Thursday, July 22, 2010, 11:00pm CDT | Modified: July 26, 2010, 11:00 PM

ETF money hiccup highlights importance

by Christopher Calnan

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A shortfall in capital for the Texas Emerging Technology Fund underscores the difficulties that accompany public funding of private ventures. But fund officials expect the temporary problem will benefit the ETF’s reputation in the long term.

Although the fund has stopped accepting applications from fledgling companies, the funding issue should be offset for a while when the state receives a $46 million reimbursement from the Federal Emergency Management Agency. That should keep the state’s startup-investment fund in business for at least the next six months, ETF Director Alan Kirchhoff said.

But the latest funding situation highlights the complexities that arise when a public body gets involved in private business.

“It has nothing to do with the program and everything to do with how it’s funded,” Kirchhoff said. “It’s heartbreaking and frustrating. It’s hard to operate what is almost a private equity fund in a public setting.”

Since it was started in 2005, the ETF has taken up some of the slack caused by wary investors — and relatively few of them. Unlike Boston and Silicon Valley, pre-revenue startups in Central Texas don’t have dozens of local angel groups and early-stage investors to choose from. That’s because most of the venture capitalists that kept local offices after the dot-com bubble burst in 2001 turned to more conservative, later-stage deals, industry experts said.

The ETF initially had $200 million to invest in innovative technologies developed in Texas, and the state Legislature typically replenishes the fund each session for a two-year period. By the end of 2009, the fund had distributed about $106.3 million to early-stage companies and $148 million in grant matching and research funding to universities.

Last year, the ETF received 87 applications from Central Texas companies versus 50 during 2008. It distributed $10.5 million to seven local companies compared with $10.6 million to 10 companies during 2008, state officials said.

About 50 percent of the companies funded this year by the Central Texas Angel Network, a crucial part of Austin’s startup environment, were also funded by the ETF. The importance of the fund is more than the money — it’s the motivation that it provides to entrepreneurs and confidence it gives potential investors, CTAN Executive Director Randall Crowder said.

“The state really ‘de-risks’ a lot of the deals,” he said.

But they come with political strings attached.

VC with a political twist

In 2009, the fund had dwindled to about $63 million before the Texas House Appropriations Committee granted the ETF $203.5 million — less than the amount Gov. Rick Perry requested. The reduced funding came after Perry’s office skipped the normal approval process and awarded a $50 million ETF grant to the Texas A&M University System for a pharmaceutical manufacturing center with money transferred from the Texas Enterprise Fund.

The house committee on appropriations subsequently took fund leaders to task during specially called hearings. This month, the committee’s chairman, state Rep. Jim Pitts, R-Waxahachie, was caught off guard by the news that applications are being halted, according to the Associated Press.

The ETF and the Enterprise Funds are points of pride for Perry and largely controlled by his appointees. As a result, for one of them to run out of capital demonstrates poor management skills, said Matt Glazer, founder of GNI Strategies LLC, an Austin-based political consulting firm.

Kirchhoff said he repeatedly warned the Legislative Budget Board that about $50 million of the capital counted as unexpended was already reserved for grant recipients that receive capital when reaching milestones. Another $50 million was FEMA money that has yet to arrive.

Consequently, the ETF was left with $103 million — and $36 million of that was already dedicated to grants in the pipeline, resulting in a $67 million for funding grants. The fund typically awards $20 million to $30 million in grants each quarter.

The temporary shortage may inadvertently bolster the ETF by illustrating how it has fueled the state’s entrepreneurial engine, Kirchhoff said.

“I’m confident that as we move into the next couple of rounds of appropriations,” he said, “I think good things will come from it.”