The final report of the Senate Study Committee on Venture Capital Investments

GEORGIA STATE SENATE
SENATE RESEARCH OFFICE
204 Coverdell Legislative Office Building 1 404.656.0015 18 Capitol Square SW Atlanta GA 30334

ANGIE FIESE DIRECTOR ALEX AzARIAN DEPUTY DIRECTOR ELIZABETH HOLCOMB PROJECTS MANAGER

THE FINAL REPORT OF THE SENATE STUDY COMMITTEE ON VENTURE CAPITAL INVESTMENTS
COMMITTEE MEMBERS

Senator Brandon Beach- Chair District 21

Senator Judson Hill District 32

Senator Elena Parent District 42

Senator Michael Williams District 27

Sean Banks Chair FinTech Society of TAG
Chris Carr Commissioner of GDEcD

Sam Burch General Counsel University System of Georgia
Gardiner Garrard TTV Capital

Hala Moddelmog Metro Atlanta Chamber

Jeff Muir Fulcrum Equity Partners

Blake Patton Tech Square Ventures

Lynne Riley Commissioner Department of Revenue

Prepared by the Senate Research Office
2016

COMMITTEE FOCUS CREATION AND DUTIES
The Senate Study Committee on Venture Capital Investments was created by Senate Resolution 1132 to study the feasibility and possible benefits available for increasing allocated funding to the Invest Georgia Program as well as a review of the venture capital industry in the State of Georgia
Senator Brandon Beach of the 21st chaired the Committee. The other members included Senator Judson Hill of the 32"d Senator Elena Parent of the 42"d Senator Michael Williams of the 27th Chris Carr from the Georgia Department of Economic Development Hala Moddelmog from the Metro Atlanta Chamber Lynne Riley from the Georgia Department of Revenue Gardiner Garrard from TTV Capital Jeff Muir from Fulcrum Equity Partners Blake Patton from Tech Square Ventures Sam Burch from the University System of Georgia and Sean Banks from the FinTech Society of the Technology Association of Georgia.
The Committee held three meetings in total. The first meeting was held on October 6 2016 at the State Capitol where the Committee heard official testimony from the following Knox Massey Executive Director for Invest Georgia Gardiner Garrard TTV Capital Jeff Muir Fulcrum Equity Partners and Blake Patton Tech Square Ventures.
The second meeting was held on October 26 2016 at the offices of LCG in Cobb County Georgia where the Committee heard official testimony from the following Catharine Burkett LCG Associates Cam McElroy LCG Associates Ed Johnson CEO of LCG Associates Eric Cromwell from Cromwell Schmisseur Dan Schmisseur from Cromwell Schmisseur Mike Becker Venture Atlanta and Andrew Dorman Venture Atlanta .
The third meeting was held on December 12 2016 at ATDC at Georgia Tech s "Tech Square " where the Committee heard official testimony from the following Chris Downing Vice President for Enterprise Innovation Institution at Georgia Tech and John Foster from the Georgia Department of Revenue.
COMMITTEE FINDINGS
Invest Georgia The Invest Georgia Program was created by House Bill 318 in 2013 to help grow Georgia-based venture capital funds as well as Georgia businesses that are incubated and growing within the state. This is done by providing venture capital funding to these businesses from Georgia-based venture capital funds thus bridging the capital gap that exists for companies in the early and growth stages. These Georgia companies might otherwise struggle to survive without the help of these venture capital funds who provide needed funding while also consulting these businesses as they transform from entrepreneurial entities to job-producing Georgia companies. In turn successful exits expand the base of experienced entrepreneurs investors and talent that contribute to a healthy cycle of "creation expansion exit creation..." experienced by other leading technology hubs.1
1 Taken from testimony given by Blake Patton to the Committee on October 6 2016. This information is also found in a report titled "Recommendations to the Georgia State Senate Venture Capital Study Committee " which was submitted by Ms. Hala Moddelmog and Mr. Blake Patton to the committee on December 12 2016
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Diagram of the Business Creation Cycle
i -----

SEED EARLY LATER STAGE

EXITS

--- -- ..

2

Invest Georgia is structured as a "fund of funds" and is allowed to invest in other Georgia-based venture capital funds which are encouraged to invest allocated capital primarily in Georgia companies. Potential Georgia venture funds are examined by an independent third party LCG Associates an investment consulting firm based in Georgia. LCG Associates provides the due diligence on any potential Georgiabased fund by looking at the history of the fund its managerial structure and skillsets the fund s historical investment into Georgia companies and other factors which will give an indication as to its future performance. After th is due diligence is performed the Invest Georgia Board of Directors votes on whether to invest in the fund .

The structure of the Invest Georgia fund ensures that any allocations of funding which it receives is
converted to capital on a one-to-one basis. This process both ensures that any investment helps build up companies in this state w hile also ensuring that it also brings in a return on their investment. The fund also benefits from being managed by experts in the field.3

This program has thus far received $10 million in funding in 2015 and $10 million in 2016. Under O.C.G.A. 10-10-16 the program is eligible up to $100M with potential scheduled funding of $15 million in 2017 $25 million in 2018 and $35 million in 2019 .

State of Venture Capital Funding in Georgia
Georgia has many of the key ingredients necessary to become a leading technology hub such as the state s research un iversities large high-tech talent pool an increasing number of angel investors and early stage venture firms Venture Atlanta and numerous entrepreneurial hubs and support programs such as ATDC. Georgia also leads in technology-based industries such as the financial transactions industry.4 Nonetheless in order for Georgia to continue to grow and lead in these areas it must have a vibrant venture capital investment community supporting these industries.

Though venture capital investment activity in Georgia has increased in recent years Georgia lags other leading technology hubs including some southeastern states. The state is currently considered a Tier 3 state for venture capital investing (with Tier 1 indicating the best states to invest in).5 In 2015 US-based companies raised $73 .4 billion of venture capital. Of that total amount 1.3 percent was invested in Georgia companies. Georgia also had 101 venture capital deals in 2015 which represented 1.4 percent of all deals in the nation. In each of these areas Georgia lags behind other states such as California New

2 All charts are t aken from the report submitted by M s. Hala M oddelmog and Mr. Blake Patton t o the committee on December 12 2016 3 Taken from testimony given by Eric Crom well and Dan Schmisseur October 26 2016 4 Taken from t estimony given by Gardiner Garrard October 6 2016 5 Taken from testimony given by Knox Massey October 6 2016
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York Massachusetts and Texas.6 Likewise California has more than 40 times as many venture capital funds than Georgia while Texas has over three times as many.

US V&ntu r&Cap ita l 20 15

Percentage of Capital lnvested by State

Georgia Non h

Percentage of Deals by State All other

Florida

Sc" "".fndol lol. - . 16. 2015

Number of VC Fund by State 2005-2015

1 000

883

800

600

400

252 219

200 22 0

I I - 78

52

18

18

GA CA NY MA TX WA NC FL

SewN Flutteoo.. fi v. 2 20t6

With less local capital available inside the state companies in Georgia must look outside for investors. As a result 86% of the investors in Georgia venture capital deals in 2015 were located outside of Georgia. When the investors in a fund (or the fund itself) are from out of state profits generated from successful company exits leave Georgia and are less likely to be returned to the state economy through re-investment or other mechanisms.

Percentage of lnState vs. Outof-State VCInvestors by State 2015

100%

9ew.

sew.

7ewo

65%

Gewo

6%

80% 82% 81% 85%

sew.

4ewo

3ewo

209
tewo

GA CA NY MA TX WA NC Fl

of In-State Investors 2015 of Out-of-State Investors 2015

Percentage of In-State vs. Outof-State Capital Invested in Seed and Early Stage Deals by State 2015

10 Wo 90% 80%

1

l S%

33Yo

70%

60%

SOo/o

40o/o

30o/o

20o/o

l Oo/o

Oo/o

GA CA NY MA TX WA NC Fl

In-State Capital. 2015 Out-ofState Capital 2015

6 See note 1

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This lack of local capital makes it challenging for new high-growth companies to start and stay in Georgia. Seed and very early stage investing are a local business.7 Working long distance with a business places a strain on investors who wish to work hands on with these companies. Only 22.2 percent of all venture capital exists outside the Silicon Valley Los Angeles/Orange County New York Metro or the Boston area. This concentration of venture funding in these areas puts pressure on new companies seeking investors as investors will frequently demand that these businesses relocate into these areas to receive funding. 8
Number of Funds Investing i n Seed & Ea rl y St age Dea ls in Each State 2015

800

718

600

400

320

200
23
08

197

153

70 86

- - so 33 3

22
9

u..22

GA CA NY MA TX WA NC FL

seed Early Stage

SOvltt Plrch8001c Nov. ZS 1016

Georgia s low ranking for venture capital investing is due in part to the perception the rest of the world has of Georgia as investors question whether the state can produce top-tier returns and multi-billion dollar company exits. This perception is reinforced by the lack of state funding in venture capital funds as well as the state s lack of institutional investors (such as from Georgia corporations pensions or university endowments).9 Eighty percent of the money invested in venture funds comes f rom pension funds endowments foundations finance companies fund-of-funds and insurance companies. Institutional investors typically contribute larger sums of money to venture f unds w hich leads to the creation of larger funds capable of investing higher dollar amounts in later stage companies.

Source of money in VCfunds The Business of Venture Capitol
7 See note 1 8 According to testimony given by Eric Crom well and Dan Schmisseur Octo ber 26 2016 Taken from t estimony given by Knox M assey October 6 2016
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Increasing the investments from Georgia corporations and pensions would signal to other investors that Georgia is a credible state to invest in. 10 While recently passed legislation allows investment of public
funds in alternative assets as well as a fund of funds strategy in the form of Invest Georgia there are
still fewer Georgia-based institutional limited partners LPs) investing in local funds compared to other
leading technology hubs. Not only do the leading states for investment have more institutional LPs but those LPs invest heavily in their local funds.11

Inst it u tional l imited Partne ( LPs) by State 2005-2015

200

144

150

121

I I I I 100
50 16
0

62 58
22 25 16


GA CA NY MA TX WA NC FL

11 d Knc)l m lnstit tional LPs 200 2015

Instit utional Limited Partne (L Ps) by State 200S-2015

1001)$
ro s
60)$ 75
4() )S

2US 7996

65

32

72

7396

7296

94

20)$ 2596

3596

2896 2796 2896

0

"

GA

CA

NY MA TX

WA

NC

FL

Institutional LPs v.ho Committed t o Out-of..State VC Funds 200 2015 )$ Institution al LPs wh o Committed to Local VC Funds 200 2015

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Funding for these businesses currently only originates on the state level. Although the federal
government does provide loans and funding to small businesses these programs do not assist
companies in the formation stages but after companies have left the early stages of growth.12

Additional venture capita l investments would help to grow Georgia s economy at a crucial time of its growth. The information technology industry is currently in the synergy phase of its lifespan which involves high growth due to the creation of new innovative and potentially disruptive applications of already existing technology. Georgia has and can continue to benefit greatly from this period of growth due in large part to the current size of the financial transactions industry in the state .13 Investments in these businesses today will help to develop a larger economy in Georgia for the future.

10 Taken f rom testimony given by Knox Massey Oct ober 6 2016 11 See note 1 u Taken from testimony given by Eric Cromwell and Dan Schmisseur October 26 2016 13 Taken from testimony given by Gardiner Garrard October 6 2016
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RECOMMENDATIONS
Fully fund the Invest Georgia program in aggregate amounts up to the allowed $100 million over the next several legislative sessions.
Investigate allocating unused or unallocated tax credits from existing tax credit programs in Georgia to incentivize Georgia-based corporations to invest in Georgia-based venture capital funds.
Encourage and Increase other institutional investments into Georgia-based venture funds. These funds are key to venture capital growth in Georgia. Doing so will encourage other Georgia-based institutional investors (such as Georgia-based corporations endowments foundations fund-offunds state pension plans) to invest in local venture firms so as to increase access to capital for Georgia companies.
Support increased engagement of large Georgia-based companies as sources of early customers talent capital and potential acquirers for startups and growth stage Georgia companies as well as leveraging their traditional strengths (e.g. scaling distribution networks marketing and branding etc.) and their current focus on innovation.
Maintain the current quality of investments from Invest Georgia. Create a year round Venture Capital Task Force. Duties could include
o Provide updates on the Invest Georgia program from the venture capitalist perspective o Provide updates on venture capital activity in the state. This would include all capital under
management in Georgia capital invested in Georgia-based companies whether from Georgia based venture capitalists or venture capitalists outside of Georgia all exists of Georgia-based venture capital-backed companies and commitments from Georgia based companies foundations etc. in Georgia venture capital firms o Provide updates on venture capital activity including in State programs regionally and nationally o Discuss macro-economic trends in venture capital investing and o Advance public relations for venture capita l investing in the state.
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Respectfully Submitted
THE SENATE STUDY COMMITTEE ON VENTURE CAPITAL INVESTMENTS
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Senator Brandon Beach -Chairman District 21
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