Monday, May 03, 2010
Tom Wilemon - The Daily News -

Innova Memphis and the Memphis Bioworks Foundation have launched the Mid-South Angel Network, which will link investors with promising startup companies.

Matt Kisber, commissioner of the Tennessee Department of Economic and Community Development, and Reagan Farr, the commissioner of the Tennessee Department of Revenue, were on hand for Thursday’s announcement.

Until now, Innova has primarily functioned as a seed fund for startup ventures. Now, it will allow others to co-invest in the ventures it chooses.

The initiative builds on the TNInvestco program, which was launched earlier this year. The state allowed six chosen TNInvestcos to sell tax credits to insurance companies. The Memphis-based Innova Fund II LP was one of the six chosen. Innova raised more than $14 million.

The TNIvestco program is attracting interest from investors who want to buy stock in the companies chosen by the funds.

“This could wind up being a half billion dollars of new venture capital in Tennessee, all said and done, as a result of the TNInvestco program,” Kisber said.

Ken Woody, president of Innova, said the organization has been contacted by out-of-state investors.

“We haven’t seen that before,” Woody said. “It’s what we had hoped and it seems to be working pretty well.”

The Innova Fund II LP has announced one investment decision and is working on three other investments. Knoxville-based TrakLok was its first choice.

The company developed the GeoLok, a locking system for containers that monitors movement and refuses to open until the containers have arrived at their destination.

Angel investors are high net worth individuals who invest directly into promising businesses in return for stock. Many have business experience and end up serving on company boards.

The Center for Venture Research estimates angels invested $17.6 billion in more than 57,000 ventures last year, creating 250,000 jobs. That figure accounts for about 5 percent of total job growth last year.

Statewide, TNInvestcos have made nine investments in startup companies, three of which have been publicly announced.

Although the state chose 10 finalists to be TNInvestcos, the program allowed only six. Legislation is moving in the current session of the General Assembly to allow the other four finalists to also become TNInvestcos.

Farr said Tennessee’s program is unique because it differs from the Certified Capital Companies or CAPCO program. This program also issued tax credits, but Farr said the primary incentive was capital preservation, not growing the investments.

“It was a very regulatory intensive program,” Farr said. “It was structured so that you had to hit certain benchmarks as a CAPCO manager.”

More than a dozen states have such programs, he said, but results have been mixed.

“Commissioner Kisber and I said if we were going to put our foot in the water and subsidize capital formation in Tennessee, then we’re going to do it in a way that more closely aligns with the governor’s economic development agenda.”

Farr said he believes the TNInvestco program has been “transformational” and other states are looking to emulate it.

“We changed it from a model where the total incentive was capital preservation so you made very safe loans to companies to a model where you received an incentive for doing what was most needed,” Farr said. “That is investing in seed and early stage companies, where there is a high risk of loss, but there is also a great opportunity for return.”

This model encourages the investors to provide mentoring in addition to money, he said.