Matthew Murray, PhD

MATTHEW MURRAY PhD, one of Tennessee's go-to economists at the University of Tennessee, has, albeit with qualifications, affirmed that it could be worthwhile to do some modeling of variations on the design of this state's controversial TNInvestco program, in hope of determining whether or not there are modified versions that might be superior to the state's waning capital formation initiative, whether or not a new model was actually adopted by the state.

Matt Murray is associate director of the Boyd Center for Business and Economic Research, and director of the Howard H. Baker Jr. Center for Public Policy at the University of Tennessee, Knoxville.

In February, Murray acknowledged in an exchange with Venture Nashville that modeling TNInvestco variations "could make sense, but it would depend on the assumptions underlying the alternative structure and the assumptions used to run the model. Modeling things like this is fraught with problems so you could in principle get any outcome you want. The most important assumptions are the responsiveness of capital investment to the incentive and the counterfactual of what would have happened without the incentive."

Murray's response was entirely consistent with comments he provided VNC in 2014, at which time he also volunteered that there are "established methods to conduct such evaluations" and for dealing with the counter-factual question of 'how the state would have fared without TNInvestco'.

There is evidence of substantial support in some quarters for a rigorous assessment of TNInvestco, formally titled the Tennessee Small Business Investment Company Credit Act.

Ted Townsend

Today, for example, Ted Townsend, chairman of the board of Life Science Tennessee and the University of Memphis' chief economic development and government relations office, told Venture Nashville, "The TNInvestco program catalyzed a statewide awareness of the need for early-stage capital and the importance of thoughtful, formative capital structures. Regardless of the wins or losses from investment portfolios, the framework and institutional disciplines were built, which resulted in multiple follow-on rounds of venture capital fund formation. The investment climate has certainly changed since the inception of TNInvestco and I believe that a holistic approach to modeling any next-gen capital formation partnership between the public and private sector is an imperative." In a brief exchange on the topic last November, Townsend told VNC he viewed TNInvestco as having produced some benefits.

Vic Gatto

Similarly, Vic Gatto, CEO of Jumpstart Health Investors, recently told VNC, "To start with, isn't this is the kind of study government should do on any of its important programs? We should determine what worked, what didn't work and what 'next steps' make sense. It could be really valuable to simulate how changing some or all variables in the original TNInvestco program could produce stronger outcomes statewide. I think most of the people that participated in the original program believe it was a real boost for Tennessee entrepreneurship, capital formation and our state's perception as an innovation-firendly ecosystem across the US.

The TNInvestco program is set officially to end in 2021. In a worst-case scenario -- given the convergence of coronavirus, trade tensions, a sharply retreating market, climate change and an aging growth cycle -- it seems reasonable to consider the possibility that the Tennessee economy could find itself in much worse straits than in CY2019, along with the rest of the nation.

Economist Murray's January 2020 report on the state's economic outlook contained a pessimistic scenario that put the odds of a recession by the end of 2020 at 35%, lasting less than a year, with a decline in real GDP of 2%. Its optimistic scenario with 3.4% real GDP growth was accorded only 10% probability. That report was published before the potential damage of the spread of the coronavirus was apparent.

Many believe that the entrepreneurial sector of the Tennessee economy was directly and-or indirectly lifted from its doldrums by the TNInvestco program, a $200MM corporate tax credit program legislated into being in 2009 and fully operational in 2010.

The program allowed Tennessee-based insurance companies to buy at a discount premium tax credits, proceeds from which sales funded 10 new TNInvestco venture funds. State premium taxes totaled about $410.9MM in 2008-09 and rose to $985MM in 2017-18.(Scores of TNInvestco stories in reverse order here.)

Executives associated with the 10 TNInvestco funds that were formed via monetization of TNInvestco tax credits have always been cautious in commenting publicly on the program. No TNInvestco fund founder has ever told VNC they wouldn't participate in another TNInvestco round.

Cam Newton

When they do speak on the record, they often signal something like what Relevance Capital Managing Partner Cam Newton told VNC in 2018 -- that is, that without TNInvestco, which led to creation of the NEST-TN TNInvestco fund in Tullahoma, his VC firm "just wouldn't be here."

Almost from the program's inception, there have been reports of strong insurance-industry interest in the program, and enthusiastic comment on the creativity shown in proposals put forward by the 10 new funds that sought access to Tennessee insurance premium tax-credits to sell at discount to the insurance industry.

There's also been recognition that the program needed stronger representation by racial and ethnic minorities in TNInvestco portfolios.

VNC has chronicled the ups and downs of the TNInvestco program since spring 2009; and, this 2014 piece puts forth our unchanged sense of the importance of rigorous assessment of the program, no matter the outcome of such an assessment.

In the past two months, VNC sought to obtain from Tennessee Economic and Community Development (ECD) data and/or analyses related "to all overall or individual TNInvestco fund reports related to costs, benefits and/or detriments associated with the TNInvestco program and the individual funds, participating therein. [VNC's] interest includes State-, contractor- or Fund-generated reports and related data."

Jennifer McEachern

ECD Communications Director Jennifer McEachern replied that the agency did not "any releasable records. Everything that can be shared can be found on the web." McEachern's reference was to ECD's 10 years of rudimentary data posted here.

Responding to further followup questions from VNC, McEachern said, "Currently, there is no plan to improve on the program for another round. As for the performance of the funds, the annual reports show the returns from the investments thus far. At this point, highlighting individual performances of the TNInvestcos is 1) not complete because the program has not ended and 2) can have a negative impact on investments that are still active in which the state has ownership interests. Any perceived negative attention about the TNInvestcos, the program or the portfolio of companies may impact the valuation of active companies and negotiations of the TNInvestcos with potential buyers."

In the absence of a rigorous assessment of the TNInvestco model and alternatives, thereto, Tennessee taxpayers are -- perhaps barring action by the General Assembly or others -- left with scant information regarding TNInvestco net multiplier effects, if any; contribution to helping recruit talented workers and attractive employers, if any; support for academic institutions' technology commercialization efforts, and many other variables. In evaluating TNInvestco, the state has since 2009 focused mainly on jobs creation and on follow-on capital raised, rather than on metrics crucial to energizing the state's entrepreneurial economy.

Justin Wilson Esq.

Against that backdrop, virtually the only public comment on the program by state officials has come from the Office of the Comptroller, which issued findings in 2012 and addressed related issues just after Election Day 2016 -- five years before the TNInvestco program's scheduled end.

The Comptroller's 2016 technical document notes (at page 7) said that, in addition to other reporting gaps, during the period audited ECD did not report "the amount of proceeds received from liquidity events of TNInvestco companies," though that absent data was not referred to in Comptroller Justin Wilson's subsequent press release, in which he observed that "it doesn't appear that the TNInvestco program has been successful."

Comptroller Wilson added encouragement that any such program get fuller examination in future. Notably, the Comptroller also lists identifiable TNInvestco data as an exception to the Tennessee Open Records Act, though no restriction on use of anonymized data for technical analyses of TNInvestco such as discussed in this article is apparent in related documentation.

Eric Cromwell

Eric Cromwell, who led Tennessee Technology Development Corporation (TTDC, now dba Launch Tennessee) as president and CEO while features of the current TNInvestco program were debated, responded to a VNC query on Friday with this written response, quoted below in its entirety:

Government should continuously evaluate the performance of economic development programs that deploy taxpayer funds. For TNInvestco, a thorough, credible analysis of the "comprehensive returns" generated by the program - financial returns plus economic impacts -- would help address lingering questions about the initiative.

There are important lessons to learn from TNInvestco, not only about what constitutes an effective and efficient venture capital program, but also about the competency and capabilities of government officials and state-supported entities. A thorough, credible analysis would be valuable and include the following:

1. An analysis of how much capital is returned to the state when the investment positions have been liquidated by all TNInvestco funds. The actual financial return generated should be calculated along with what would have been returned to the state on a cash on cash basis if the program had been structured to standard terms in the venture capital industry (100% return of principal to the state first, then a profit share with fund managers on a % basis).

2. An analysis of the direct and indirect impacts generated by the TNInvestco program. Important performance metrics used by other states include private capital leverage, number of companies assisted, new fund formation, spillover wealth effects, job creation and others. Supporting the growth of a local venture capital industry is extremely important, and unfortunately, not well understood. New funds bring capital, industry sector knowledge, networks, energy and optimism to startup ecosystems in Tennessee, changing the perceptions and reality about Tennessee as a viable location to profitably invest in.

By leveraging facts, subject matter experts and measurable data, stakeholders can explore if and how TNInvestco had a positive impact while educating policymakers on the recognized flaws of TNInvestco that are clear and fixable in future program models." [End quote]

Cromwell and partner Dan Schmisseur consult "nationally on the design, implementation, management and performance reporting of government-sponsored venture capital programs," and they advise private-sector firms considering participation in such programs. Their website here.

In the same 2014 VNC story cite above, in which we quoted economist Matt Murray, economist Murak Arik PhD of Middle Tennessee State University, concurred with respect to the feasibility of conducting a rigorous analysis of TNInvestco. Again, that 2014 story is here. VNC

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