State technology leaders are lobbying legislators to adopt CAPCO (certified capital companies) legislation in 2004 to spur capital investment in Mississippi and to move the state toward increased access to risk capital. If passed, CAPCO legislation would provide incentives in the form of insurance premium tax credits to boost investment in the state.
“The single greatest need that we hear our state`s start-up and early stage small businesses cry out for is investment capital,” said Mississippi Technology Alliance (MTA) president and CEO Andy Taggart. “We have a wealth of terrific ideas, inventions, innovations, and the like, but we have a real dearth of dollars in our state to chase the deals arising out of all that valuable intellectual property. CAPCO legislation would create a $100-million pool of investment capital in our state to go to work in our state, and we believe the results would be the rapid growth of the innovation economy of Mississippi.”
The underlying concept crucial to improving access to investment capital is to create momentum – to motivate companies, pension funds, endowments and banks to consider an increased share of their investment in Mississippi, said Jack Herrington, MTA vice president of business and venture development.
“Private venture capital would be the source of risk capital at the top of our wish list,” he said. “However, we continue to be limited in structured venture capital that both invests in Mississippi and is headquartered here. The Certified Capital Company program is one form of capital that has met with success in neighboring states.”
From 1988 until 1999, $600 million was invested and 3,500 full-time direct jobs were created as a result of CAPCO investments in Louisiana, which approved the nation`s first CAPCO program. Alabama, Colorado, Florida, Georgia, Missouri, New York, Texas and Wisconsin have adopted similar legislation, and other states are considering it.
In Wisconsin, the CAPCO program included the creation of an investment pool directed toward small, high-growth companies with an annual income of less than $2 million and fewer than 100 employees, with at least 75% employed in the state. To qualify, a company`s net worth could not exceed $5 million, and could not be predominantly engaged in professional services provided by accountants, lawyers or doctors. The company could not be engaged in the development of real estate for sale, or in banking or lending. The state commerce department was assigned to oversee the three CAPCOs certified to make capital investments of $50 million, or $16.6 million each, in qualified Wisconsin companies. The cash investment could be used for the purchase of an equity security or a debt security, if the debt had a maturity of at least five years and if the debt was unsecured or convertible into equity securities or equity participation instruments, such as options or warrants.
A Florida-based startup technology firm has greatly benefited from CAPCOs. More than $5 million in CAPCO money has been invested in AuthenTec, a fabless semiconductor company that provides advanced silicon solutions to the biometric and security markets. Harris Corporation originally developed AuthenTec`s fingerprint-reading technology. With the company`s support, its CEO and CTO spun off the technology into a separate company in late 1998. After creating a prototype product, the first round of venture capital was raised in December 1999. Two Florida CAPCOs were critical participants in that round, in a bridge financing in August 2000, and in the round that closed in March 2001. Out-of-state sources invested $27.4 million. The company, now a market leader, has more than 40 employees making annual salaries averaging more than $90,000.
“There is a compelling reason to consider CAPCO legislation,” said Herrington. “Economic development, which traditionally has focused on attracting large-scale industrial and manufacturing projects at the expense of direct project subsidies and tax abatements, must also nurture small businesses with big future potential. That traditional approach required sizable front-end investment and extended return periods. These traditional ‘incentives’ put pressure on state budgets that are increasingly fragile. For every large-scale project, perhaps hundreds of smaller projects exist nearby. CAPCOs are custom-designed to serve the small business growth market that makes up the vast preponderance – well over 90% by any measure – of Mississippi`s economy. As important, the CAPCO programs do not target any single market sector. Investment decisions are left to the CAPCO managers to maximize returns.”
All CAPCO programs have similar key features. Qualified investors contributing to CAPCO receive tax breaks, usually in the form of insurance premium tax credits, which are offered annually and generally divided equally over a 10-year period. Investments made by CAPCOs must be made in companies that reside in or relocate to the state.
“The work we do at MTA involves trying to get investment dollars to the table with our state`s inventors, researchers and entrepreneurs,” said Taggart. “Almost always, that money is from out of state, and often, the deal makers want to try to take their newly acquired deals back out of state with them. We need money generated in Mississippi to put into deals generated in Mississippi to grow our economy in Mississippi.”
CAPCO proponents propose that the state treasurer, now Republican Tate Reeves, administer the plan. At press time, a bill number had not been assigned in the 2004 legislative session. Crafting a “best practices” piece of legislation that meets the approval of the four national CAPCOs is a primary goal, said Matt Thornton, MTA vice president of innovation and resource development.
“You don`t want to create legislation where the national CAPCOS and insurance companies won`t come and play, but you also want to create legislation advantageous to Mississippi,” he said.
The Mississippi Economic Council, who contracted the Goodman Group to study CAPCOs in 2001 and received a very positive report, and the Mississippi Economic Development Council are also endorsing CAPCO legislation.
Contact MBJ contributing writer Lynne W. Jeter at email@example.com.