CAPCO program: Idea that’s for the birds

Investments should yield rewards; that’s a cornerstone of capitalism.

And it’s critical to understanding just how bad a deal for Georgians would ensue if the General Assembly takes the final step toward creating a “CAPCO” program. This idea should go nowhere fast.

CAPCOs, short for certified capital companies, plunge governments into the midst of the venture capital, or VC, business. That’s work best left to the private sector, we believe.

Venture capitalism provides money that nurtures small businesses along the growth curve. It’s a critical function, given that small- and medium-size companies provide a majority of new jobs.

Venture capitalists gather money from so-called “high net worth” individuals, pension funds and other investors. They use these pooled assets to buy stakes in promising young companies. VC money enables entrepreneurs to hire staff, buy equipment, push research forward or do any of the other things needed to grow businesses in their early and middle stages.

Once they’ve put greenbacks in the game, VC officers watch fledgling companies more closely than hawks, usually involving themselves heavily in day-to-day management and operations. They do whatever it takes to maximize the odds that their upfront money is repaid in full and earns double- or triple-digit returns within just a few years.

Still, payoffs are not guaranteed. Venture capitalism is not for the risk-averse or the fainthearted, but it works and has helped grow our economy and create jobs by the thousands.

All of which is said to note the differences inherent in the public-sector version of venture capitalism that some wish to foist upon taxpayers here.

The Georgia Small Business Investment Company Act, or GSBIC, proposes to use $125 million in state tax credits to help seed small firms. The credits would be claimed by insurance companies that would then place money with the “investment” houses, or CAPCOs by another name. They would then invest with the stated goals of growing jobs and the tax monies paid by profitable firms.

What’s wrong with that? For starters, a fully subscribed CAPCO plan would remove $125 million from state government’s revenue stream. This in a state that’s had to painfully scrounge and hack its way to a balanced budget in recent years.

Worse, unlike private-sector investments made with the expectation of earning tangible returns, the CAPCOs as currently construed would not have to repay the credits or share with the state any profits earned.

Compare that with traditional VC deals, where 80 percent of future profits can flow back to venture capitalists to reward their risk-taking.

CAPCOs would be a sorry, one-way deal — one we can’t afford, despite misty promises of accountability.

There are far more efficient ways in which the state can help grow companies. We can begin by simply making better use of our existing competitive advantages.

First, we have to realize that Georgia’s venture capital sector is far too paltry.

At the recent Georgia Economic Outlook 2012 presentation by the University of Georgia’s Terry College of Business, Dean Robert Sumichrast noted that “about 85 percent of the venture capital investment in Georgia companies comes from firms headquartered outside the state.” That’s a sad performance for both a state that touts itself as business-friendly and for a metro area that’s grown as many businesses and as much wealth as Atlanta. We must do better. That will take a truly public-private partnership.

The General Assembly can start by letting Georgia join the other 49 states that invest some portion of state employee pension funds in private-equity investments such as VC. Competent risk managers should be able to make this work. Doing so would also show that Georgia is serious about growing capital for entrepreneurs.