Maryland Tries To Ramp Up Venture Capital

There is a bit of a spectacle going on in Maryland. What it says about the nation’s appreciation of venture capital is revealing.

Newly re-elected Governor Martin O’Malley wants to use venture capital to create jobs. It’s a nice idea. Unfortunately, he and other officials are thinking short term about what is a long-term proposition.

The Maryland plan is an interesting attempt by a state to inject itself into economic development – a laudable goal as the innovation gap closes and nations in Asia and elsewhere taking aim at America’s lead. (O’Malley is of course a Democrat.)

He wants to raise $100 million of venture money by auctioning off up to $142 million in tax breaks to insurance companies over six years. (Maryland is not the only state to come up with such as scheme.)

The $100 million would be invested in startups trying to commercialize research, such as those working on products stemming from the medical research conducted at Johns Hopkins University. The firms would pay back the money with 80% interest after going public or being sold.

Maryland already has a small version of the program in place – a 13 year old, $25 million effort that the governor insists has returned $61 million and created 2,000 jobs.

Yesterday, the governor was quizzed by a skeptical legislature. There were complaints about budget deficits and questions about how to ensure the fund makes a profit in time to cover the insurance industry tax breaks.

But to me, this misses the point. Venture capital can’t be approached as a profit maximizing exercise. It is about building a long-lasting entrepreneurial ecosystem like the one in Silicon Valley so the program continues when the government funds go away.

It suggests the legislature doesn’t entirely “get it” with a sizeable amount of money on the line. It is a dangerous combination.