Illinois VCs Lobby to Nix State Investments in Start-ups

The IVCA, on the other hand, encourages state investments in privately managed fund of funds – presumably, the proposed Illinois Opportunity Fund – a program backed by the governor that would incent participating firms to make local investments. A fund of funds is collection of money from other private equity funds.

The only people investing to make a difference now is the IDFA.
– Tom Churchwell, managing director of ARCH Development Partners and IVCA member
“The IVCA supports a professionally managed fund of funds that will be invested in Illinois-based private equity firms,” said IVCA President Jim Downing, who worked for IDFA prior to co-founding the IVCA in 2000. “We do not support direct investing or co-investing by the state.”

A spokesperson for Sen. Obama told ePrairie that Bill 1426 would not pass as currently constructed. The bill’s intent, rather, is to “raise the profile” of how the state manages the venture capital process.

One notorious case in point is a $300,000 investment IDFA made in early 2001. WanderOn, which billed itself as a business-to-business marketplace for the bicycle industry, collected money from the IDFA several months after the company essentially ceased to operate.

Since 1983, however, the state has invested in 29 companies and six fund of funds through the IDFA. The $14 million invested by the IDFA has preceded more than $140 million in follow-on investments, according to IDFA executive director Pat Rea.

Rea says the IDFA will follow whatever mandate is imposed by the state. He added: “We are a creature of the state. We follow the directions of the governor and the legislature,” Rea said. “Whatever the state wants us to do, we will do to the best of our ability.”

Chicago-based zuChem, a biotech firm that develops specialized sugars for the food and pharmaceutical industries, is among the IDFA’s most recent investments. In addition to the $500,000 it raised from Chicago-based ARCH Development Partners in its first round of financing, ZuChem received nearly the $300,000 maximum the IDFA invests in seed-stage companies.

Ray Willis, vice president of operations at ZuChem, acknowledges that raising money from state agencies “takes a little longer,” adding that he would support a privately managed alternative for accessing seed-stage funding. However, Willis says the IDFA’s support has been crucial to his company’s growth and questions when an alternative would be in place.

“I am not opposed to new ideas for venture capital firms and how they relate to the state,” Willis said. “I would hate to disrupt what has been a good history for most of the companies that have dealt with the IDFA.”

ZuChem is one of eight companies that have received funding from both the IDFA and ARCH Development Partners. ARCH is a privately managed fund committed to seed and early stage investment opportunities in the Midwest.

ARCH managing partner Tom Churchwell, who is a member of the IVCA, would also welcome an alternative to IDFA but fears that entrepreneurs and early stage investors would currently suffer if the IDFA were prohibited to make investments.

“The only people investing to make a difference now is the IDFA,” Churchwell said. “When and if there are programs in place that seriously incent seed and early stage investing that would do the same work the IDFA program does, then by all means replace it. But right now, nothing is happening.”

David Wilhelm, a venture capitalist with close ties to the Blagojevich administration, announced last week at an industry event that the Opportunity Fund would not make its first investment for at least one year. Tom Thornton and John Maxson, both of the Illinois Coalition (which co-manages investments with the IDFA), expected to visit with Sen. Oboma on March 4. Sen. Oboma sits on the coalition’s board of directors.

The Illinois Coalition supports the Opportunity Fund, which also encourages investments in minority-run companies and start-ups based in rural and lower-income parts of the state. Still, can a cash-strapped state afford to fund both the IDFA and the Opportunity Fund? If not, when would you pull one in favor of the other?