The state of Illinois is getting back in the venture-capital business for the first time in several years.
Treasurer Michael Frerichs says he’ll start investing more than $220 million of state treasury money with venture funds across the state.
The Legislature first authorized the state to invest up to 1 percent of its funds in venture capital in 2002, which resulted in over $65 million that ultimately flowed to startups such as Diagnostic Photonics, SpotHero and Sittercity. (The original legislation was co-sponsored by then-state senator Barack Obama.)
Some of that money ended up with Illinois Ventures, which led a $2.5 million initial investment in Diagnostic Photonics, a Chicago-based medical device company spun out of the University of Illinois.
“Having that ability to close with a local investor made the difference between our company starting and not starting,” said Andrew Cittadine, CEO of Diagnostic Photonics, which makes a device to detect cancer cells.
The fund invested $66 million in 18 venture and private-equity funds, which made investments in 276 companies. The state does not invest its money directly into individual companies.
“We plan to spread the investments across 15 to 20 funds,” Frerichs said in a statement. “No more than 15 percent of the money will be placed within the same fund.”
Legislators reauthorized the fund, known as a Technology Development Account, in 2011. But Treasurer Dan Rutherford, who ran unsuccessfully for governor, never implemented it because of concerns about the state’s budget situation. The funding comes from the $13 billion in state funds that the treasurer invests.
“People ask how can you afford to make these investments at a time like this?” Frerichs said this morning at 1871. “I ask, how can you afford not make these investments?”
The biggest benefit is in jobs. But the state gets a financial return, too, he argues. it already has received a return of $27 million on investments that have sold, and the remaining portfolio is valued at about $56 million and could still go higher. That works out to a rate of return of about 6 percent, compared with the 0.5 percent the state normally gets from bond funds and other less-risky investments.
The funding comes from the $13 billion in state funds that the treasurer invests.
“We’ve all been hoping it would move forward,” said Ira Weiss, managing partner of Hyde Park Venture Partners. “It was a very good program.”
Northern Trust, which oversaw the investments in various funds the first time around, will manage this one, as well.
Illinois’ venture-capital investment scene is still in the early stages, with a number of sub-$100 million funds. Several of them are reloading for follow-up funds, including Hyde Park Venture Partners, Illinois Ventures, OCA Ventures and Origin Ventures.
It can be hard for small or relatively young funds to attract institutional capital from insurance and pension funds or endowments. But such funding is important to venture-capital firms raising bigger funds that are crucial to a thriving startup scene.
“One of the challenges is not having enough capital to invest,” said Mark Tebbe, a longtime tech investor and entrepreneur who chairs ChicagoNext, a tech-focused arm of World Business Chicago, which is focused on recruitment and retention of companies. “I think it will be a good thing for the startup community.”