Over the past 10 years I have been involved in five startups. Now, in my new role with the Illinois Department of Commerce and Economic Opportunity, I find myself at the center of many discussions about the proper role of government in helping jump-start the economy.
Illinois is experiencing a burst of innovation beyond anything I have seen before. During my startup days, my primary business development target was the local chamber of commerce. Today, there are online lead generation tools and business incubators and accelerators in the region. The emphasis is on driving creative density to create ideas, build new businesses and disrupt markets. It is a completely different environment for entrepreneurs, one rich with opportunity.
At the state level, one tool in particular, the Invest Illinois Venture Fund, gives Illinois a significant competitive advantage in terms of access to venture capital, direct support to entrepreneurs and ability to attract more smart capital to the region.
Here's how it works: Through the fund, DCEO Director David Vaught can make direct investments in individual companies, after they've been vetted by staff. We are one of the few states in the nation able to make such direct investments. This is a tremendous advantage. In less than five months from its formation, the program received more than 75 applications. Altogether, the IIVF has invested $1.7 million in five companies, with about a dozen more to close in the next month. The companies already receiving money are AuraSense Therapeutics, Buzz Referrals Inc., Local Offer Networks, SweetPerk Inc. and Tap.Me Inc.
The state can get involved in a deal only after the company shows it has a commitment from a third-party lead investor. As with all investors, we anticipate a return. Proceeds from eventual business transactions will go back into the IIVF, letting it support even more businesses.
States across the country are watching the Illinois program closely. If it succeeds—and I'm confident it will—others are likely to follow. That scrutiny heightens our responsibility to be transparent about all investments, always keeping in mind that public funds are involved.
The idea of direct investment in business is a sharp departure from past economic incentives. Local, state and federal grant programs and tax relief remain as anchor tools for public funding, but direct investment provides an interesting alternative. Grants carry anywhere from 10 to 15 percent on average in administrative costs and do not include return of principal. By contrast, direct investment generally has lower overhead costs (around 3 percent) while having the potential to return not just the original capital, but upside equity and interest.
In Illinois we are seeing an unprecedented alignment of public and private capital resources with one objective—to give entrepreneurs the opportunity they seek and build great companies. From that flows a stronger economy that helps us all.
Published in Crains Chicago on July 14, 2012
