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Colorado CAPCO Demise Leads to Questions for Other States

March 12, 2004

The creation and subsidization of CAPCOs, certified capital corporations intended to encourage venture capital (VC) investment, is one of the more controversial policies some states have adopted to encourage the growth of tech-based economies. With substantial revisions to Colorado's short CAPCO experiment this month, questions are raised once again for other states that either have passed or are considering various approaches to increasing the availability of risk capital for new tech firms.

Colorado Governor Bill Owens signed two bills on March 4 effectively ending the state's two-year-old CAPCO program -- and blocking an additional $100 million in tax credits scheduled for distribution in April.

Instead, the $100 million will be split equally between a new Colorado Venture Capital Authority (see Colorado Senate Bill 04-106) to provide capital to businesses throughout the state and CoverColorado, a program designed to provide health benefits to the chronically ill.

Colorado state lawmakers originally enacted CAPCO to stimulate economic growth, giving tax credits to insurance companies that in turn lend money to CAPCOs to invest in small businesses. The first $100 million tax credits were distributed in 2002 to be used over the next 10 years.

An October 2003 audit by the Colorado legislative audit committee could not determine the actual number of jobs created in the state through the CAPCO program. In a December 2003 Rocky Mountain News article, Tony Monteraselli, spokesman for six CAPCOs, said since its enactment the CAPCO program had invested $16 million in Colorado companies, generated $35 million in additional financing and created 370 jobs.

Opponents of the program, however, describe it as expensive and inefficient, producing little job creation for the cost to taxpayers. Their argument, substantiated by criticism of the CAPCOs from State Treasurer Mike Coffman and the legislative audit, won earlier this month. The Colorado Legislative Audit Committee concluded:

  • The state's CAPCOs had received $15.2 million in startup and management fees while investing only $14.1 million.
  • In addition, over the 10-year life of the program, less than half of the funds would be available for investments. “After accounting for the costs of the guaranteed cash repayments [to insurance companies] and for the costs related to financing and insuring the repayments…approximately $44 million of the original $100 million remained for the CAPCOs to invest in qualified businesses.”
  • In summary, the auditor concluded, “Research indicates that CAPCO programs are the most inefficient means for the state to raise venture capital.”

Skepticism of the CAPCO model is not limited to Colorado, however. Since Louisiana passed the first CAPCO bill in 1983, the model has been riddled by criticism. Louisiana has revised and restructured its program nearly every year since 1989, after it was determined little impact could be shown for the initial investment.

A 2000 report for the Louisiana state legislature concluded the state had awarded more than $600 million in CAPCO credits since its inception, but had only seen $180 million in CAPCO-related venture capital deals. Proponents for the program contend, however, that the CAPCO act is responsible for nearly all of the state's VC activity.

Last year, the Florida legislature withheld the second installment of its CAPCO tax credits after learning the state had lost more than 150 jobs from its initial $150 million investment.

According to a Feb. 9, 2004, Denver Post article, a 2002 annual report on the New York CAPCO program revealed it had lost 88 jobs, but with a $280 million cost to the taxpayers.

According to a Missouri state study cited in the Milwaukee Journal-Sentinel, 66 percent of funds generated by venture capital programs through its CAPCO legislation were not being used for their intended purpose of providing capital for start-up or expanding state businesses. In Wisconsin, an analysis by the state audit bureau found the $50 million CAPCO program enacted over three years ago had generated only 157 jobs.

In addition to the poor job creation figures, a recurring criticism of the CAPCO model in most news accounts and state audits appears to be that all or nearly all of the risk is borne by the state. The CAPCOs receive the full tax credits and management fees regardless of the quality, quantity or success of the investments made.

There are other approaches available to states interested in increasing venture capital investment in their tech community. In October 2001, the National Association of Seed and Venture Funds (NASVF) prepared Understanding CAPCOs, a 21-page paper comparing various VC models. The NASVF report is available at: http://www.nasvf.org/web/allpress.nsf/6f8e2b6a64fb92e786255f880053ee02/2c673437172e0c0986256ade005780fa?OpenDocument

Colorado