DCED’s John Sider spearheads a Pennsylvania
initiative meant to push innovative companies through their early
stages of development with venture capital partnerships. The financing
program has only one-quarter of its original funds left, but according
to Mr. Sider, the positive affects of the program have just begun.

Governor Ed Rendell recently announced a shot of venture capital
funding for early-stage life science companies in western Pennsylvania.
Through a program managed by the Commonwealth Financing Authority, the
New PA Venture Capital Investment Program will provide $5 million to
Pittsburgh-based Corridor Ventures to invest in Pennsylvania-related
companies within the life sciences sector.

The New PA Venture Capital Investment Program was created by
Governor Rendell’s 2003 Economic Stimulus Package after he first came
into office. The stimulus package passed the state legislature in 2004,
clearing the way for the Venture Capital Investment Program along with
other financing programs meant to jumpstart the Pennsylvania economy.

Last week, CivSource sat down with John Sider, Deputy
Secretary for the Technology Investment Office within the Pennsylvania
Department of Community and Economic Development. In this role, Mr.
Sider oversees operations of the Technology Investment Office, which
serves as a catalyst for growth and competitiveness for Pennsylvania
companies and universities by financing innovation, creating
partnerships and providing support services through technology-based
economic development initiatives. Mr. Sider spoke about the Venture
Capital Investment Program – its role within the larger financing
picture in Pennsylvania and what affect the program has had on the
state’s entrepreneurial landscape.

The Capital Investment Program was allocated $60 million in the
state’s stimulus package. And in 2005, funds began to find their way to
Pennsylvania venture capitalists. “The idea,” Mr. Sider said, “was to
have a ‘fund of funds’ approach. The state would not directly invest in
companies, but instead invest with venture capital partners who met
certain criteria.”

According to Mr. Sider, the Commonwealth saw opportunity in courting
venture capitalists who focused in seed and early-stage investments,
and those who were first time funds. Not only would seed money-focused
investors help local businesses get a start, new investors to the state
would provide an additional level of economic development. “We wanted
to attract VC [venture capital] funds to Pennsylvania that had not
necessarily included it in their geography before. We felt that as a
limited partner, the Commonwealth could jumpstart those relationships,”
Sider said. The program also sought to place money with current
Pennsylvania venture capital funds that could support the existing
investment infrastructure.

Investing in Pennsylvania companies statewide

In an effort to spread the regional impact of the investments to all
corners of the state, 50 percent of Venture Capital funds are required
to be invested in Pennsylvania-related companies located outside the
Philadelphia Metropolitan Statistical Area, and that have a population
of one million people or less. As part of that effort, the Ben Franklin
Technology Partners (BFTP) operates through four independent, nonprofit
organizations established in different regions to best serve companies
across the state.

“These two programs are complementary,” Sider said. “Ben Franklin
centers are step one of the process and the Venture Capital program is
step two.” These four state funded, regional seed funds are generally
some of the first money into a company, according to Sider. “They
[BFTP] are really the riskiest capital that we have in our continuum.
But they help to progress a company far enough that private investors
will pick up the ball from there.”

However, Mr. Sider and his colleagues at DCED saw a need to fill a
gap in the continuum of financing and services available to startup
companies, above the $500,000 level available to companies through
BFTP. “We needed VCs who wanted to put money in those companies who are
past the beta product, who are ready to launch, but need that extra
influx of capital to get them going.”

Venture Capital Program loans require a match by the VC of
three-to-one. For every dollar the Commonwealth provides to VCs, they
are obligated to provide three dollars of investment into PA companies.
But according to the latest bi-annual report, the state is on an even
better heading.

“Most venture capital funds have a ten-year lifetime and we just
started in 2005, so it’s too early to assess the complete financial
performance of the program,” Sider said. “But we’re pretty pleased with
the progress so far. We’ve made some very good partnerships with some
very responsive VCs.”

According to a report compiled by DCED and the twelve closed venture capital fund investments through in June 2009:

  • PA company investments: 45
  • Jobs created at those companies post investment: 485
  • Jobs retained at those companies: 1095
  • Total invested by 12 partner VCs in PA companies: $117,430,628
  • Total other dollars invested on or after VC investment: $240,227,320

Mr. Sider pointed out that despite their aggressive target,
Pennsylvania is on track to meet its goal of $4 to PA companies for $1
the state put into venture capital funds. He also said that five of the
twelve were first time funds that probably would not have closed
without the state’s upfront commitments. “The $16.45 million we put
into those five funds was matched with $87.5 million in private dollars
– all new risk capital for PA entrepreneurs,” Sider said in follow-up
e-mail.

Another encouraging statistic for the state comes from the National
Venture Capital Association (NVCA) and PricewaterhouseCooper. In 2008,
NVCA and PwC’s MoneyTree Report ranked Pennsylvania first for the
category “Growth in VC Investment” and second for “Growth in number of
VC-funded companies.”

A study released by the Pennsylvania Economy League in early 2009,
found that BFTP investments grew the Pennsylvania economy by $9.3
billion from 2002 through 2006. Pennsylvania also received more than
$517 million in additional tax revenue as a result of BFTP programs
during that time, indicating a 3.5-to-1 payback ratio to the state on
its $140 million investments.

Lasting affect of state-partnered investments

The Corridor Ventures deal ratchets up the investment program’s
totals to $45 million, three-quarters of the program’s totals already
spent.

But as the Pennsylvania Economy League report showed, the money
comes back in the form of increased tax revenue so it can be put out
into the street again. “We’ll be able to continue the activity with the
original $60 million, but there will be a lag of maybe two or three
years,” to realize tax revenue generated by an expanded economy, Mr.
Sider pointed out.

Corridor Ventures is expected to leverage an additional $15 million
in private funds towards six to eight early-stage life science
companies in western Pennsylvania, Gov. Rendell said last week. And for
Mr. Sider, the deal continues to illustrate the value of limited
partnerships in creating long-lasting development for Pennsylvania’s
economy.

“Limited partnership thinking is based on the idea that partner
funds will be more responsive to the kinds of deals we’re asking them
to look at and create long-term relationships. And ultimately, those
are the kinds of people we want to be close to – those funds who make
their living by placing capital in Pennsylvania.”