CAPCOs: Higher Costs + Fewer Jobs = Risky Idea

Kelly McCutchen, GPPF President

It’s an ugly secret that Georgia is losing talent, tax revenues and jobs. While the state is a “technology and scientific research powerhouse, 92 cents of every venture capital dollar invested in Georgia companies comes from out of state,” according to testimony last month by the executive director of the Enterprise Innovation Institute at Georgia Tech, Stephen Fleming.

“We lose many smart entrepreneurs and promising startups to other states because venture capital firms want a closer eye on their investments,” Fleming said.

Why is this important? Startups like these are responsible for all of the net new job growth in the U.S. over the last three decades, according to the Kauffman Foundation. If legislators are truly focused on “jobs, jobs, jobs,” we cannot afford to lose these job creators to other states just before they start to accelerate their growth, increase their employment and pay more taxes.

The problem is real, but far better solutions exist than “certified capital companies” or CAPCOs, which the General Assembly came close to authorizing to accept $125 million in tax credits last year.

There are traditional venture capital firms, then there are CAPCOs. Unfortunately, CAPCOs have higher costs, create fewer jobs, invest fewer dollars in startup companies and offer taxpayers a much lower return on investment than those traditional firms. Taxpayers underwrite all of the risk while the CAPCO companies keep the profits. Sound familiar?

Venture capital firms are expected to return the principal plus 80 percent of the profits. But a CAPCO takes 100 percent of the tax dollars, deducts its fees and startup costs and typically keeps the principal and the profits.

It would be far more efficient for the state to simply attend the next scheduled entrepreneurs’ conference and drop $125 million from the ceiling onto the crowd. At least then 100 percent of the money would actually reach the intended beneficiaries.

Will investing millions in small companies create jobs in Georgia? Certainly. The important question, however, is whether there are better ways of creating jobs, such as venture capital, or simply enable taxpayers to keep more of their money in the first place.

Investing a small portion of existing pension funds in venture capital investments and incentivizing early-stage venture capital formation would be far more effective than a risky bet that CAPCOs in Georgia would defy their track record in other states.

Here’s a simple rule for legislators: If you wouldn’t invest in these programs with your own funds, you shouldn’t allow investment of taxpayers’ dollars in them.

(Published on December 18 in the Atlanta Journal-Constitution)

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