Monday, September 26, 2011

What’s with the “Fund of Funds” Fast Track?

When the original venture capital legislation was introduced, opponents of it repeatedly called for the legislature to slow down and more deliberately evaluate the various options. That is certainly a notion that I agreed with because this is an important issue and regardless of the exact approach we must proceed in a thoughtful manner. But now that the focus of many has changed entirely to a “fund of funds” approach, suddenly some are ready to take a fast track. This is the exact kind of blatant inconsistency that makes me wonder about what is going on behind the scenes and what motivations lie there.

Let me be clear. I’m not saying that a “fund of funds” approach shouldn't be a part of our venture capital planning but I am saying that we better make sure that we do things right the first time. A few weeks ago I gave the Oklahoma example to show that using a “fund of funds” approach should not be looked at as the Holy Grail of venture capital programs. Oklahoma has had the “fund of funds” program the longest and in fact it is frequently referred to as the “Oklahoma program”. After using this program for decades, recent reports and audits in that state are hardly inspiring.

Since my last blog posting about the venture capital complications in Oklahoma, a bipartisan group of state officials have written an editorial about their flawed system. In it they highlight the fact that 85 to 95 cents of every dollar that Oklahoma invested through its program was invested in start-up companies located outside of the state and at least one was outside of the country. A state audit in 2006 found “$31 million in debt and more questions than answers.” While the private fund managers in that state have collected generous fees for years, state officials described it in the recent op-ed as a “failed program that has become too costly...”

Surely Oklahoma originally thought that their program was a good one but due to its complexity, problematic issues remained relatively hidden for years. That is until the state faced paying multiple millions of dollars to cover losses. Since a private entity was allowed to run the program it took public officials longer to detect such problems. In fact the entity that ran the program was not even subject to public records requests, open meetings laws or to the inquiries of state legislators.

The State of Wisconsin certainly shouldn't be rushing to replicate these kinds of mistakes; rather we should take the time to learn from them and carefully arrive at a solution that fits our specific needs. We should also ensure that all entities associated with our venture capital program are open and fully subject to public scrutiny.

Scott Walker has assembled a venture capital commission to apparently advise the legislature on this issue. However even this commission seems to be moving very quickly. Apparently they have already had their first meeting and I’m still trying to find out who exactly is involved. Some reports have given a few names but it would be nice to have a full listing before this commission goes too far too fast. For example, I think that we should know if any conflicts of interest exist on the commission. I further think that its deliberations should be made fully available to the public.

Bringing in a much larger share of venture capital dollars is certainly an important goal for our state but we should plan it carefully and with full disclosure. We certainly shouldn't repeat other state's mistakes whether it is on a “fund of funds” fast track or on some other overly rushed route.

UPDATE: I just happened across this News from West Virginia, which I believe uses the "Oklahoma Program". They started it in 2002 and a recent audit has revealed a $20.8 million loss.

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