need capital in order to “scale” the business into a larger 

enterprise. 

• Later-stage or mezzanine capital investments refer to the most conservative stage of VC 

investments, which still carry a greater risk profile than loans from banks. In fact, 

investors often structure mezzanine capital investments as subordinated debt with 

equity options.

Compared to the overall U.S. market for VC investments, SSBCI state VC programs focus more 

on pre-seed, seed and early stage investments – the stage of investment on the financing 

lifecycle where market inefficiencies most often exist. More than 65% of SSBCI VC program 

capital allocations focus on pre-seed, seed and early stage investments, compared to only 32% 

of total U.S. VC investments in 2011.7

Potential Comprehensive Benefits from SSBCI Program Activities

While highlighting the benefits of SSBCI’s role in directly increasing the supply of risk capital for 

small business investment, many state VC program managers expect to generate additional

intangible benefits from the SSBCI state VC option. Anticipated intangible benefits include:

• “Prime the pump” for private sector investment activity. Many states use SSBCI capital 

to stimulate the development of private capital markets where market inefficiencies 

exist. These states hope to fill gaps in capital markets, meet realistic market demand, 

and build regional investment capacity until the need for government intervention is 

dissipated.

• Support and retain innovation, entrepreneurs and the high-potential companies they 

develop. State and local leaders seek the jobs and wealth created by successful

entrepreneurs, but their business environments too often lack sufficient capital 

resources to support them at critical development stages..

 7 National Venture Capital Association Yearbook 2012, p. 27.
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• Facilitate knowledge sharing and collaboration with peer state VC program managers.

SSBCI combines a federal capital program for all states with the flexibility for state 

program managers to design unique VC program structures, an unprecedented 

opportunity for states.

• Development of new measurement standards, principles and best practices for state 

VC programs. States invested in VC programs long before SSBCI, but with varying 

results and no consistent measurement standards . Many state program leaders foresee 

the development of new measurement standards built from common experiences and 

verifiable data, giving states better tools to address the risk capital needs for future 

programs.

Principles of Well-Designed State Venture Capital Programs

SSBCI is in the “early implementation phase” of the seven-year initiative (2011-17). While “best 

practices” will emerge over time from SSBCI program-specific experiences, the Consultants 

offer the following “principles” to the field of practitioners based primarily on their cumulative 

prior experiences:

1. Understand the supply of and demand for venture capital. Program managers with 

detailed knowledge of the capacity for VC investments in their state (i.e., data on 

number of resident VC funds, amounts of capital managed, transactions closed, 

amounts invested, industry focus and preferred development stages, etc.) are more 

likely to develop programs with targeted investment strategies that “prime the pump” 

for accelerated private sector investing.

2. Focus on capacity building with an ecosystem approach. Program managers committed 

to building long-term entrepreneurial capacity and a sustained venture capital presence, 

rather than one-off investments, are more likely to design strategies aligned with 

market-based principles. Several state program managers communicated how they are 

using SSBCI capital to boost existing development strategies designed to build

innovation capacity.

3. Create pathways to the next investment round. The most successful VC investors are 

continually planning for the next financing event, actively communicating about 

investment opportunities and expanding professional networks to the benefit of 

portfolio of companies. If pathways to the next financing event are not created, small 

businesses receiving early-stage investments from state VC programs might not survive.

4. Plan for the long-term and manage expectations. Experienced managers set

expectations for achieving “comprehensive returns” across a diverse portfolio of longterm investments that include reasonable projections for both financial returns and 

indirect economic benefits.

5. Proactively address the potential for conflicts of interest and political influence. Welldesigned initiatives use clearly stated policies and processes to govern activities and 

investment decisions.
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6. Attract the most capable leaders to manage resources. Successful programs recruit 

capable fund managers with specialized skills and credibility with elite entrepreneurs 

and investors.

7. Measure results accurately with defensible logic. In an industry without recognized 

standards for measuring results, experienced program managers define credible 

measurement standards at the outset and then measure results consistently and with 

third party validations.

8. Align state economic development interests with the financial interests of fund 

managers and limited partner VC fund investors. States should participate in the 

financial returns from successful investments in order to provide future capital 

resources for new investments. 

Recommendations Related to SSBCI State Venture Capital Programs

As a byproduct of the technical assistance provided to the Treasury’s SSBCI team, the 

Consultants have drafted recommendations for consideration by the Treasury and the body of 

SSBCI VC program managers, the details of which are described in the body of this report:

1. Treasury should continue its efforts to work with the industry of state venture capital 

programs in order to describe common challenges, clarify the lessons learned and 

identify emerging best practices.

2. Treasury should encourage the sharing and review of transaction-level data and the 

development of impact measurement policies, which are important to assessing the 

performance of SSBCI VC programs over the program period that ends in 2017 and 

beyond. Policy leaders should be cautioned that it is likely that state VC programs will 

record some financial losses before 2017, while the financial successes and 

comprehensive returns will come over a longer period.

3. Federal policy leaders should build on the foundation established by SSBCI to support 

state venture capital programs that operate on the principles of a well-designed 

program identified in this report.

4. Future federal venture capital initiatives should require relevant program-specific 

training for VC program managers. VC program managers empowered by state 

government leaders range from novice to expert with respect to their preparedness to 

manage VC programs, and therefore need a common baseline of knowledge about 

options for design and operation of a state venture capital program.

5. States should implement capital formation initiatives as part of a comprehensive 

strategy for supporting entrepreneurial ecosystems, and the federal government 

should seek to foster the development of regional innovation networks with 

complementary development strategies. 
2. SSBCI Venture Capital Option

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2. SSBCI Venture Capital Option

Congress created and President Obama signed into law the Small Business Jobs Act of 2010, 

which includes the $1.5 billion State Small Business Credit Initiative (SSBCI), a credit support 

program intended to address concerns that small businesses were having greater difficulty 

accessing capital following the national economic crisis of 2008. SSBCI provides direct funding 

to states, the District of Columbia, territories and approved municipalities for strengthening 

existing programs that expand access to credit for small businesses.

An important attribute of SSBCI is the flexibility afforded state leaders in program design to 

address local market conditions affecting small businesses and manufacturers. States can play 

an important role as “laboratories for innovation” for designing effective programs. By 

permitting states the leeway to customize venture investment strategies within given 

parameters, the initiative may set a new precedent for federal-state economic development 

collaborations that build on state capabilities with federal funding.8

The amount of SSBCI funds states received was based on a formula established by Congress 

that took into consideration state populations and job losses following the 2008 economic 

crisis. The minimum state allocation was $13.2 million. States were required to apply for SSBCI 

funds using a standard application process that included planned uses of funds, projected 

economic benefits attributable to the program and the projected amount of private sector 

leverage. States were required to show a “reasonable expectation” that their program design 

and overall financial projections would achieve a private leverage ratio of 10:1 by the end of 

2016. 

States that applied early for SSBCI funds began using the capital by June 2011, and all 

participating states must use SSBCI funds for program purposes through March 2017. As 

 8 The existing federal and state financial assistance programs for small businesses are structured such that it is not 

possible to compare the relative outcomes of federal programs that stimulate private sector investment. In 

general, the federal programs conform to specific agency program goals, such as the DOD, EPA and NASA direct 

investment programs, or are designed to enhance private investment vehicles, such as the SBICs, RBICs and New 

Markets Tax Credit Programs. The existing state programs are diverse and not funded from a single source, which 

inhibits state-to-state comparisons.

Program Structure Federal Government State Government

Direct Investment DOD (DARPA, In-Q-Tel, OnPoint), EPA, 

NASA, DOE (ARPA-E), SBIR/STTR

State-managed VC funds, coinvestment funds and proof-ofconcept fund initiatives

Fund-of-Funds SBA (SBICs), USDA (RBICs) State pension funds, state-financed 

fund-of-funds programs

Tax Credit Financing New Markets Tax Credits, Renewable 

Energy Tax Credits, Investment Tax 

Credits.

Angel investor tax credits, taxcredit financed VC programs
2. SSBCI Venture Capital Option

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designed, states may retain SSBCI capital at the program’s conclusion to continue their SSBCI 

programs or reallocate the resources for other purposes.

In addition to the credit support programs designed for financial institution’s commercial 

lending, SSBCI provided states the opportunity to create or support “venture capital” (VC) 

programs to serve the segment of high-growth potential small businesses carrying a risk/reward 

profile underserved by banks. 

Venture capital is financial capital provided to high risk, high-growth potential startup 

companies. Professional investors managing VC generally specialize in emerging technologies 

and the unique challenges of small companies with ambitions to grow rapidly. Managing a VC 

firm requires embracing and managing risk as an opportunity to achieve extraordinary 

outcomes. VC funds invest capital in exchange for ownership interests in companies positioned 

to grow their overall value by several multiples of their current value. One “home run” 

investment in ten could yield above-market returns for a VC fund, even with several write-offs 

in the portfolio.

Even with the SSBCI VC option, there are fewer state VC programs than well-established lending 

support programs. However, state leaders increasingly recognize that emerging high-potential 

small businesses disproportionately create high-wage jobs and economic growth. The 

Consultants believe that participating States requested to use their SSBCI allocation for VC 

programs among eligible program types for a couple reasons:

• Several states reported that demand from lenders for enhanced loan programs was 

lower than expected. Many banks are working to reduce portfolios of marginally 

acceptable loans, and with interest rates historically low, some banks see the profit 

potential from an incremental portfolio of small business loans as not aligned with the 

risks inherent in a still-recovering economy. 

• Several states saw SSBCI as an opportunity to begin or strengthen VC programs 

constrained by state budgets beset by lower state revenues. Due to the inherent risks

and long maturation cycles for companies in the VC profile, state officials often devote 

limited state funds to more traditional business support programs. With the availability 

of new resources provided by SSBCI to stimulate capital investment, many states 

recognized an opportunity to start or strengthen programs for which state funds have 

been unavailable at scale. 

As of September 30, 2012, thirty states and territories operated VC programs approved by the 

U.S. Department of the Treasury (Treasury), representing a total of $403 million of SSBCI 

capital. Six additional states and territories were in the process of modifying applications to add 

VC programs and/or transfer funds previously allocated by the states to non-VC SSBCI 

programs. 
2. SSBCI Venture Capital Option

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States participating in SSBCI allocated funds to either Capital Access Programs (CAP) or Other 

Credit Support Programs (OCSP), of which there were several options

9

, including one for VC 

programs:

Venture capital programs: These programs provide investment capital to create and grow start-ups,

early-stage and mid-stage businesses, often in one of two forms: (1) a state-run venture capital fund 

(which may include other private investors) that invests directly in businesses or (2) a fund-of-funds, 

which is a fund that invests in other venture capital funds that in turn invest in individual businesses. 

Many factors, particularly resources and available talent, inform a state’s decision on which form to 

choose.10

 9 Eligible lending programs included Capital Access Programs, loan guarantee programs, loan participation 

programs, and collateral support programs. 10 U.S. Treasury SSBCI Program Profile: Venture Capital
2. SSBCI Venture Capital Option

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Exhibit 1

SSBCI VC program allocations by state, as percentage of total SSBCI allocations

State Total Allocation 

($millions) 

VC Allocation

($millions)

$ for VC as % of Total 

Allocation

American Samoa 10.4 0.0 0%

Anchorage, AK 13.2 13.2 100%

Alabama 31.3 0.0 0%

Arizona 18.2 18.2 100%

Arkansas 13.2 4.7 36%

California 168.6 0.0 0%

Colorado 17.2 0.0 0%

Connecticut 13.3 0.0 0%

Delaware 13.2 0.0 0%

District of Columbia 13.2 0.0 0%

Florida 97.6 43.5 45%

Georgia 47.8 0.0 0%

Guam 13.2 0.0 0%

Hawaii 13.2 13.2 100%

Idaho 13.2 0.0 0%

Illinois 78.4 20.0 26%

Indiana 34.3 34.3 100%

Iowa 13.2 5.0 38%

Kansas 13.2 2.6 20%

Kentucky 15.5 0.0 0%

Louisiana 13.2 5.1 39%

Maine 13.2 3.0 23%

Maryland 23.0 6.5 28%

Massachusetts 22.0 0.0 0%

Michigan 79.2 6.0 8%

Minnesota 15.5 1.0 6%

Mississippi 13.2 0.0 0%

Missouri 26.9 16.9 63%

Montana 13.2 0.0 0%

Nebraska 13.2 13.2 100%

Nevada 13.8 0.0 0%

New Hampshire 13.2 4.5 34%

New Jersey 33.8 5.0 15%

New Mexico 13.2 0.0 0%

New York 55.4 26.0 47%

North Carolina 46.1 10.0 22%

Northern Mariana Islands 13.2 0.0 0%

Ohio 55.1 15.0 27%

Oklahoma 13.2 13.2 100%

Oregon 16.5 0.0 0%

Pennsylvania 29.2 5.0 17%

Puerto Rico 14.5 2.0 14%

Rhode Island 13.2 11.0 83%

South Carolina 18.0 0.0 0%

South Dakota 13.2 0.0 0%

Tennessee 29.7 29.7 100%

Texas 46.6 46.6 100%

U.S. Virgin Islands 13.2 0.0 0%

Utah 13.2 0.0 0%

Vermont 13.2 0.0 0%

Virginia 18.0 0.0 0%

Washington 19.7 5.0 25%

West Virginia 13.2 7.7 58%

Wisconsin 22.4 16.0 71%

TOTAL 1434.8 403.1 28%
2. SSBCI Venture Capital Option

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Within the VC option category, states created, and are implementing, a variety of programs. 

The most important variables within the VC option relate to the stage of investing that the 

program targets, if any, and the structure of the VC program for capital deployment to small 

businesses.

1. Stage of Investing

Many high-growth potential companies progress through a common development lifecycle, the 

stages of which pose different types of risks to investors. Generally, early stage investments 

carry relatively greater risk and the potential for greater returns than later stage investments. 

As a company matures, the risk of financial loss to investors decreases, and the different phases 

of company maturation along the “capital continuum” or “financing lifecycle” are served by 

different types of investors.

Most SSBCI VC programs designed by states focus on a particular stage of investing. The 

Consultants classified investment stages similar to, but not exactly aligned with, the definitions 

used in the MoneyTreeTM report published by PricewaterhouseCoopers and the NVCA. For 

SSBCI, the investment stages are described as follows:

a. Pre-seed and “Proof of Concept” Funds

At the earliest stages, the company may represent little more than an entrepreneur’s idea, or a 

conceptual but unproven technological innovation developed by a scientist or engineer at a 

Exhibit 2

“Capital Continuum”; source: Bessemer Trust
2. SSBCI Venture Capital Option

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research institution. Companies at this formation stage typically have no full-time employees. 

Investors put very small amounts of capital in the business, typically $15k to $150k, depending 

on the degree of technology development work involved in providing evidence that the 

innovation is viable technically. 

Oklahoma (24% of allocation), Missouri (7%) and Iowa (6%) allocated a portion of their VC 

program funds to pre-seed investments, most of which will fall into the high-technology “proof 

of concept” category. University technology transfer offices commonly refer opportunities to 

proof of concept programs with the goal of introducing the researcher and his/her innovation 

to strategic angel investors following successful outcomes from the pre-seed investment. 

Failure rates from proof of concept investments can range as high as 80%, and even successful 

technology experiments may not receive follow-on capital if investors perceive the market size 

of the problem solved as too small.

Rhode Island committed 18% of its SSBCI VC program funds to a startup business “accelerator” 

called Betaspring that provides pre-seed capital along with intensive training, mentoring and 

relationship building. Business accelerators attract idea stage entrepreneurs with primarily lowtech solutions to a perceived market need. The accelerator invests a small amount of capital 

($12k-$20k) in teams that enroll in an intensive 12-week mentoring program. At the conclusion, 

the teams pitch angel investors for seed capital to launch their small businesses. Betaspring is 

similar in design to national accelerator models such as Tech Stars and Y Combinator. Like proof 

of concept funds, startup accelerators are expected to experience high failure rates for the 

firms they support. However, success rates are bolstered by the value-add services provided, 

and successful companies that raise subsequent rounds of investment capital can yield 

substantial leverage and comprehensive returns on the small amounts of capital invested.

b. Seed Capital and Early Stage Funds

State VC programs commonly combine seed and early stage investments into a single category 

when describing the scope of their investment programs. Seed capital is the first investor 

money used to start the business and launch the first product/service. All seed capital 

investments are early stage investments, the more expansive definition used to describe highpotential small businesses that are rapidly developing and introducing new products but are 

not yet profitable. Investment risks are lower in early stage investments than pre-seed 

investments because early stage private investors generally do not begin funding market 

penetration activities until there is an acceptable level of confidence that the technology is 

viable. The tolerance for financing technology risk varies across industries with life sciences and 

energy technology more likely to attract VC investment prior to market introduction. However, 

failure rates at this stage remain very high – with an experienced-based estimate in the range of

40-60%11 - because the “market risk” is typically unproven until the products or services are 

 11 Robert Wiltbank and Warren Boeker, Ewing Marion Kauffman Foundation, “Angel Investor Performance 

Project,” November 2007. According to this report, 39% of reported angel investments returned less than 1X 

original capital from all investments, of which 75% were seed/startup. Loss rate is expected to be higher for nonresponding angel investors and less for later stage investments in the survey.
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 13

developed and efforts are made to attract paying customers. For this reason, seed/early stage 

venture capital funds are less common outside Silicon Valley, and angel investors are the most 

common sources of capital for seed/early stage high-potential small businesses across the 

country.

This category encompasses more than 65% of SSBCI funds in VC programs ($257 million), with 

23 out of 30 states with VC programs committing some portion of their funds to seed/early 

stage investing. Technology-Based Economic Development (TBED) program leaders and the 

communities they serve are strong advocates for government support of seed/early stage 

investing. Most TBED program leaders see government capital programs such as SSBCI as 

critical to helping high-growth potential small businesses accelerate the closing of capital 

rounds. By increasing access to capital, state leaders endeavor to retain the company in their 

own state rather than see the company relocate to areas of the country with greater access to 

seed/early stage capital.

Program managers of seed/early stage VC programs should monitor “investment drift.” In prior 

experiences unrelated to SSBCI, the Consultants observed VC funds apply for funds from 

government-sponsored programs on the alleged merits of their expertise in seed/early stage 

investing, only to favor more mature investments once in control of the funds. Although the

demand for seed/early stage capital far exceeds the supply, investment managers are tempted 

to migrate to the least risky investments allowed. 

c. Later Stage VC, Mezzanine and Debt Funds

“Growth” capital invests in small businesses that can demonstrate established demand for their 

products and/or services and require capital to scale or expand. Investors often describe 

growth capital investments as financing “execution risk,” meaning that the technology has been 

proven to work, customers have shown a willingness to buy the products or services at 

reasonable prices, and the risk-reward profile relates to whether the business can sufficiently 

grow its market share to achieve profitability and/or sell the business to a competitor at a 

premium valuation. 

Compared to seed/early stage capital, there is a greater supply of later stage VC and 

“mezzanine” capital – a broad term commonly used to describe subordinated loans to growth 

stage companies with some kind of upside participation, either via warrants to purchase equity 

or a royalty on revenues. Investors in later stage businesses provide less guidance/mentoring to 

management teams than do seed/early stage investors, and they typically base investment 

decisions more on business fundamentals than deep industry domain experience and future 

high-growth projections.

Later stage and mezzanine funds appeal to government program managers because they can 

more directly correlate investments to immediate jobs growth. Michigan, Ohio and Arizona

allocated their entire SSBCI VC funds to mezzanine/debt funds because their non-SSBCI 

programs already addressed the capital needs of seed/early stage small businesses, and the 
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 14

program managers perceived near-term opportunities to use mezzanine/debt investments to 

help manufacturing companies capitalize immediate growth plans. 

Exhibit 3

SSBCI VC program projected capital allocations by investment stage

2%

12% 4%

17%

64%

Seed/Early

Mezz./ Debt

Growth

Any

Pre-Seed
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 15

Exhibit 4

SSBCI VC program capital allocations by state and projected stage of investing

State Total Any Pre-Seed Seed/Early Growth Mezz./Debt

Anchorage, AK $ 13.2 $ 13.2

Arizona 18.2 18.2

Arkansas 4.7 4.7

Florida 43.5 43.5

Hawaii 13.2 13.2

Illinois 20.0 20.0

Indiana 34.3 2.8 25.5

Iowa 5.0 0.3 2.2 2.5

Kansas 2.6 2.6

Louisiana 5.1 - 5.1

Maine 3.0 3.0

Maryland 6.5 6.5

Michigan 6.0 6.0

Minnnesota 1.0 1.0

Missouri 16.9 0.7 1.1 2.9 6.5 5.7

Nebraska 13.2 4.2 9.0

New Hampshire 4.5 4.5

New Jersey 5.0 5.0

New York 26.0 26.0

North Carolina 10.0 10.0

Ohio 15.0 15.0

Oklahoma 13.2 3.2 5.0 5.0

Pennsylvania 5.0 5.0

Puerto Rico 2.0 2.0

Rhode Island 11.0 2.0 9.0

Tennessee 29.7 20.7 9.0

Texas 46.6 27.0 19.6

Washington 5.0 5.0

West Virginia 7.7 7.7

Wisconsin 16.0 7.0 9.0

Total Allocated to VC $403.1 $18.1 $6.6 $259.9 $49.6 $62.9

Percentage of Total 4.5% 1.6% 64.5% 12.3% 15.6%

Stage of Investing
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 16

Exhibit 5

SSBCI VC program capital allocations by state and projected stage of investing

 -

 10

 20

 30

 40

 50

Anchorage, AK

Arizona

Arkansas

Florida

Hawaii

Illinois

Indiana

Iowa

Kansas

Louisiana

Maine

Maryland

Michigan

Minnnesota

Missouri

Nebraska

New Hampshire

New Jersey

New York

North Carolina

Ohio

Oklahoma

Pennsylvania

Puerto Rico

Rhode Island

Tennessee

Texas

Washington

West Virginia

Wisconsin

Total

 -

 10

 20

 30

 40 Seed/Early

 -

 10

 20

Mezz/Debt

 -

 10 Any

 -

 10

Pre-Seed

 -

 10

 20

Growth

$10 MIL
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 17

2. Structures of VC Programs

The SSBCI VC programs were categorized using four types of program structures for capital 

deployment: Direct Investment Fund, Fund-of-Funds, Co-investment Fund, and Third-Party 

Managed Fund.

• Fund-of-Funds = Allocates capital to more than one fund with external management

• 3rd Party Managed Fund = Allocates capital to a single fund with external management

• Direct Investment Fund = State has significant responsibility for leading investment 

decisions

• Co-Investment Fund = State has limited due diligence responsibility and follows private 

investment

13%

14%

34%

39%

Exhibit 6

SSBCI VC program capital allocations by structures

Direct

Fund-of-Funds

3rd Party

Co-Investment
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 18

Exhibit 7

SSBCI VC program capital allocations by state and program structure

State Total Fund-of-Funds 

 Direct 

Investment 

 3rd Party 

Managed 

 CoInvestment 

Anchorage, AK $ 13.2 $ 8.7 $ 4.5

Arizona 18.2 18.2

Arkansas 4.7 0.7 3.0 1.0

Florida 43.5 43.5

Hawaii 13.2 13.2

Illinois 20.0 20.0

Indiana 34.3 7.3 18.0 9.0

Iowa 5.0 5.0

Kansas 2.6 2.6

Louisiana 5.1 5.1

Maine 3.0 3.0

Maryland 6.5 6.5

Michigan 6.0 6.0

Minnnesota 1.0 1.0

Missouri 16.9 16.9

Nebraska 13.2 13.2

New Hampshire 4.5 4.5

New Jersey 5.0 5.0

New York 26.0 26.0

North Carolina 10.0 10.0

Ohio 15.0 15.0

Oklahoma 13.2 8.2 5.0

Pennsylvania 5.0 5.0

Puerto Rico 2.0 1.3 0.7

Rhode Island 11.0 9.0 2.0

Tennessee 29.7 29.7

Texas 46.6 46.6

Washington 5.0 5.0

West Virginia 7.7 7.7

Wisconsin 16.0 7.0 9.0

Total Allocated to VC $403.1 $137.9 $155.2 $55.0 $55.0

 Percentage of Total 34.2% 38.5% 13.6% 13.6%

Structure
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 19

 -

 10

 20

 30

 40

Anchorage, AK

Arizona

Arkansas

Florida

Hawaii

Illinois

Indiana

Iowa

Kansas

Louisiana

Maine

Maryland

Michigan

Minnnesota

Missouri

Nebraska

New Hampshire

New Jersey

New York

North Carolina

Ohio

Oklahoma

Pennsylvania

Puerto Rico

Rhode Island

Tennessee

Texas

Washington

West Virginia

Wisconsin

Total

 -

 10

 20

 30

 40 Fund-of-Funds

 -

 10

 20

Direct Investment Fund

Exhibit 8

SSBCI VC program capital allocations by state and structures

 -

 10

 20

 30

 40 3rd Party Managed Fund

 -

 10

 20

 30

 40 Co-investment Fund

$20 MIL
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 20

a. Direct Investment Funds

Just over half of state VC programs use state agencies and/or quasi-state entities (typically 

formed as nonprofit public/private partnerships) to manage SSBCI funds with the roles and 

responsibilities of a VC fund. The staff of these organizations meet with small business owners, 

solicit business plans for review, perform due diligence on investment opportunities, 

collaborate with co-investors and may even set deal terms and serve on the company’s boards 

of directors. States like Indiana, Maryland, Oklahoma, Pennsylvania, Maine and Rhode Island

have experience with investing taxpayer funds in pre-seed and seed/early stage small 

businesses for economic development purposes but with the goal of earning “comprehensive 

returns.” Comprehensive returns include direct financial returns plus indirect economic 

development returns. Several of these programs have well-established systems of processes 

and controls, solid reputations with business leaders, and experienced investment 

professionals. These programs offer examples of managing funds with the goal of making 

investments in high-potential companies and supporting the regional ecosystem that mentors 

and invests in entrepreneurs that aspire to develop high-growth potential companies. 

Program leaders in Illinois, Anchorage and Missouri established new programs with SSBCI 

capital to make direct investments in companies. The Missouri and Anchorage, AK teams are 

primarily leading investment rounds, typically making the first commitment of capital and 

establishing the deal terms that other investors would follow. Illinois is also playing an active 

role in catalyzing investment rounds, but with a policy of not leading investment rounds. 

Instead, Illinois begins investment due diligence with seed/early stage companies that already 

have a lead investor but need substantially more capital to close the round. By making 

investment commitments that accelerate momentum towards achieving the close that will 

allow the small businesses to access the capital, Illinois program hopes to have a direct impact 

on helping high-potential small businesses obtain key financing for development activities. 

b. Fund-of-Funds

In this structure, the SSBCI funds are managed by third party investment managers, with the 

state investing capital in more than one privately managed fund. The state’s investment 

decision focuses on choosing fund managers that, once selected, make investment decisions in 

small businesses based on an approved strategy without direct state involvement. The SSBCI 

capital might or might not be comingled with funds from non-federal sources in these fund 

structures.

New Jersey and Hawaii leverage the infrastructure from previously established state-sponsored 

fund-of-funds programs to make new commitments to funds making seed/early stage 

investments in industry sectors aligned with the state’s economic development goals. Louisiana

is investing $5 million in seed/early stage VC funds focused on commercializing medical 

technologies from the state’s universities and hospitals. New York is investing $25 million in 

five regional VC funds making seed/early stage investments with the goal of providing greater 
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 21

access to capital for high-potential small businesses outside the thriving VC community in New 

York City. Michigan allocated $6 million for LP investments in two regional mezzanine funds 

with a focus on financing growth plans of mid-size manufacturers that have had challenges 

maintaining critical banking relationships due to tightened credit review processes. North 

Carolina is investing $10 million across five in-state VC firms that are actively engaged in fundraising processes for new VC funds. Texas quickly allocated $27 million to two funds managing 

in-state CAPCO funds, then initiated a fund-of-funds application process for six or more regional 

angel investor networks to manage a pool of $18 million of SSBCI funds for investments in 

seed/early stage high-potential small businesses. Indiana and Arkansas are implementing VC 

programs with more than one investment strategy for capital deployment, and both states have 

allocated a portion of their total allocations to VC for a fund-of-funds model. Indiana has 

allocated $5.5 million of SSBCI capital to seed investment funds through a competitive process, 

and Arkansas is working to commit an estimated $685,000 to regional angel/seed funds for 

investment in small businesses.

c. Third-Party Managed Funds

Some states engage a single private-sector investment manager (not associated with state 

government) to invest SSBCI funds through a single venture capital program structure. Florida’s

state-sponsored non-profit responsible for the tech-based economic agenda, Enterprise Florida, 

entered into a management contract with Arsenal Venture Partners to invest its entire $43.5 

million SSBCI VC program allocation via a stand-alone fund directly in high-potential small 

businesses. New Hampshire intends on committing its $3.3 million VC program allocation as a 

limited partner investment in Borealis Ventures, which is using this anchor investment to 

market a $30 million seed/early stage VC fund that will invest exclusively in New Hampshire 

small businesses. Rhode Island outsourced management of a seed investment fund to 

Betaspring, which is operating a startup accelerator investment model. Washington allocated

its entire $5 million SSBCI VC program allocation to the newly created W Fund, managed by the 

technology transfer office at the University of Washington.

d. Co-investment Funds

Several states are deploying fund structures that simply match private sector investments at 

pre-determined ratios. State program managers have review processes in place that focus 

primarily on whether the applicants meet the minimum eligibility requirements rather than 

evaluating the financial merits of the investment proposal. Unlike direct investment funds, 

program managers of state co-investment funds are not directly responsible for sourcing deal 

flow, conducting due diligence on investment opportunities, establishing deal terms, identifying 

strategic investors for the syndicate and ongoing oversight of the investment portfolio.

Tennessee allocated its entire $29.7 million SSBCI allocation to a program that matches 

investments by “approved investors” that paid a fee and completed an application process. The 

ratio of the private sector match varies from 2:1 to 4:1 depending on the amount of nonfederal capital invested. Kansas created a $2.7 million co-investment fund that limits the state’s 

capital participation to 9% of an investment round and not more than $250,000. West Virginia
2. SSBCI Venture Capital Option

Prepared by Cromwell Schmisseur LLC 22

used its $7.7 million SSBCI VC program allocation to launch a co-investment program in which 

the initiating investor from a list of approved funds/organizations assumes the ownership 

interest in the SSBCI capital from the state. Oklahoma, Indiana, and Arkansas use a portion of 

their SSBCI VC program funds to make co-investments in high-potential small businesses backed 

by angel investors.
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 23

3. Venture Capital as Economic Driver

Prior to SSBCI, many states experimented with state-sponsored programs intended to create 

high-paying jobs and stimulate development of innovation-based economies through capital 

investments in high-potential small businesses. Most of these programs operated at a relatively 

small scale in comparison to the VC industry and state investments in traditional economic 

development incentive programs, such as relocation assistance or job training incentives. 

Disparate program structures and the competencies of program managers, as well as a general 

lack of program measurement standards, make comparative evaluations minimally valuable to 

policymakers.

Public and private sector organizations engaged in regional innovation ecosystems generally 

advocate technology-based economic development (TBED) policies that support state VC 

programs, including: 

• Strong research institutions (universities and non-academic laboratories like federal or 

non-profit labs) and their “technology transfer” offices; 

• Focus on entrepreneurs and innovators with high-growth aspirations, as differentiated 

from “lifestyle” entrepreneurs that self-employ to serve a local market need; and

• Engaging investors in high-growth potential small businesses, such as VC investors that 

primarily invest capital from pension funds, family trusts, and university endowments, 

and “angel investors” that primarily invest personal funds directly as individuals or 

through affiliated networks 

of accredited investors.

Advocates generally claim that highgrowth potential companies are a 

small segment of small businesses 

that disproportionately contribute 

to innovation development, job 

creation and wealth creation in

regional economies. Anecdotal 

evidence is widely used because 

most regions can point to “pillar 

companies” that employ thousands 

of workers and contribute 

substantially to the regional 

economy. However, commonly 

gathered economic data and 

statistics are insufficient to support 

Exhibit 9

Economic Impact of Venture Capital; Source: NVCA
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 24

the anecdotal evidence because the data does not properly differentiate between lifestyle 

entrepreneurs and those with high-growth ambitions.

Some economists seek to define a category of high-growth businesses called “gazelles” –

companies that grow revenues 20% or more for at least four consecutive years starting from a 

base of at least $1 million in revenue. In his seminal publication, The Job Generation Process,

MIT economist Dr. David Birch estimated that just 4% of companies created 70% of the nation’s 

new jobs,12 and that most of these companies had fewer than 100 employees.13 Determining 

how to stimulate job creation from gazelles, however, is a major challenge for policymakers. 

TBED program advocates generally agree that VC programs are an essential component of

strategies to stimulate regional innovation ecosystems. Venture capital -- financial capital 

provided to early-stage, high-potential, high risk, growth startup companies- is commonly used 

to finance the critical development and growth stages of gazelle companies before they reach 

gazelle status. A study by the National Venture Capital Association attributes 11% of total U.S. 

private sector jobs to companies backed by VC during development or growth stages, and these 

companies account for 21% of U.S. GDP.

There are many challenges, however, to achieving the promise and potential of VC programs 

sponsored and/or managed by government entities:

• VC focuses more on “wins” rather than “mistakes” – The venture capital fund business 

model is premised on a portfolio theory that a very few investments will achieve 

extraordinary financial returns that more than offset the high number of firm failures in 

the balance of the portfolio. Even the most highly regarded VC funds often have several 

write-offs in their portfolios. A fund’s good reputation is earned by a relatively small 

number of investments that return >10X of cash proceeds relative to the original

investment. Some VC funds will fail in their quest for the “home run” investment, and 

many of the write-offs, with the luxury of hindsight, can look like bad decisions with 

taxpayer dollars. A challenge for state VC program managers is to educate government 

officials at all levels about the comprehensive benefits from stimulating VC investment 

in homegrown high-potential small businesses in a portfolio approach.

 12 http://www.investopedia.com/terms/g/gazellecompany.asp#axzz28iyjOlUx 13 http://kb.trilincanalytics.com/upload/a7/a7748348a9dc009.pdf
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 25

• VC performance

incentives are should 

be aligned with the 

regulatory 

requirements of 

government funding –

A dozen years ago, 

private equity dollars 

flowed liberally into the 

VC sector, establishing 

hundreds of new firms 

with management fees 

to the fund managers 

guaranteed for 10-12 

years. A common debate at that time was whether to accept government pension funds 

as limited partner investors if doing so required disclosures of investments and returns 

that fund managers would prefer to keep out of public view. Following the 2008 

financial crisis, however, the scarcity of new capital commitments led many capable VC 

firms to consider participating in government-financed capital programs that require 

participating funds to invest state funds exclusively within state borders, invest capital 

within certain timeframes, and/or incur penalties if investees relocate jobs to another 

state. In theory, such state restrictions can dampen financial returns, making resident 

VC funds less competitive in the contracting market for institutional capital focused 

exclusively on financial returns.

• Scarcity of capital allows VCs to 

invest opportunistically rather than 

engage in the risks/rewards of 

company building – Outside the 

economic anomaly of Silicon Valley, 

VC fund managers afforded the 

privilege of managing capital from 

limited partner investors are 

extraordinarily selective in the 

opportunities they pursue. Most 

admit to rejecting 90% of business 

plans received after a single read. 

With the pipeline of aspiring highpotential entrepreneurs far greater 

than the supply of capital, some VC 

fund managers can afford to 

position their investment strategy to 

focus on firms just beyond the 

Exhibit 10

Data on number of companies receiving VC 

investments annually; Source: NVCA

Exhibit 11

VC investment around the country ($bil), 1970-2008

Silicon Valley $150.2

LA/ Orange County $29.2

Northwest $18.5

San Diego $16.3 Southwest $7.2

Texas $26.1

North Central $8.3

Colorado $14.2

Southeast $31.9

New England $55.2

NY Metro $37.2

Philadelphia Metro $12.7

DC Metro $20.3

South Central $2.1
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 26

“valley of death” and cherry-pick only the survivors. Many tout the scarcity of VC fund 

competitors in their region as a selling point to prospective LPs in their funds, reasoning 

that they can negotiate lower valuations from entrepreneurs and thus set the stage for 

higher investment returns. If true, established VC fund managers may not have their 

interests aligned with state VC programs looking for high-volume investments and

transformational outcomes. They are less inclined to engage in the “missionary work” of 

mentoring entrepreneurial leaders.

A significant challenge for the nation’s innovation economy results from the extreme 

geographic disparity in the management and investment of VC. Historically, Silicon Valley and 

Boston are the two regions where the VC industry is deeply rooted. They are regions with elite 

research institutions that “spilled over” innovation and engineering talent to create new 

industries with transformative impacts on global economies. Bolstered by early successes, 

pioneering VC firms began selling the “Silicon Valley” and “Route 128” story to limited partner 

investors across the U.S., including state pension funds and university endowment funds, 

raising tens of billions of dollars from institutional investors and managing the capital from the 

center of two closely knit technology and business communities. 

In the late-1990s, extraordinary investment gains from the “bubble” economy fueled by dotcom and telecom innovations created an enormous wave of capital into VC funds. As 

institutional and private investors increased capital commitments to the investment class, 

entrepreneurs and finance professionals from other disciplines like investment banking entered 

the market and launched hundreds of new VC firms. At the peak of the frenzy in 2000, investors 

placed $100 billion of new capital commitments into VC funds. 

Market corrections following the bubble economy fallout continue to challenge the innovation 

economy outside Silicon Valley and Boston. A major issue arose when the stock market faltered 

in April 2000 and the “IPO window” that had been wide open for startup companies to raise 

large amounts of financing was essentially closed. Without the ready access to public markets, 

VC investor options for exiting an 

investment profitably were limited, 

forcing VCs to hold investments 

longer and finance company 

operations until their portfolio 

companies matured through 

development stages and achieved 

substantial revenues and profits. 

Also, with so much capital under 

management needing to be placed 

in high-potential companies, 

valuations were perceived to be 

inflated, and the value of many VC 

investments were soon under 

water after the market corrections 

Exhibit 12

VC Investment in the United States, 1970-2008
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 27

took hold. The net result was that the aggregate VC returns to limited partner investors from VC

funds launched from 1999-2001 were far below historical averages, and many funds and 

investors lost money from their investment commitments to VC funds.

From 2004-06, industry observers noted a general trend away from seed/early stage VC 

investing towards later stage VC and mezzanine investments. Two recognized factors drove this 

trend: 

1. By 2004-2006, the maturation of companies that received seed/early stage investments 

during the active investment period of 2000-02 needed growth capital that could not be 

obtained before the IPO window closed, and 

2. Stories of “dot-com disasters” soured the market for seed/early stage investing as a 

strategy for generating strong investment returns.

Then, in 2008, the global financial crisis created stresses for the VC industry not directly related 

to industry performance. Many large institutional investors, faced with losses in their overall 

portfolios, curtailed new VC commitments by policies capping the percentage of total 

investments allocated to private equity. For example, a pension fund with $10 billion of assets 

and a 10% allocation to private equity quickly found its $1 billion VC portfolio equal to 12.5% of 

its portfolio when its assets declined to $8 billion. In the years since 2008, the VC industry has 

seen four consecutive years where the amount of capital invested by VC funds in companies 

has exceeded the rate of new capital commitments from LP investors into funds. Like a lake 

after four consecutive years of below average rainfall, the pools of capital available for 

investments in high-potential companies are approaching the lowest levels seen in 15 years due 

to a lack of replenishment.

Exhibit 13

Capital commitments to VC funds, 2000-

2011; Source: PwC MoneyTree
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 28

While the national pool of VC 

for high-potential companies 

has declined, the concentration 

of VC increased. Since the dotcom/telecom era, Silicon Valley 

and Boston have steadily 

increased their combined 

market share of the VC 

industry, helping their states 

far outperform other states in 

terms of VC investments per 

capita. Since 2006, more than 

60% of U.S. companies 

receiving VC investments were 

located in California and Massachusetts. Prior to 2006, the combined totals had never reached 

60%.

Why has VC concentration increased to unprecedented levels? One possible explanation is that 

VC firms thriving in California and Massachusetts prior to the dot-com/telecom bubble years 

boasted historical performance of positive returns such that the dot-com/telecom era results 

could be portrayed as an anomaly. Many newer firms with investment returns histories 

dominated by dot-com/telecom era results to show have been unable to raise new funds.

Another significant factor is cultural and self-perpetuating. Silicon Valley, in particular, has 

become the destination for technology entrepreneurs, with “risk capital” widely available from 

institutional VC investors as well as a large number of incredibly wealthy entrepreneurs 

participating as active angel investors. This cultural drive towards concentration is 

demonstrated in a May 2012 Forbes Magazine interview with Reid Hoffman, cofounder of 

LinkedIn, and Peter Thiel, cofounder of PayPal 

and angel investor behind Facebook (which 

moved from Boston to Silicon Valley at the urging 

of investors):

Hoffman: Technically, you’d think, “Well, it’s 

human ingenuity, it can be from anywhere in 

the world.” But one of the reasons why it’s 

good to focus on just a couple (geographic) 

areas is that entrepreneurs move to where 

they need to be in order to start interesting 

companies. So, if you’re thinking about doing 

a consumer Internet company and you’re not 

Exhibit 14

VC Investments in California and Massachusetts 

Companies as Percentage of Total VC Investments in 

U.S. Companies – 1985-2010

Exhibit 15

Wall Street Journal – Sept. 27, 2012
3. Venture Capital as Economic Driver

Prepared by Cromwell Schmisseur LLC 29

thinking about moving to Silicon Valley, that’s—

Thiel: A red flag. If you go into politics, you should go to D.C. If you go into finance, New 

York. Movies, probably still L.A. And tech is Silicon Valley...We wanted people who wanted 

to win.”14

While appropriate to applaud the success of Silicon Valley, the mantra that entrepreneurs 

should move to one or two regions in order to “start interesting companies” is a concern for 

policy leaders at the local, state and federal levels. To summarize the key points from this 

section on the addressable need:

• High-growth potential small businesses are important to new job creation, innovation 

development, and economic growth.

• Venture capital possesses strategic value in financing a large number of “gazelle” 

companies during development and growth stages.

• Since 2008, the annual rate of investment from VCs into companies has exceeded the 

rate of new investment commitments from institutional investors into VC funds, 

resulting in the lowest pool of VC available to invest in high-potential businesses in at 

least 15 years.

 14 http://www.forbes.com/sites/ryanmac/2012/05/02/reid-hoffman-and-peter-thiel-share-the-secrets-ofbreaking-into-techs-most-exclusive-network/2/
4. Principles of Well-Designed State VC Programs

Prepared by Cromwell Schmisseur LLC 30

4. Principles of Well-Designed State VC Programs

SSBCI is a national initiative consisting of diverse capital formation programs and substantial 

complexity – all implemented within a compliance framework established by Congress and 

administered by the Treasury. During this early implementation phase of SSBCI, when several 

state VC programs are finalizing details of processes and agreements to invest capital in small 

businesses, best practices from SSBCI VC program implementations cannot be definitively 

determined. However, based on the Consultants’ knowledge and experience, certain principles 

of well-designed state VC programs are identifiable from the cumulative experiences of state 

VC programs that long predate SSBCI. 

1. Understand the supply of and demand for venture capital. In order to design a state 

venture capital program that alleviates market inefficiencies and increases access to risk 

capital, it is necessary to have a realistic understanding of capital supply and demand 

unique to a specific geographic region. Venture investing can vary greatly from state to 

state and region to region. Program managers who communicated knowledge of the 

current financing lifecycle in their state – # of resident VC funds, # of transactions, $ 

amounts invested, funding sources, funding stages – are more likely to develop 

programs with targeted investment strategies implemented at an appropriate scale to 

support small businesses and create value.

2. Focus on capacity building with an ecosystem approach. The potential comprehensive 

benefits of a state venture capital program will be limited if the program operates as a 

stand-alone initiative rather than integrating into a larger small business support 

system. Program managers committed to building entrepreneurial capacity and a 

sustained venture capital presence are more likely to design strategies aligned with 

market-based principles. Several state program managers communicated how SSBCI will 

interact with and support complementary development strategies while building 

innovation capacity within their state’s economy.

3. Create pathways to the next investment round. Nearly all state program managers 

communicated their expectation that the SSBCI funds allocated to venture capital would 

be readily absorbed by market demand. However, with a majority of VC programs 

focused on the seed/early stage of investment along the capital continuum, the greater 

challenge that faces program manages may well be in securing follow-on investment 

rounds in markets underserved by institutional venture investors. The most successful 

private VC investors continually plan for the next financing event, actively 

communicating about investment opportunities and expanding professional networks to 

the benefit of portfolio of companies. If pathways to the next financing event are not 

created, small businesses receiving seed investments might not survive.

4. Plan for the long-term and manage expectations. State venture capital programs are 

long-term development initiatives, and the term “patient capital” is used to describe VC 
4. Principles of Well-Designed State VC Programs

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for a reason. Venture investing, and particularly early-stage venture investing, is 

dynamic and unpredictable, so experienced program managers understand the need to 

plan for a six to ten year maturation cycle. Furthermore, when communicating about VC 

programs, it is important to manage expectations for achieving “comprehensive 

returns” that includes both financial ROI and economic development calculations. In any 

investment portfolio, there will be good investments and bad investments (and some 

likely total write-offs), so program leaders should be proactive in educating partners and 

stakeholders on a program’s processes and expectations.

5. Specifically address the potential for conflicts of interest and political influence. 

Several state VC program managers acknowledged the potential for conflicts of interest 

and/or political influence in a state-managed capital formation initiative. It is not 

unheard of for a manager of a VC program to receive correspondence from a state 

official (elected or appointed) about an investable deal that has their interest. Similarly, 

state capital programs commonly engage volunteer civic leaders to serve on advisory 

committees with responsibilities for vetting opportunities and making investment 

recommendations. Well-designed initiatives specifically address the potential for 

conflicts and influence by having clearly stated policies and processes in place to govern 

activities and investment decisions.

6. Attract the most capable leaders to manage resources. A critical success factor for 

state capital programs is the ability to attract capable investment managers to manage 

public resources. Some state programs have demonstrated success with engaging highperformance leaders as part of the internal team or through a state-sponsored 

organization. Other state programs seek capable managers by contracting with forprofit investment managers rather than building duplicate internal capabilities. Both 

strategies can deliver expected outcomes; however, successful programs are built on 

the understanding that success is determined largely by who is involved with managing 

funds.

7. Measure results accurately with defensible logic. Some state program managers have 

significant experience with evaluating key metrics for VC program performance and 

reporting results. Although there are currently no recognized national standards for 

evaluating the direct and indirect impact of state VC programs, potential best practices 

are emerging, and SSBCI could be helpful in bringing clarity to the national debate by 

offering sound, logical methodologies for calculating value. Program managers have 

communicated perspectives on this important topic and expressed interest in sharing 

information on how to move towards a best practice approach. Key measurement issues 

with VC programs relate to calculations of investment leverage, job retention/creation, 

causal impact on investment transactions, direct and indirect economic impact, etc.

8. Align state economic development interests with the financial interests of fund 

managers and limited partner VC fund investors. “Double bottom-line” rhetoric has 

persuaded some state policy leaders to trust that private sector interests will focus 
4. Principles of Well-Designed State VC Programs

Prepared by Cromwell Schmisseur LLC 32

equally on creating jobs as well as maximizing their personal financial interests. In the 

Consultants’ view, the two goals do not always coincide. State policy leaders should 

recognize that indirect economic development benefits such as the creation of highwage jobs and the development of new industries are achieved indirectly from profitmotivated investing, not by placing new priorities on professional investors that perform 

best when singularly focused. In the Consultants’ view, states can best target economic 

objectives by influencing the parameters of allowable investments, and then fully 

participate in the sharing of financial returns so that successful investments create new 

sources of capital for future investments.
5. Recommendations Related to SSBCI VC Programs

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5. Recommendations Related to SSBCI VC Programs

In summary, the flexibility permitted by SSBCI to states for designing customized capital 

deployment strategies within the parameters of the enabling legislation and program guidelines 

has resulted in a diverse range of state venture capital programs. The diversity of programs 

implemented within SSBCI is a strength of the program and will provide value to policy 

makers as these programs are implemented and evaluated. With thirty state venture capital 

programs created and/or supported by SSBCI, the U.S. Treasury now has a portfolio of 

programs to facilitate small business investment, with the initiative’s success measured over 

the long term and determined by the overall collection of investments made.

SSBCI is expected to deliver value not only by the direct investments facilitated and made in 

small businesses across the country, but also by the increased information sharing and 

improved understanding of a principles-based approach to capital formation initiatives that 

leads to recognized best practices for efficiently and effectively stimulating small business 

investment. The initiative is moving from the early implementation phase of assisting states 

with standing up state venture capital programs to assisting states with the investment of 

capital into small businesses. Significant progress has been made in a short period, and the 

initiative has strong support from state and regional leaders who are committed to SSBCI’s 

success. The Consultants commend the SSBCI team for their exceptional work to stand up and 

administer a new federal capital program. By continuing the plan for delivering responsive 

technical assistance to state program leaders while monitoring progress in alignment with 

SSBCI requirements and objectives, SSBCI is on the right course for creating substantial value 

for the U.S. economy.

Consultant recommendations related to state VC programs include:

1. Treasury should continue its efforts to work with the industry of state venture capital 

programs in order to describe common challenges, clarify the lessons learned and set 

forth emerging best practices.

During program review meetings and the two SSBCI Conferences, we consistently heard from 

state VC program managers that they recognize a compelling need to capture and share 

information on best practices. An important legacy of the SSBCI initiative may be promoting 

new recognized standards that to enable adherents to implement VC programs with greater 

efficiency and effectiveness. To accomplish this, we encourage SSBCI program leaders to 

establish an ongoing review process of VC programs over the life of the initiative and support 

efforts to fairly measure results, identify best practices and tell the full story of SSBCI. 

2. Treasury should encourage the sharing and review of transaction-level data and the 

development of impact measurement policies, which are important to assessing the 

performance of SSBCI VC programs over the program period that ends in 2017 and 

beyond.
5. Recommendations Related to SSBCI VC Programs

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Policy leaders should be cautioned that it is likely that state VC programs will record some 

financial losses before 2017, while the financial successes and comprehensive returns will come 

over a longer period. The SSBCI application requested certain measures of impact, such as 

estimated jobs created and private leverage achieved. However, there are few industry 

standards for these measurements, and it is difficult to establish policies that fully capture the 

impact of SSBCI dollars allocated to VC programs and subsequently invested in high-growth 

potential small businesses. The comprehensive benefits of SSBCI should also be recognized in 

relation to the development of more robust entrepreneurial capacity and the support of 

transformational businesses that “but for” the additive value of SSBCI capital might never have 

contributed significantly to economic growth and brought society-benefiting innovations to 

market. State VC programs lack industry standards for measuring impact, which creates 

challenges for policy leaders to assess the overall impact of VC programs relative to other SSBCI 

program options. 

3. Federal policy leaders should build on the foundation established by SSBCI to support 

state venture capital programs that operate on the principles of a well-designed 

program identified in this report.

A federal-state partnership to build state investment capacity can improve access to the critical 

resources necessary for driving an economic recovery and creating the next generation of great 

American businesses. The early implementation phase of SSBCI offers valuable guidance on 

state-managed venture capital deployment models and the benefit of federal-state 

collaborations to facilitate and leverage private investment in small businesses. The Consultants 

recommend that the federal government continue its support of state-led capital programs that 

incorporate the principles of well-designed state venture capital programs.

4. Future federal capital initiatives can be strengthened by requiring training to improve 

relevant experience for state VC program managers.

VC program managers empowered by state government leaders range from novice to expert 

with respect to their preparedness to manage VC programs, and therefore need a common 

baseline of knowledge about options for design and operation of a state venture capital 

program. For more than 25 years prior to SSBCI, states varied greatly in their approaches to 

supporting technology-based economic development programs, of which capital formation is 

often a major component (the others being research infrastructure and venture development 

programs). For states, SSBCI funds were welcome infusions of capital to strengthen and 

leverage existing, well-managed programs with mature infrastructure and capable leadership in 

place. For others, program managers have been effectively learning on the job while seeking 

connectivity to information and third party solution providers. Furthermore, experienced VC 

program managers are more likely to have an accurate understanding of the state’s existing 

venture capital and venture development communities. 

5. States should implement capital formation initiatives as part of a comprehensive 

strategy for supporting entrepreneurial ecosystems, and the federal government can 
5. Recommendations Related to SSBCI VC Programs

Prepared by Cromwell Schmisseur LLC 35

foster the development of regional innovation networks that improve and leverage 

complementary development strategies. 

Government-sponsored venture capital programs should not be implemented in isolation. To 

encourage and support high-growth entrepreneurship throughout the nation, the Consultants 

recommend that the federal government assist with the development of regional support 

systems. A strategic initiative to facilitate the creation of regional innovation networks can 

deliver comprehensive value and improve outcomes of government sponsored capital 

formation programs. While the primary focus should remain on programs that directly 

stimulate private sector investment in small businesses, a secondary focus of supporting human 

capital development and connectivity will enhance all financial assistance programs targeting 

small businesses.
6. Author Bios

Prepared by Cromwell Schmisseur LLC 36

6. Author Bios

Eric Cromwell is an entrepreneur and public advocate for improving the business climate for 

innovation and entrepreneurship in America. Eric led the restructuring and revitalization of the 

Tennessee Technology Development Corporation (TTDC), a private, nonprofit corporation 

created by the Tennessee General Assembly to promote economic growth. As TTDC’s president 

and CEO, Eric was responsible for setting the agenda for sustained state investment in 

Tennessee’s innovation economy. Prior to accepting the executive position at TTDC, Eric served 

as Tennessee’s first-ever Director of Technology Development, a leadership position created 

within the Governor’s Administration to be the point of contact for technological innovation.

Eric began his career in technology-based economic development in Memphis, Tennessee, as 

the founding director of EmergeMemphis, a technology business incubation/accelerator 

program and later as a leader on the founding team that launched the FedEx Institute of 

Technology, a public-private initiative seeded by FedEx Corporation. Eric has been a leader in 

establishing new organizations and programs, a director of multiple tech-based development 

organizations, and is a frequent advisor and guest speaker on development strategies related to 

venture capital formation, entrepreneurial support systems, research commercialization and 

broadband deployment. Eric holds a B.S. in Biology from the University of Tennessee at 

Knoxville and a M.S. in Electronic Commerce from the University of Memphis. 

Dan Schmisseur is an entrepreneur and experienced technology-based economic development 

consultant. Prior to co-founding Cromwell Schmisseur LLC, Dan was the vice president of 

operations and strategy for the Tennessee Technology Development Corporation (TTDC). At 

TTDC, Dan was responsible for strategy formation and partnership development to design and 

implement a comprehensive competiveness agenda for innovation-driven economic 

development throughout Tennessee. Previously, Dan was vice president of strategy and policy 

with the Kansas Technology Enterprise Corporation, where he developed a strategic plan for 

implementing the Kansas Economic Growth Act legislation, a 15-year, $581 million initiative to 

support bioscience-related economic development. Dan has managed the development of a 

comprehensive business plan for the IC2 Institute at The University of Texas at Austin to 

develop an outreach entrepreneurship education and support services program called The 

Texas Entrepreneurship Network.

Dan began his professional career with PricewaterhouseCoopers after graduating from the 

University of Texas at Austin with a BBA in Accounting. In eight years with the firm, Dan served 

a wide variety of clients, ranging in size from zero-revenue startups to a Fortune 250 technology 

company. Early in his tenure, Dan served clients in many industries, including healthcare, 

manufacturing, financial services and non-profit. His last three years with the firm focused on 

serving technology high-potential small businesses as a manager in the firm’s Technology 

Industry Group.