SOMETIMES YOU CAN’T AFFORD NOT TO INVEST
The state of Illinois has serious financial woes. That’s not news here in Chicago and it would be difficult to find any state that doesn’t have money problems. There’s plenty of misery to share and Alaska, Louisiana and Missouri, among others, are sharing it. Sorry state finances are as much of a “bitter sweet” oxymoron as jumbo shrimp, military intelligence or exact estimates. The more interesting part of this situation is what the best state managers are trying to do to solve the problem. We all acknowledge that they can only address the budget parts within their control and those funds and resources available to them. Notwithstanding these limitations, the Illinois Treasurer, Mike Frerichs, is leading the way in a fashion that couldn’t be better or more timely news for entrepreneurs, startups and the overall tech community.
I would expect that you will quickly see other states jump on this business-boosting bandwagon and follow Illinois’ lead. I’m hopeful that— as an entrepreneur— when the conversations and arguments start in your state that you’ll have the ammo to hold up your end of the discussion as well and, if you’re so inclined, even help to lead the charge.
As the state’s chief investment officer, Frerichs has just announced the creation of a new $220 million growth and innovation fund (representing a very small percentage of the existing state investment pools and not tied to Illinois’ budget stalemate), which will drive innovation and job creation by supporting investments in emerging technology companies. These funds will not be directly invested by the state (thank goodness for that), but will be distributed to 15-to-20 existing, experienced and successful venture funds (selected by an independent investment manager and financial institution), which will in turn make the specific company selections and investments. It’s expected that this action will attract another $400-to-$500 million in private-sector money as well for young and growing Illinois startups. Sounds pretty positive to me.
Much to my surprise, though, and to a certain extent because of an overall lack of understanding of the fact that the funds in any state’s coffers aren’t fully fungible, a lot of people—including some of our own VCs and entrepreneurs at 1871— have been critical of this new initiative. While there are legitimately two sides to parts of this argument, I think that it is really important for all of us to understand what really isn’t open to argument. Then, at least, the discussion can proceed on the merits instead of simple misunderstandings.
What’s not open to argument?
If you’re the chief investment officer of any state and you’re charged with earning the best possible return on all the state funds that have been entrusted to you (including, for example, thousands of families’ 529 college investment funds), then you simply have to invest. There’s really no choice. You can’t save your way to success by sitting on the sideline. In addition, you can’t spend a dime of these “trust” funds to help the state solve its general operating problems and deficits because the use of these funds is rigidly restricted by state law. It would be nice to see some of these dollars spent to save critical programs, feed and care for folks, and address other pressing needs, but it’s just not legally possible. So the choices are pretty clear —sit on it or invest it smartly.
Venture capital investments are risky. Startups fail every day. Maybe the last place that the state should invest even one fiduciary dollar is with early-stage and growth-stage businesses. But I personally don’t agree. This topic we can debate all day long and there are certainly multiple viewpoints, but almost every fund (professional, institutional, family offices, etc.) understands the idea of diversification and the need to have some exposure to the various parts and sectors of the new economy. In addition, we know that the only real job growth in our economy for at least the last decade has come from the hiring spurts of new businesses (not small businesses) and frankly it’s very much in all of our interests to keep that ball rolling.
What’s really smart?
As often as this idea has misled us in the past, I firmly believe that the smartest part of this investment strategy is the state’s decision to leave it to the pros. The beauty of the VCs who will be making the investments is that they have one simple agenda and that is to maximize returns for their investors. They don’t have to deal with the media. They don’t have a million competing political concerns. They don’t have to try to be all things to all people. They just have to do their jobs the very best that they can and make a ton of money for the state.
Bottom line: you can argue the merits of the program any way you like. Just don’t tell me that by encouraging the growth and expansion of hundreds of new businesses and the creation of thousands of new jobs that Illinois is taking the food from any families or helping the “haves” to the detriment of the “have nots” ‘cause that ain’t happenin’.