Legislative auditors have concluded the state got virtually nothing out of a longstanding program to put money into venture capital.

But the auditors mentioned reaching that conclusion was difficult by the truth that record-keeping was so insufficient.

Of $25 million invested within the program, the auditors decided, no less than $8 million was not invested in West Virginia. And 4 of the seven firms that acquired loans wound up in receivership.

So all of the investments have been written down to $0.

“In summary, it is the Legislative Auditor’s opinion that the loan program did not achieve the intended outcomes and what was achieved is difficult to quantify,” in accordance to conclusions launched at present.

The audit examined the state Economic Development Authority’s $25 million funding program in venture capital firms.

The Legislative Auditor really helpful that when related packages are established sooner or later, the Legislature ought to present clear and concise statutory steerage to businesses about anticipated outcomes of a program, in addition to pointers to administer and monitor investments made with state funds.

The audit was prompted by a 2019 letter from then-Treasurer John Perdue, expressing concern about obstacles throughout makes an attempt to wind down the loan program. Perdue was additionally the chairman of the Investment Management Board, which issued the loan that was then distributed by the state Economic Development Authority.

Current executives on the Economic Development Authority responded to the report, indicating they may not make certain why their predecessors made some of the choices they did — and why there weren’t adequate mechanisms to observe the investments and their efficiency.

But the EDA response urged extra success than the audit concluded.

“Once an investment in a West Virginia company was identified, (West Virginia Enterprise Capital Fund) would track the investment and request job creation and/or job retention data from (venture capital) companies for each investment,” the EDA wrote in response to the audit.

“Based on the data collected over the life of the program, five VC Companies invested $41 million in 25 West Virginia- based companies, resulting in the creation or retention of 409 jobs.”

Good intentions, dangerous outcomes

The program started in 2002 with legislative authorization of a $25 million nonrecourse loan to be issued from the Investment Management Board to the Economic Development Authority with the goal of industrial and financial progress.

Bob Wise

“My recollection is that this program was one of many economic development measures that my administration launched,” Bob Wise, the governor on the time, acknowledged in response to MetroNews questions in regards to the program.

In his 2002 State of the State speech, Wise mentioned, “We must draw in venture capital to encourage entrepreneurship and create jobs.”

At the time, Wise famous, West Virginia was in deep recession, the state was digging out of huge floods, and the nation’s economic system was nonetheless reeling from the financial results of the Sep 11 assaults.

Looking to different examples across the nation and  working with the Legislature, Wise mentioned his administration launched many new monetary autos, together with the primary venture capital initiatives,  “to reflect what modern businesses — especially high technology — required.”

He described a $25 million plan to appeal to one other $75 million extra in federal funds for a complete of $100 million in new funding functionality for companies in West Virginia.

“Almost 20 years later, I can say this was one of many aggressive attempts to jumpstart the West Virginia economy, especially to attract  rapidly emerging high tech businesses,” the Democratic governor mentioned. “The plan was sound and reflected the need to attract high tech companies.”

But, as Wise famous, “I  left office in January 2005 and am unable to speak to either the administration of the program or the reporting during the last 15 years.”

By 2011, reporters took be aware of the program’s mounting losses. A headline within the Charleston Daily Mail bluntly mentioned, “Losses hammer venture program,” describing $20 million in crimson ink.

Negligible return on funding

The loan was to be funded from the state’s consolidated fund, principally comprised of working money of the state and short-term investments of state businesses and native governments.

Since the program’s begin in 2002, the EDA has invested $24,514,201 with seven venture capital firms.

Millions of {dollars} went to  Anthem Capital Limited Partnership of Baltimore; Toucan Capital Fund II Limited Partnership of Bethesda, Md.; Adena Ventures Limited Partnership of Athens, Ohio; Mountaineer Capital Limited Partnership of Charleston; Novitas Limited Partnership of Wayne, Pa.; and Walker Investment Fund Limited Partnership of Glenwood, Md.

Innova of Fairmont, an affiliate of the West Virginia High Technology Consortium, acquired a $750,000 grant as half of the program to assist encourage and seed early-stage entrepreneurism and start-up exercise.

Over the years, questions additionally arose about how these firms, in flip, selected to make investments the cash. Although public {dollars} had been getting used as seed, there was no means for taxpayers to learn about any income and losses from the investments.

Because of restricted return on the investments, the EDA has solely repaid $674,222 of principal, leaving an unpaid principal stability of $24,325,778 excellent.

Moreover, auditors concluded that two of the venture capital firms chosen for the program acquired a complete of $8 million of funding from the EDA, however didn’t make investments any funds throughout the state. Meanwhile, 4  of the businesses that had been chosen wound up coming into into receivership earlier than the program concluded.

The state Board of Treasury Investments tried to put collectively what would wish to be repaid, however $24,325,778 in loan principal remained excellent as of Jan. 20, 2021.

The state Legislative Auditor concluded the Economic Development Authority didn’t keep satisfactory information or use an accounting system environment friendly sufficient to maintain observe of the loan program’s transactions.

For instance, The EDA was unable to find two years of supporting supply paperwork and common information for loan program transactions.

Because the EDA didn’t gather satisfactory details about the funding, the Legislative Auditor concluded it couldn’t quantify the roles and companies created or retained as a result of of the loan program.

“While the performance of these investments did not provide the returns intended, it is likely the loan program did create jobs within the state,” auditors concluded.

“However, the total number of jobs created that were attributable to the loan program were unable to be quantified by the audit team from the information provided by the EDA. Whether the state received a fair return on investment in terms of job creation and economic development in relation to the roughly $24.5 that remains in unpaid principal is not clear based on the information available.”