published Wednesday, March 16th, 2011

State venture fund seeds business startups

Chas Sisk/The Tennessean
  • photo
    Pem Guerry, executive vice president of Signix, left, and Jay Jumper, president and CEO of Signix, right, show a computer page that can be used by clients.
    Staff Photo by Angela Lewis/Chattanooga Times Free Press

A state program set up to steer seed money to Tennessee’s young startup companies has funded nearly 40 ventures, but the beneficiaries include some companies that have been trying to get off the ground for a decade or longer.

More than $27 million has been doled out so far to private companies through the TNInvestco program, a state economic development initiative launched in 2009 that uses tax credits to fund “innovative new companies in Tennessee in the early stages of development.”

At a time when funding for startups has been tight, the program has pumped money into ventures that claim they will revolutionize medical treatments, cut the cost of health care and move social networking off computer screens.

But a Tennessean review of the 38 ventures that have received funding so far also turns up several that have been trying to find funding for a decade or more — beyond the point in time when would-be entrepreneurs can usually hope to find investors willing to back their startup plans.

Although these investments appear to meet the criteria set for TNInvestco deals and have been approved by the state’s economic development officials, they are drawing scrutiny from some in the venture capital community.

This week, the Department of Economic and Community Development is scheduled to release its first report on TNInvestco to Gov. Bill Haslam, who says he wants to study the results before deciding whether TNInvestco should be expanded.

“Like a lot of people, I’m anxious to see the results,” he said.

TNInvestco’s supporters say the program has caused four young companies to relocate to Tennessee and a fifth has plans to do so. The program has also spurred outside investment of $37 million, money that probably would not have been laid out had the TNInvestco program not been in place.

Reports released to the Tennessean show that so far 60 jobs have been created by the program, though participants and supporters say that figure is a poor yardstick for TNInvestco’s progress so far. Instead, they say it should be measured by the investments and their potential.

“There are going to be winners and losers, and to be honest with you, there will probably be more losers than winners,” said Townes Duncan, a veteran venture capitalist investing through the program. “The size of the winners will more than outweigh losers, but it’s certainly not going to take three months or six months.”

Social media to misting fans

The ideas that have been funded range widely, from a startup that is trying to fuse the online fields of social media and e-commerce to a company that has been trying to win investors over to a vision-screening device that uses technology from the first Persian Gulf War. They also include a company that makes misting fans, a company developing a fat-burning dietary supplement and a company that produces information screens and ads for medical offices.

Tennessee taxpayers are providing the capital behind TNInvestco. Funds for the program were raised by selling $200 million in tax credits to private insurance companies, letting them reduce future tax payments to the state.

Insurers paid $145.5 million for these credits. That money was made available to 10 investment firms.

Since its outset, critics of TNInvestco have questioned the program’s design. They say the venture capital firms chosen to distribute investments have too little at risk and will get to keep too much of the program’s profits.

They also say the design encourages companies to put money into startups they are already invested in, and they have questioned the lack of information released to the public about the companies’ business prospects.

“In venture capital, you keep investors informed,” said Rusty Siebert, a former TennCare director and entrepreneur who has invested in startup through venture capital firms. “There’s no reason why we shouldn’t know everything about the investments they make. We should expect it.”

The only Chattanooga company to receive funding so far is Signix Inc., which has developed a process for signing documents digitally. Over the last decade, the company has emerged from a business incubator at Georgia Tech, gone into bankruptcy, been bought by an investment firm, been bought a second time by the financial services software firm SunGard and emerged again as an independent company in Chattanooga.

Under the leadership of CEO Jay Jumper since 2008, Signix filed to raise $2 million in November and received $750,000 from NEST-TN, a TNInvestco fund set up by the Tullahoma investment firm Marcum Capital. The firm’s principals believe mobile technology has created a market for Signix’s products that did not exist when the company was launched a decade ago, said Cameron Newton, the fund’s president and chief operating officer.

“We felt like now is the right time,” he said.

Contact Chas Sisk at 615-259-8283 or csisk@tennessean.com

WHO GOT FUNDING?

TNInvestco, a taxpayer-funded venture capital program, has doled out more than $27 million to private companies since it was launched in 2009. Among the recipients:

  • Shareable Ink, a way to digitize doctors’ handwritten notes instantly
  • Pathfinder Therapeutics, developing a device to treat liver cancer
  • AuraMist, a fan that sprays a fine mist and is to be sold to restaurants
  • SIGNiX Inc., a Chattanooga firm that has developed a process for signing documents digitally

WHERE ARE THE STARTUP FIRMS

Among the nearly 40 businesses that received money from TNInvestco, SIGNiX Inc., is the only firm in Southeast Tennessee.

  • 28 are in Nashville
  • 10 are in Memphis
  • 6 in Knoxville
  • 3 in Brentwood

Source: Tennessee Department of Economic and Community Development

List of funded companies
List of funded companies
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