Audit: ‘hard to quantify’ what state got out of $25 million loan program to venture capital firms

Legislative auditors have concluded the state got practically nothing out of a longstanding program to invest in venture capital.

But the auditors said reaching that conclusion was complicated by the fact that record-keeping was so inadequate.

Of $25 million invested in the program, the auditors determined, at least $8 million was not invested in West Virginia. And four of the seven companies that received 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,” according to conclusions released today.

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

The Legislative Auditor recommended that when similar programs are established in the future, the Legislature should provide clear and concise statutory guidance to agencies about expected outcomes of a program, as well as guidelines 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 during attempts to wind down the loan program. Perdue was also the chairman of the Investment Management Board, which issued the loan that was then distributed by the state Economic Development Authority.

Current executives at the Economic Development Authority responded to the report, indicating they could not be sure why their predecessors made some of the decisions they did — and why there were not sufficient mechanisms to track the investments and their performance.

But the EDA response suggested more 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, bad results

The program began 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 aim of industrial and economic growth.

Bob Wise

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

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

At the time, Wise noted, West Virginia was in deep recession, the state was digging out of massive floods, and the country’s economy was still reeling from the economic effects of the 9-11 attacks.

Looking to other examples around the country and  working with the Legislature, Wise said his administration launched many new financial vehicles, including the first venture capital initiatives,  “to reflect what modern businesses — especially high technology — required.”

He described a $25 million plan to attract another $75 million more in federal funds for a total of $100 million in new investment capability for businesses 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 said. “The plan was sound and reflected the need to attract high tech companies.”

But, as Wise noted, “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 note of the program’s mounting losses. A headline in the Charleston Daily Mail bluntly said, “Losses hammer venture program,” describing $20 million in red ink.

Negligible return on investment

The loan was to be funded from the state’s consolidated fund, mostly comprised of operating cash of the state and short-term investments of state agencies and local governments.

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

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, received a $750,000 grant as part of the program to help encourage and seed early-stage entrepreneurism and start-up activity.

Over the years, questions also arose about how those companies, in turn, chose to invest the money. Although public dollars were being used as seed, there was no way for taxpayers to know about any profits and losses from the investments.

Because of limited return on the investments, the EDA has only repaid $674,222 of principal, leaving an unpaid principal balance of $24,325,778 outstanding.

Moreover, auditors concluded that two of the venture capital companies selected for the program received a total of $8 million of funding from the EDA, but did not invest any funds within the state. Meanwhile, four  of the companies that were selected wound up entering into receivership before the program concluded.

The state Board of Treasury Investments attempted to put together what would need to be repaid, but $24,325,778 in loan principal remained outstanding as of Jan. 20, 2021.

The state Legislative Auditor concluded the Economic Development Authority did not maintain adequate records or use an accounting system efficient enough to keep track of the loan program’s transactions.

For example, The EDA was unable to locate two years of supporting source documents and general records for loan program transactions.

Because the EDA did not collect adequate information about the investment, the Legislative Auditor concluded it couldn’t quantify the jobs and businesses created or retained because 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.”

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