Update: The Tennessean reported 29 Dec. 2014 that General Assembly House Speaker Beth Harwell is guiding a review of the process by which Fiscal Notes are developed for the General Assembly.-Ed.

THE METHOD by which the economic consequences of TNInvestco -- Tennessee's $200MM capital-formation initiative -- might eventually be determined is not yet clear, and it appears state officials are giving little thought to the matter, at this time.

In 2009-10, TNInvestco effectively disbursed a net of more than $140MM capital in equal shares to the 10 new venture-capital firms that won the limited number of TNInvestco berths. By year-end 2013, participating funds had invested in 132 early-stage companies, attracting ample additional investment from non-TNInvestco sources.

TNInvestco was created, as the original legislative summary described it, to provide fresh capital to firms with strategies for "achieving transformational economic development outcomes through focused investments of capital in seed or early stage companies with high-growth potential..."

However, more than five years after enactment of TNInvestco, VNC interviews and research have turned-up no evidence of any efforts to define the methods and process by which TNInvestco's full economic impact might ultimately be determined, thereby arming legislators and advocates with data that might suggest opportunities for further capital-formation policy innovation, whether via TNInvestco, or not.

VNC interviews and research suggest that current monitoring of TNIinvestco's progress is rudimentary, focused on raw numbers of jobs and capital attracted, and particular administrative mandates complied with, rather than on capturing the total economic effects, whether good or bad, and whether "transformative" or not.

Original legislative co-sponsor Sen. Doug Overbey (R-2-Maryville) has previously said he believes the issue of another TNInvestco round probably merits a hearing, at some point.

The issue seems to be a non-starter for the FY2016 budget process that begins in January. Several members of the General Assembly have told VNC that current state-government budget strains, the impending change of command recently announced for the agency administering TNInvestco, and interest-group petitions to reduce taxes are among factors making any near-term discussion of another TNInvestco a very remote prospect -- despite widespread concern that supplies of follow-on capital within the state may be inadequate to fuel continued entrepreneurial momentum here.

According to two Tennessee-based economists interviewed separately for this story, any attempt to determine the actual economic impact of the program would have to be custom-tailored to TNInvestco.

Nonetheless, the economists said, a rigorous assessment of the program can, indeed, be performed by adapting methods use in weighing the benefits of other state-government initiatives, such as offering tax incentives to new or existing industry.

Many TNInvestco observers agree that the five-year-old TNInvestco program -- formally, the Tennessee Small Business Investment Company Credit Act (TSBICCA, 2009) -- deserves a longer run of unspecified duration before it is subjected to an actual economic performance evaluation. Indeed, fiscal notes associated with the enabling legislation refer to a nine-year period for realizing fiscal impact.

While "transformative" economic-development criteria were not identified the process of creating TNInvestco, substantial emphasis was placed on compliance by all parties in the execution of the program, as well as on estimates of net gain or loss to state government's checkbook.

For example, the General Assembly's Fiscal Review Committee (FRC) said in 2009 that, based on guidance from the state's Department of Revenue, "the capital investment ventures undertaken by the TNIvestcos will produce at least a twelve percent rate of return."

Moreover, the FRC's fiscal notes at the time showed that the state's coffers would receive "profit share" from the program that "over time" would exceed foregone tax revenue, with a portion of that profit share also eventually benefiting the Rural Opportunity Fund (ROF). The ROF is administered by Nashville-based Pathway Lending as a "perpetual revolving loan fund for small, disadvantaged, and start-up businesses in rural communities throughout Tennessee," according to Pathway's website.

Fuller evaluation of TNInvestco could be a decisive factor in any future debate regarding whether or not to fund another similar capital-formation initiative.

As previously reported, many observers believe another round, if any, must sharply improve upon the original TNInvestco model. Many are also on record with believing the program has "moved the needle" in early-stage venture development in Tennessee and has contributed directly to improving the state's entrepreneurial climate and national reputation. Others says they see TNInvestco as a virtual scourge.

No econometric assessment methodology was outlined in the original bipartisan TNInvestco legislation or in the "fiscal note" that accompanied the original legislation, signed into law in 2009 by then-Gov. Phil Bredesen.

Under the 2009 law that authorized the TNInvestco program, the state's Department of Economic and Community Development (ECD) was asked only to tally raw numbers of jobs generated and TNInvestco and non-TNInvestco capital investments made in early-stage companies within the portfolios of the ten TNInvestco firms.

ECD has seemingly performed the data-collection duty it was assigned, thus far. An ECD spokesman confirmed for this story that the agency has not been tasked to undertake further analyses. A spokeswoman for current Revenue Commissioner Rich Roberts said Revenue "is not developing any such methodologies," and noted that ECD is responsible for administering the program.

Previous ECD statements have signaled the agency would expand its TNInvestco analyses, or make comments pro or con the merits of a further TNInvestco round, only if and when asked to do so by members of the General Assembly (and/or, presumably, by Gov. Bill Haslam).

Matt Murray, PhD

Going beyond an assessment of basic administrative compliance with the law, to get at TNInvestco's more important economic impact -- helpful or harmful -- would be "tricky," said Matt Murray, Ph.D., who is both the director of the Center for Business & Economic Research, as well as director of the Howard H. Baker Jr. Center for Public Policy, at the University of Tennessee, when queried for this story.

Beyond looking at raw numbers for jobs and capital associated with the 10 TNInvestco funds and their portfolio companies, "presumably one would want to look at [broader] employment and earnings impacts, maybe tax revenues as well," said Murray.

Rendering a judgment on TNInvestco based solely on numbers of direct jobs and direct investment would leave unaddressed "the counter-factual" question-- regarding, that is, what would have happened within the state in the absence of TNIinvestco, said Murray.

This sort of deeper assessment "is really difficult to do in practice. Would the investment had taken place anyway, or was it in fact induced by this program? A difficult puzzle to solve," Murray continued.

Still, Murray expressed confidence that the final TNInvestco economic judgment need not rely on a fundamentally political process, alone.

Illustrating the point, Murray offered the "parallel" of attempts to assess the effectiveness of pre-Kindergarten educational programs: "The evaluation of pre-K's effectiveness requires some fancy data and/or methods to tease-out the effects relative to those who were not 'treated' by the program. I suppose [assessment of TNInvestco could] become political like everything else. But, there are established methods to conduct such evaluations," Murray said, even though the TNInvestco program's design "does not include the typical control group that you would find in a scientific experiment."

Murat Arik, PhD

Economist Murat Arik, Ph.D., also told VNC he is confident that a deeper assessment of TNInvestco could be executed using proven research methods.

Arik also told VNC that it would not be the best approach to evaluate TNInvestco based simply on jobs and capital investment tallied-up by state administrators. Optimally, an economic appraisal would be broader and should be done independently of TNInvestco managers and participants, he said.

Provided adequate access to data generated via TNInvestco, as well as funding for such an effort, a TNInvestco economic-impact assessment could probably be executed within six months, Arik estimated. (TNInvestco's refusal to release some data, citing non-disclosure agreements, has previously been litigated, story here. Also recommended: The sheer "messiness" of capitalism may be another factor coloring handling of these matters.)

Notably, Arik is also a member of the team that is designing the proposed Middle Tennessee Distributed Research Park (MT-DRP), previously reported by sister publication Venture Tennessee Connections.

Arik is interim director of the Business & Economic Research Center (BERC), Jones College of Business, at Middle Tennessee State University in Murfreesboro.

Arik, who told VNC he has a passion for studying the entrepreneurial sector, is also author of the recently published, Understanding and Analyzing Competitive Dynamics: Methods, Processes and Applications to a Regional Setting. VNC