Economic development

Northwestern Financial Review, Sep 15-Sep 30, 2003 by Bengtson, Tom, Dullum, Justin

Efforts underway in Iowa to attract venture capital

A two-year effort to bolster Iowa's appeal to venture capital is gaining momentum thanks to the diligence of several bankers, the Iowa legislature and economic development professionals. A new state-sponsored board will work with Davenport-based Great River Capital, LLC., to raise $150 million to fund leading-edge technology firms, advanced manufacturing efforts and other value-added enterprises. The idea is to create good jobs for Iowans and diversify the state's fragile economic base.

John Rigler, president of Security State Bank in New Hampton, Iowa, is a key player in the effort, which involves 14 banks in the Quad Cities, a German banking giant, the Iowa Bankers Association, and the Iowa Taxpayers Association among others. Rigler is one of two bankers who serve on the board of the Iowa Capital Investment Corporation, which was formed as a result of legislation passed in early 2002. The other is Bruce Tamisiea, a director of the Community State Bank of Spencer, Iowa.

The Iowa Capital Investment Corp., was authorized to leverage $100 million in contingent state tax credits, using the proceeds to invest in venture capital funds around the country. The legislation created something called the "fund of funds," and the Iowa Capital Investment Corp., hired Great River Capital this spring to manage it. Great River Capital will begin raising money this fall and eventually will raise up to $150 million in venture capital funds supporting high-growth-potential ventures. The hope is that many of those ventures will be based in Iowa. Great River Capital itself will become the first limited partner by making a $10 million investment.

For years, Iowans involved in economic development bemoaned the state's dismal record for attracting venture capital. In the seven years from 1994 through 2000, the state had attracted $133.7 million, only 1 percent of what Illinois attracted in 2000 alone, or 2 percent of what Minnesota attracted in 2000, or about one-third of what Wisconsin attracted in a single year. During the summer of 2001, Steve Ringlee, a venture capital professional from Ames affiliated with the Iowa Taxpayers Association, rallied a group of bankers, lawyers, accountants and others to come up with an idea for improving the state's venture capital climate. The Iowa Seed Capital Program had sunset three years earlier, and the group wanted to come up with an up-to-date approach that would make the most of state government to attract venture capital.

The group identified a model in Oklahoma where the state used tax credits to raise investment money for high-potential ventures that had exhausted their sources of traditional funding. Ringlee and the others fine-tuned a proposal that eventually became a bill in the state legislature, Iowa House File 2078. With the Iowa Taxpayers Association and the Iowa Bankers Association taking the lead, legislative leaders were quickly won over. Ringlee made a presentation at the Iowa Bankers Association convention in September 2001, earning the support of the broader banking community. By February 2002, the legislation was passed and Gov. Thomas Vilsack signed it into law.

The legislation created the Iowa Capital Investment Corporation that would organize an Iowa fund of funds. Through a private placement based on contingent state tax credits, the fund of funds would raise money for investment in venture capital funds. Although the legislation authorized the use of $100 million in tax credits, the fund of funds will be able to raise more than that because the investments won't be completely guaranteed. Rigler explained that by sharing risk with investors, the fund of funds will actually pose less risk to Iowa taxpayers, while giving it the ability to finance a greater number of projects.

Meanwhile, Dresdner Bank, a unit of insurance giant Allianz, was looking for new investment opportunities in the United States. Having funded venture capital enterprises all over the world, Germany's second-largest bank was exploring the Midwest. Representatives from Dresdner Bank hooked up with economic development leaders from the Quad Cities (Moline and Rock Island, Ill., and Bettendorf and Davenport, Iowa). They connected Dresdner with the Quad Cities Community Development Corp., a group formed about a year ago by 14 area banks to fund businesses that agree to set up shop in the area. The QC Community Development Corp., is a unique cooperative effort by banks that otherwise compete against one another. John Stavnes of Wells Fargo Bank Iowa in Davenport, one of the founders of the organization, said the banks set aside their competitive differences for the betterment of the community.

Dresdner Bank, which had been following the progress of House File 2078, proposed the creation of a company that would manage the fund of funds. A group of Quad Cities leaders put up $500,000 toward the formation of Great River Capital, with the QC Community Development Corp., providing half of that. Dresdner put in the rest and shortly after that Great River Capital won the right to manage the fund of funds. Great River Capital's investors will make money from the fees that it will charge to manage the fund of funds.