Maine lags far behind other states and its New England neighbors when it comes to venture capital, the money needed by small, innovative companies to get off the ground. Without this funding, new companies are starting in other states and creating new jobs there.
Two bills that were passed by the House and Senate would have begun to improve the situation. Unfortunately, only one of them is pending, as the other was killed Monday because of its price tag.
LD 1, which also was approved by lawmakers last year but pocket vetoed by the governor, would encourage the Maine Public Employees Retirement System to invest a small portion of its $9 billion in venture capital funds. Funds would be vetted by the Finance Authority of Maine, with input from the Maine Technology Institute and the Department of Community and Economic Development to ensure the quality of the entities seeking funding and that such investments will benefit Maine. As a further hedge against risk, the state would pay a portion of any losses up to $4 million per investment.
A companion bill, LD 1666, would have expanded existing tax credits for venture capital investments, making them more attractive to investors, especially those outside Maine. The credit would have been expanded to cover venture capital funds that make an investment in a startup in Maine. If the company moves out of state, some of the tax incentive would have been recaptured by the state.
LD 1666 was rejected by the Appropriations Committee, because it was estimated to cost about $500,000 in the next fiscal year, although the tax credit likely would have paid for itself with increased economic activity in Maine.
Venture capital, or seed money, is needed for new companies that are developing new products. Because they often don’t have buildings or other items of value to put up as collateral, it is difficult for them to get money from traditional lenders. In essence, venture capital gets a company going until it can make enough money to get financing from other sources.
According to an evaluation of the state’s research and development efforts done earlier this year for the Maine Office of Innovation, the wages in the state’s technology sector are much higher than average. The average annual wage in the state’s technology sectors was about $49,000, compared to the average statewide annual wage of $36,000.
Nationally, venture capital-backed companies have outperformed traditional companies. Between 2003 and 2006, employment at venture capital-backed firms grew by 3.6 percent, while total employment grew 1.4 percent. Sales as venture capital-backed ventures grew by 11.8 percent during those years, compared to 6.5 percent sales growth for all U.S. companies, according to analysis by Global Insight.
Massachusetts is among the top states for venture capital funds, with much of the money going to startup companies in the state’s technology corridor along Route 128. Attracting some of that money to Maine, to help Maine companies grow, could pay big dividends. LD 1666 would have made Maine a more attractive place for such investments.
LD 1 is a start to making Maine more attractive to venture capital investments. An expanded tax credit would have moved the start further along, and when the new Legislature is seated in January, it should reconsider this idea.