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Losses hammer state venture capital program

CHARLESTON, W.Va. - A $25 million venture capital program set up nine years ago at the request of then-Gov. Bob Wise has lost $20.8 million so far.

Some remaining investments still have a chance to eventually make money, an audit report says.

In his 2002 State of the State speech, Wise said, "We must draw in venture capital to encourage entrepreneurship and create jobs.

"At my direction, the West Virginia Investment Management Board is ready to move forward with a $25 million plan that will attract $75 million more dollars in federal funds for a total of $100 million in new investment capability for businesses in West Virginia."

The idea was that state Economic Development Authority, as manager of the program, would receive a $25 million loan from the state Investment Management Board - the agency that manages the state's pension funds.

The development authority then was to pick qualified venture capital companies to invest the money in West Virginia enterprises, and the state's investments would attract $75 million in federal money.

How much federal money the program ultimately attracted is not clear.

However, the $20.8 million in losses are spelled out in a draft audit report released Thursday by the West Virginia Enterprise Advancement Corp. - the entity set up by the development authority to oversee the program.

"On paper it looks like a $20.8 million loss, but there is no way to quantify that until all of the investments are liquidated," said David Warner, executive director of both organizations.

That typically happens when a startup sells stock to the public or is sold.

The bad investments typically get written off first and the investments that are winners "are the last to get liquidated because the venture capital firms want to maximize the return," Warner said.

"We are looking for a substantial upside from the current book loss. We won't know how it all settles out for another three or four years. The upside is going to be at the end, when the portfolio is liquidated."

The national economic downturn that occurred in 2008 has made it difficult for new companies to sell stock to the public and has reduced the number of mergers and acquisitions.

"Those are the normal exit strategies that growing venture capital companies use," Warner said. "These strategies are not as widely available as they were 10 or 15 years ago, and that's had a big impact."

The original idea was for profits generated by the state's investments to be reinvested in other ventures so the state would have a perpetual venture capital fund.

The money the Enterprise Advancement Corp. received from the Investment Management Board was in the form of a loan with a 3 percent interest rate. However, there is no requirement that money invested in deals that go bad must be repaid.

According to the auditor's report, the program has a current value of $7 million, down from $8.6 million a year ago.

The audit report does not list the venture capital funds that received state money.

However, it was previously reported that the funds include Anthem Capital Limited Partnership of Baltimore; Toucan Capital Fund II Limited Partnership of Bethesda, Md.; Adena Ventures Limited Partnership of Athens, Ohio; Mountaineer Capital Limited Partnership of Charleston; Novitas Limited Partnership of Wayne, Pa.; Walker Investment Fund Limited Partnership of Glenwood, Md.; and Innova of Fairmont, an affiliate of the West Virginia High Technology Consortium.

The funds in turn invested in portfolios of high-risk start-up companies. The audit report does not list those companies.

The audit report said, "Due to the absence of readily ascertainable market values and the inherent uncertainty of valuation of venture capital investments," the current reported $7 million value of the program's assets "may differ significantly from the value that would have been used had a ready market for the investment existed, and the difference could be material."

Contact writer George Hohmann at business@dailymail.com or 304-348-4836.

 


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