Control of Md. tech fund debated

A renewed effort to pump $100 million into small, high-tech Maryland companies could meet resistance on the same point that held up similar legislation in the spring — deciding who gets to control that big pot of money.

The Department of Business and Economic Development is crafting a bill for the 2011 General Assembly session that would offer insurance companies tax credits to be used down the road to restock the depleted Maryland Venture Fund.

Half of the $100 million fund would be distributed directly to companies by DBED, and half would be given to venture capital firms to invest Maryland companies.

“What tends to work in a bigger way than any other part of economic development is organic growth,” said DBED Secretary Christian Johansson. “Communities that have done well over a longer period time have done well in organic growth, and that comes from start-ups and small firms.

“We are a mecca for discovery. Our challenge as a state is that we’ve not nearly lived up to our potential in commercializing those discoveries.”

DBED is working with legislators, members of the tech sector, insurance companies and venture capitalists to shape the bill around the framework already in place.

“There are some really delicate things to negotiate, the most important being where one balances the role of state government, what the role of the state is in investing, what the returns are to the state relative to the VC firms,” said Del. Bill Frick, D-Montgomery, the sponsor of the venture capital legislation that failed this spring.

Del. Brian Feldman, a co-sponsor of Frick’s bill, said the effort stalled with lawmakers and DBED at loggerheads over the 50-50 allocation of funds between the state-controlled pool and private venture capitalists. Private firms would have to return 100 percent of the principal to the state before reaping any profits from their investments.

“The budgets have not been friendly to the venture fund over the last eight or nine years,” said Feldman, D-Montgomery. “This is an effort to inject life into the venture fund, which I think is a good goal. But the question is whether that’s 20 or 30 or 50 percent.”

The legislation’s future is also tied closely to the Nov. 2 election — Gov. Martin O’Malley has thrown his support behind the effort to replenish the venture fund, while his likely Republican challenger has criticized the proposal.

“We think this has serious, possibly harmful, implications for the future,” said Andy Barth, spokesman for former Gov. Robert L. Ehrlich Jr. “What he [O’Malley] is doing is reducing future income when we already know there’s a structural deficit.”

There would, however, likely remain some lawmakers who would support raising venture capital through tax credits. A bill similar to that being written by DBED failed this year, but had supporters among Republicans and Democrats, including Del. Sheila E. Hixson, chairwoman of the Ways and Means Committee, which controls tax legislation.

Other states with programs like that planned by DBED have had success in drumming up interest in the tax credits from insurance companies. From 2005 to 2008, Texas sold $200 million in credits to 110 insurance companies.

DBED would distribute the credits, which could be used starting in 2015, through an auction with a price floor of 70 cents on the dollar. Johansson said that if the plan succeeds, the taxes and economic growth generated by the companies that receive the capital investment could make up for the long-term loss in tax revenue.

DBED’s tax credit funding mechanism would mean a large expansion for Maryland’s fund, which has made $51 million in investments over 13 years. In the year ending June 30, $1.3 million was lent to 11 companies.

Martin Knott, CEO of the e-learning company Moodlerooms Inc., said the fund is essential to keep tech companies like his afloat.

He said Moodlerooms has grown from 20 employees at the beginning of this year to 53, during which time the state’s venture fund bought $250,000 in stock in the company.

“The VC’s want more mature companies,” he said “Very few VC’s are investing in early-stage companies. I mean start-ups — three people and a great idea. That’s where angel investors come in. That’s where the state comes in.”