Why Won’t Oregon Invest in Itself?

"Water, water, everywhere,
And all the boards did shrink;
Water, water, everywhere,
Nor any drop to drink."

-Samuel Coleridge, Rime of the Ancient Mariner

The importance of venture capital for Oregon
Venture capital money is used to support new or unusual undertakings such as equity, risk or speculative investment capital. This funding is provided to new or existing firms which exhibit potential for above-average growth. But while some states' VC community thrives, Oregon is not meeting its stated goals with respect to VC funding and strategic growth.

According to a 2002 report by the Oregon Council for Knowledge and Economic Development, one Oregon VC fund in the mid-1990s with $20 million in capital helped 50 Oregon companies create over 3,000 jobs, realize revenues of over $798 million, and leverage over $570 million of additional investment. A common economic measure is for a worker with a $60,000 income to create $300,000 of economic ripple effect in a community. Jobs created by VC investment have a significant economic multiplier effect. Today, things have changed.

Oregon fails to make progress
According to the Oregon Progress Board, the state is not making progress in the availability of venture capital. The Progress Board’s 2005 Report states that Oregon’s goal of being in the top ten for VC investments (on a per capita basis) actually worsened from 4th place in 1992 to its current position: 20th place.

The legislatively-created Progress Board’s responsibility is to keep Oregonians focused on the future by developing and implementing a state strategic plan. Citing national economic indicators, this board identifies venture capital as a critical factor in the ability of our state to provide quality jobs for all Oregonians. This in turn leads to policy maker’s goals of creating safe, caring and engaged communities as well as healthy, sustainable surroundings.

So what keeps Oregon from reaching its stated goals as it relates to VC funding? Four problems have been identified:

Problem #1: geography hurts Oregon
Oregon has been described as a “venture capital wasteland” and a “fly-over state” by many entrepreneurs and venture capitalists, referring to the VC deals done in the morning in Silicon Valley and in the afternoon in Seattle. Geography plays a large role in Oregon’s lack of venture capital. New York Venture Capitalist Fred Wilson of Union Square Ventures states in his blog: “Venture capital is like retailing. Location matters – a lot. The best VCs, which are the ones that can actually help you build a business, have learned that it is a face-to-face business. And it is very hard to do a face-to-face business from 3,000 miles away. Some VCs do it and do it well, but I believe that they are the exception that proves the rule.”

There are only nine Oregon-based venture capital firms. Venture firms tend to focus on particular niches of expertise, leaving many companies searching outside the state for a VC that invests in their type of business. If they get funding from a VC, they often need to move their small operations close to their investor.

While Silicon Valley and Route 128 in Boston account for nearly half of the United States venture capital activity, Oregon accounts for less than one half of one percent. Perhaps this also contributes to Oregon’s dubious honor of having one of the highest unemployment rates in the nation.

Problem #2: Oregon doesn’t invest in Oregon
The Oregon Investment Council (OIC) is a five-member board, four of which are appointed by the Governor (the State Treasurer is a member by law). It is their responsibility to determine how to invest the state’s $70.7 billion in assets. The OIC is staffed by the office of State Treasurer Randall Edwards. The Treasurer’s Investment Division manages the Public Employees Retirement System’s investments (PERS), the State Accident Insurance Fund (SAIF), the Oregon Short Term Fund (OSTF), and numerous smaller funds such as the Common School Fund (CSF) and the Oregon Growth Account (OGA). With assets of over $57 billion, the PERS account was recently ranked the 22nd largest pension fund in the U.S.

As trustees for the state’s investments, the Treasurer’s office staff is quick to note its fiduciary responsibility for achieving the maximum return on investment. In other words, they cannot use these funds for economic development purposes in Oregon if there is not an adequate rate of return. They also note that Oregon could not accommodate the amount of capital that they have to invest.

Just how much capital is managed by the OIC? Over the last 10 years, over $2.4 billion in venture capital investments have flowed into Oregon companies from various venture capital firms. Meanwhile, over the last 10 years the Oregon Investment Council has committed over $1.14b to the Texas Pacific Group (TPG) and over $2.8b to Kohlberg Kravis Roberts & Co. (KKR), two aggressive leveraged buyout firms headquartered in Texas and Chicago, respectively. (It should be noted that both TPG and KKR have used OIC investments to buy out or attempt to buy out several large Oregon-based companies, including but not limited to Fred Meyer, Payless and Portland General Electric.) With just these two investments programs by the OIC, 40% more was invested in VC outside the state than was invested by all VC firms into Oregon. For perspective’s sake, these were just two of over 100 venture capital investments for the OIC during this time period, valued at over $15 billion. As was previously mentioned, VC makes up less than 9% of the OIC’s investments.

Problem #3: Oregon programs aren’t moving the needle
To correct Oregon’s anemic VC condition, AOI worked with the Legislature to pass HB 3613 in the 2003 Session. This bill mandated the Oregon Investment Council (OIC) to design a $100 million program to encourage the growth of emerging businesses within the state of Oregon.

State Treasurer Randall Edwards was tasked with implementing this new law and determined that the best way to implement this program was to outsource it. Despite the presence of nine venture capital companies within the state, the OIC, upon the Treasurer’s recommendation, committed $100 million to European-based Credit Suisse Group, which in turn created the Oregon Investment Fund (OIF). To date this fund has committed $64 million to seven VC firms, only two of which are Oregon-based. Aside from less than $20 million committed to the two Oregon VC firms, only one direct investment into a company has occurred – Hillsboro’s Kryptiq Corporation, a medical information company, recently received $6.57 million from Credit Suisse’s Oregon Investment Fund.

VC investment takes five to seven years to return investment, so it is hard to analyze the OIC – OIF – Credit Suisse – multiple VC structural arrangement to determine the likelihood of its success. What can be said is that after three years, only about $26 million in venture capital has been appropriated to Oregon. The results have not altered Oregon’s position relative to the “venture capital invested per worker” as measured by the Oregon Progress Board.

Problem #4: bad data leads to bad policy
The collection of Oregon Investment data leaves a lot to be desired from a policymaker’s standpoint. The only data comes from the Treasurer’s Office, which publishes an annual report (usually two years behind with three-year-old data) – that lists Oregon investments.

However, the definition of “Oregon Investments” according to the OIC is “a company with over 2,500 employees.” This definition is so narrow that it excludes many Oregon-based companies, opting for larger out-of state companies with many employees such as grocery store chains Albertsons, Kroger, Safeway and Wal-Mart. These jobs are important to Oregon’s economy, but it could be argued that an “Oregon investment” would be an investment in a company domiciled and headquartered within Oregon.

Another data problem relates to VC investment transparency. When a VC invests OIC money, there is little information as to what Oregon companies it invests in. This information is currently voluntarily given to a third party, but great differences in data exist. For example, some VCs list the companies, the amounts invested and the fair market value, and some aggregate the data for their entire portfolio. This, too, leaves Oregon policymakers with little information available to determine if adequate investments are being made by Oregon in Oregon-based companies.

Another data problem exists in that there are two Oregon investment programs; the Oregon Investment Fund (OIF) and the Oregon Growth Account (OGA). Despite a similar goal of improving Oregon’s access to VC, these are two very different funds with very different objectives. The OIF invests PERS money in some Oregon VC companies, who may invest in Oregon-based companies with profits returning to the PERS employees. The OGA, on the other had, invests a little less than 2% of all Oregon Lottery funds on behalf of the Education Stability Fund into Oregon VC companies, with profits going back to the state education stability fund. It is unclear from the 2004 Treasurer’s Report whether the 11-year old, $60 million OGA program chaired by the Treasurer has produced any profits for the Education Stability Fund. It is also unclear whether the OIF is considered an Oregon investment, since the capital is being managed by European-based Credit Suisse.

Possible solutions to Oregon’s VC problem
A sophomoric analysis of money flow would indicate that Oregon is hamstringing itself with its current investment strategy. Public tax dollars pay state employees, state employees pay into PERS, the OIC invests PERS outside the state, Oregon businesses lay off employees or leave the state due to a lack of capital, which creates fewer public tax dollars to pay for state employees’ salaries and benefits. All of this is due to an OIC Board focused on narrow definitions of Oregon investments, legislative mandates on certain types of investments and too much attention paid to external investment opportunities.

Clearly one solution is for the Treasurer to direct his staff to deliver a useful report on all Oregon investments he supervises. The data should use the same definition for Oregon investments, the same level of information for amounts invested in VCs, the same information about each VC investment and the internal rate of return for each Oregon investment. Oregon taxpayers, their representatives, public employees and the education community deserve this level of detailed information.

Another solution is for Oregon’s public employees’ unions and the Oregon business community to work together with the Oregon Legislature to direct the OIC to invest in job-creating business ventures in Oregon. Both entities want the quality jobs, safe, caring and engaged communities and healthy, sustainable surroundings that access to VC in Oregon affords.

Venture capital is not the silver bullet that will fuel Oregon’s economy for future generations. Without it, however, Oregon’s economy will continue to lag and the success of our entrepreneurial community will continue to disappoint our elected leaders and their appointed commissions. What makes VC different from many economic drivers we would like to improve (such as infrastructure, trade and the presence of company headquarters) is that Oregon policy makers could correct this problem legislatively in a relatively short time period if its elected leaders chose to make this a priority.

The recent Oregonian recently article by Ted Sickinger can be found here.

About the author
Harvey Mathews is the president of the Software Association of Oregon. He worked most recently as the lead advocate for education, technology, elections and fiscal policy issues for Associated Oregon Industries (AOI), the state’s largest comprehensive business association. His achievements in that role included $100 million investment into Oregon start-up companies, creation of the Expanded Options program for high school students, and the development of the Oregon Open Primary. Previously, Mathews worked in the Speaker’s Office in the Oregon House of Representatives and was a public school teacher at Sam Barlow High in Gresham. He is a proud alumnus of Western Oregon University.  As a former public school teacher, Harvey Mathews has a PERS retirement account that is managed by the OIC. Harvey can be reached at harvey@sao.org.