Gov. Eric Greitens wants Missouri to support entrepreneurs on a much larger scale than it ever has, but he doesn’t want bureaucrats picking winners and losers.
His solution is something he’s calling a Missouri innovation fund, which would be launched with borrowed money and turned over to private fund managers. The money would flow through Missouri Technology Corp., which had been making investments in early-stage companies until its budget was slashed this year.
Greitens mentioned the innovation fund Thursday at an economic development conference in St. Louis, during which he also laid out other initiatives for improving the state’s economy.
Drew Erdmann, the governor’s chief operating officer, refers to the innovation fund as “MTC version 2.0.” If the Legislature agrees to issue bonds, and make debt payments at the same level it was funding MTC in the past, he says the state could create a fund of more than $100 million.
Fund managers could raise additional money from private investors. The fund would have to invest in companies with a Missouri presence, but apart from that restriction the managers could invest wherever they saw the biggest potential return.
That would have some advantages over the way MTC has operated. The investment dollars would be committed for a long period, such as 10 years, and wouldn’t be subject to the whims of legislative appropriations. A private manager also could be more nimble in responding to deals.
The proposed structure could create problems too, people involved in St. Louis’ startup ecosystem say.
One of those is regional rivalries. A similar initiative in Ohio, called Third Frontier, solved this problem by allocating funds to separate managers in Cleveland, Cincinnati and other areas.
Another issue is that a large, profit-driven fund is likely to gravitate toward later-stage companies, those that have already created and tested their product or service and need money to expand.
Later-stage money is helpful, but Brian Matthews, co-founder of Cultivation Capital, doesn’t think it’s the most glaring need here. “I believe we are in more need for seed investing, not later stage,” he said in an email. “Good late-stage companies find capital from Chicago and the coasts.”
Matthews likes the idea of a long-term commitment by the state, though, and said Cultivation would consider bidding to manage such a fund.
Some of the problems could be solved by hiring multiple managers and carving out, say, a separate fund for seed-stage investments or funds for specific industries such as health care, agriculture or software. The more you constrain a fund, however, the harder it is for the manager to achieve good investment results.
Jerome Katz, professor of entrepreneurship at St. Louis University, liked the MTC’s old model, in which the state invested alongside private investors but in relatively small amounts. He said the innovation fund “would be better than to have nothing, but the difficulty is going to be in the details.”
Still, Greitens has made clear that he wants to rethink MTC, and this year’s budget cuts led to fears that the new administration didn’t back entrepreneurship efforts. A new innovation fund should calm those fears.
“If bond-sourced money is made available, and invested based on some reasonable criteria, that would have a dramatic impact on the available capital pool,” said Jay DeLong, managing director of the SixThirty Cyber accelerator fund.
Last year, Missouri attracted just 0.4 percent of the nation’s venture capital dollars. If the state is willing to make a strong commitment, there should be plenty of room to grow that number.