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Business Observer Thursday, Feb. 19, 2009 9 years ago

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The government's looming presence in the financial markets overshadowed a recent venture-capital conference in Naples that attracted 1,100 participants. Venture investors say government is where the action is.
by: Jean Gruss Contributing Writer

When the star of a venture capital conference is a state-sponsored investment fund, it's another indication the capital markets aren't working as they should.

The Florida Opportunity Fund's managers were the highlight of the Florida Venture Capital Conference in Naples last week as venture funds clamored for meetings with them.

“Just because we don't pick you doesn't mean we don't love you,” joked Mel Carter, in-state investment specialist with Credit Suisse, one of the managers of the $29.5-million Florida Opportunity Fund that will invest indirectly in small, growing companies in Florida.

The fund is a so-called “fund of funds” financed by Enterprise Florida, the state's economic development arm. It will spread the money among a group of outside investment firms that will in turn select early stage companies that deserve venture funding.

But the buzz at the conference was even greater for another, much bigger, state-sponsored investment fund that's in the organization stage. Last year, lawmakers directed the Florida state pension fund to invest 1.5% of its net assets in Florida technology and medical companies. That amounts to more than $1 billion, a lucrative prize in today's constricted venture funding market.

Venture capitalists are increasingly turning to managing government money as private sources dry up. “Staying even is the new growth opportunity,” quipped Nelson Castellano, co-chairman of the business transactions practice of law firm Trenam Kemker and a panelist at the conference.

Meanwhile, venture capitalists are following closely how the federal government will pick winners. These include companies developing “green” and “clean” technology as well as health care and education enterprises.

Whatever industry wins government favors, venture capitalists are telling companies they should make plans to benefit from the state's largesse, says Mark Heesen, president of the National Venture Capital Association. “They pay their bills at the end of the day,” he says.

In an indication that Florida companies will receive a substantial share of state and federal government spending, conference organizers say 200 venture capitalists attended the conference, more than the 180 who attended last year. Other attendees included entrepreneurs, bankers, lawyers, and accountants.

Why VCs love Florida
Florida has never been at the top of the venture-capital list, but the state government's leap into that world has people talking.

In 2008, Gov. Charlie Crist signed a bill that authorizes the State Board of Administration to invest up to 1.5% of the net assets of the Florida Retirement System Trust Fund in technology, medical and other growth companies with a significant presence in Florida. The trust fund's net assets totaled $97.3 billion on Dec. 31, the latest available figure.

The board is negotiating with Philadelphia-based money management firm Hamilton Lane, which as a “fund of funds” will manage a portion of the money by selecting outside firms that will invest it with young companies in Florida.

In addition, the board has identified 10 money management firms that it may hire to make direct investments in companies with a significant presence in Florida. The board plans to make a decision in the next few months on who will manage that money and how much each will manage.

Although management contracts are negotiated, venture-capital firms charge relatively high fees because of the risks and extensive research necessary to find good candidate. Venture funds generally charge investors 2% to manage the fund and keep 20% of the returns.

The program, dubbed the Florida Technology and Growth Investment Initiative, was designed to provide capital to growing companies in Florida in the areas of technology and life sciences. These include tech companies in the fields of aerospace, computers, renewable energy, drug development, medical implants and biomedicine.

Investment firms vying for the program must have at least $100 million under management and provide three years of performance data.

Meanwhile, Enterprise Florida, the state's economic development program, has allocated $29.5 million for the Florida Opportunity Fund. The “fund of funds” manager is a joint venture between Winter Park-based Milcom Venture Partners and Credit Suisse.

The fund has received 15 responses so far to its request for investment firms to manage the money, says Christopher Fountas, general partner with Milcom. The fund will select eight to 12 venture investors that will invest the money in Florida companies over the next 36 months. Because the Florida Opportunity Fund is a “fund of funds,” it will not decide which companies ultimately will receive funding; only the outside managers it selects will do that.

However, the managers are expected to select young companies that will help diversify Florida's economy in areas such as medicine, “clean” energy, homeland security, aerospace and defense, information technology and advanced manufacturing.

Because each manager's investment style is different, expected results will vary, says Credit Suisse's Carter. “We don't want to force false economics,” he says. However, Carter says he expects the results of the state's investment of $30 million will be multiplied threefold over the next several years.

The fund is currently negotiating management fees with the outside managers. “We want institutional-caliber terms,” he says.

Green and clean
Governments here and abroad are also pushing for more environmentally friendly technology, which could spur new investment opportunities in small, privately held companies. “It is a huge market,” says Heesen. “Governments around the world are demanding that change and subsidizing that change.”

But the era of Jimmy Carter hasn't been forgotten, when the government subsidized alternative energy companies that later failed. “They lost their shirt,” Heesen says.

Still, there may be some winners as the government spreads money into research and development, universities and government agencies like the Department of Energy. “It is going to be a lot of money in a lot of different areas,” Heesen says.

In Florida, about 14% of the venture capital investments last year went to so-called “clean” technology, such as solar and wind power, biofuels and water purification. “We saw Gov. Crist doing a lot for clean technology,” says Ravi Ugale of Crossbow Ventures.

“We're keeping a close eye on what's coming out of the university systems,” says Greg Foster, of Noro-Moseley Partners.

In particular, venture capitalists are intrigued by what's happening at the University of Miami's 1.4-million-square-foot Life Science Park, the Scripps Research Institute in Jupiter, the Torrey Pines Institute for Molecular Studies in
Port St. Lucie and the Burnham Institute for Medical Research in Orlando.

Venture capitalists say the biggest challenge when they visit Florida companies is the lack of seasoned entrepreneurs.

“The number one driver is talented managers who have raised money before,” says Drew Graham of Ballast Point Ventures.

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