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VC Turns Treasurer

When Rob McCord co-founded a suburban Philadelphia venture fund in the 1990s, he used to joke that all the openly Democratic VCs in Pennsylvania could probably fit in a phone booth. Democrats were almost equally rare in his local community, long a Republican-leaning district.

But as McCord is quick to recognize, things have changed. A shift in party loyalty among suburban Philadelphia voters has tilted Pennsylvania from a sometime Red state to a reliably Blue one. The state now has a Democratic governor, one Democratic senator, and—with McCord’s victory in November’s election—a new Democratic treasurer.

Party affiliation alone didn’t win McCord the job—it helped that he knows a thing or two about fund-raising. Formerly a managing director for Novitas Capital (previously known as PA Early Stage Partners), McCord out-raised his opponent by 15-to-1. McCord quit his VC post and campaigned full-time more than a year for a job that entails oversight of two of the country’s largest state pension funds.

McCord is a rarity among aspiring politicians, a Democrat who opted for an MBA instead of a law degree. It was a calculated move by the 49-year-old Philadelphia area native, who attended the Wharton School of Business after spending the first leg of his career in Washington, D.C., as a staffer for a succession of Democratic congressmen.

“It dawned on me working on Capitol Hill that there seemed to be too many lawyers and too few business leaders in politics—perhaps particularly in the Democratic Party,” he says.

After business school, McCord served as vice president at technology investment firm Safeguard Scientifics, then he helped to found Novitas, a tech and life sciences investor that presently manages $238 million. Prior investments include BPL Global, a provider of broadband over power lines, and Maxwell Systems, a business software developer.

While McCord once fantasized about a national appointment or Congressional seat, working as a venture investor convinced him that state treasurer was the better post. In particular, he says he likes the comparative autonomy of the job, and the ability to focus on financial matters.

Now that he has the job, McCord has his work cut out for him. “It’s arguably one of the least attractive jobs to have to deal with significantly reduced expectations for returns,” says Kevin Kemmerer, a vice president at Safeguard Scientifics and colleague of McCord.

Certainly there’s been red ink recently. The $55 billion Pennsylvania Public School Employees’ Retirement System (PSERS) posted an investment loss of -11.05% in Q3, and -16.67% for the one-year period ended Sept 30. Likewise, the $29 billion Pennsylvania State Employees Retirement System (SERS) reported an investment loss of -14.4% for the first three quarters of the year.

The two funds both have significant weighting to alternative assets—$13.8 billion worth at PSERS and $10.9 billion worth at SERS, according to Thomson Reuters (publisher of VCJ). The bulk of investments are in non-venture asset classes, though both pension funds have made commitments to VC funds. Recent investments by SERS include stakes in Battery Ventures, Ignitition Partners, Lightspeed Venture Partners and Morgenthaler Ventures. Recent PSERS investments include stakes in Quaker BioVentures and StarVest Partners.

But the pension funds’ appetite for venture assets looks to be waning. In December, SERS passed on making any alternative asset investments, citing “the uncertain market environment.” The state pension fund tabled consideration of proposed re-investments in Novitas Capital IV and three other funds: Hellman & Friedman Capital Partners VII, TL Ventures VII, and Lime Rock Resources II.

Novitas has worked with Pennsylvania pension funds in the past—on the fund-raising side of the table. PSERS and SERS each committed $10 million to PA Early Stage Partners III. That fund, which closed in 2003, had returned just $400,000 to SERS as of December 2007, according to the most recent report from SERS.

After deciding to run for treasurer, McCord stepped down from Novitas. Firm Managing Director Dean Miller says McCord has agreed to recuse himself from Pennsylvania investment decisions involving Novitas.

McCord, who took over the treasurer job in January, says he has no immediate plans to encourage the state to invest more in venture. However, as a guy who raised a first-time fund not too long ago, he tells VCJ that he’ll have a sympathetic ear for emerging managers with a compelling investment proposition.

Q: Why did you run for treasurer?

A: It’s sort of a dream job for me because it combines a long-term interest in finance with a long-term interest in politics and public policy and public service. A lot of business readers will understand that if I did take the leap and take the pay cut that I would take a job where I could make a real difference and, frankly, where I could be my own boss.

Q: How does your VC experience help with the job?

A: As a venture investor I got exposed to state treasurers around country. Also, any effective political candidate has to be a good fund-raiser. I think venture helped me with that. And having invested in so many companies—I took a role in maybe 50—you realize the plan may be nothing, but planning is everything. We ran the campaign like a business plan. There was a schedule, for example, for the fund-raising and the endorsements.

Q: So, as a venture guy, you’re going to make sure the pension funds stock up on VC assets, right?

A: Within alternative assets, I’m very much of a generalist. I don’t come into the job with a fixed view of the perfect weighting of the asset allocation pie. But a year ago, I had no quarrel with the allocations I was reading about. If I had concerns, it might be about a light overweight position in hedge funds, not private equity.

Q: Is that an area you might pare back on?

A: I admit that I’m a little leery of the use of hedge funds. I understand they have a role, but I want to double check that they’re not excessively using leverage or introducing unnecessary risk.

Q: How about other asset classes?

A: I think the math for each of these asset categories changes every few years, and I believe in recognizing context and rightsizing every portfolio. I’ve seen publications suggesting Harvard is selling LP interests in a lot of alternative asset funds, including many top-tier ones. It’ll be interesting to see how the market re-equilibrates in the next three years.

Q: Do you plan any changes in how venture investments are chosen?

A: Where I might bring a new suggestion is that expertise might be used to help us find the right first-time funds. If you have a first-time fund by people with a clear and auditable track record, I think a lot of profit can be made, especially by funds that are hungry. At the same time, losses can be made by managers that have brand recognition but may be too wealthy to be as motivated.

I’m one of those people who has been frustrated by having a gatekeeper who has little more than a graduate degree passing whole judgment on funds—people who’ve never governed a balance sheet using checkbox accounting that can serve up the wrong conclusions. So I’m eager to add qualitative as well as quantitative information to the evaluation.

Q: How about sectors and geography? The state pension funds have been active investors in regional VC firms and, more recently, cleantech. Do you plan to step that up?

A: Job one is strong returns to the pension funds. But I also agree with [former California Treasurer] Phil Angelides that there is such a thing as a double bottom line, where you have a community return on investment as well as a dollar return. Other things being equal, we should look for a community return through jobs or clean energy. But we also need to be careful. I recently heard one smart person saying we’re about to create the largest charitable contribution in history by over-investing in solar.

Q: What are your strategies for coping with the slowing economy?

A: I want to engage in a healthy conversation with managers in funds who create an exceptional amount of wealth or work within the state of Pennsylvania. In these down times, one thing I want to do is fight tax hikes. And the way to do that is to have a growing economy.

I am also very interested in emerging managers and investors who’ve figured out ways to take advantage of emerging conditions. It’s always either a good time for buying or a good time for selling. And the fact is we have some pretty acute conditions, so I’ll be fascinated to hear the arguments being made by the smart people about where to invest.




Age: 49

Education: MBA from the Wharton School of Business; bachelor’s degree in history and economics from Harvard.

Work History: Began his career on Capitol Hill as a staffer for several Democratic congressmen, including Al Gore, Norm Mineta and Bob Edgar. Later co-founded tech and life science venture firm Novitas Capital (formerly known as PA Early Stage Partners) and startup investor Eastern Technology Fund.

Notable VC Investments: Held board seats at broadband-over-powerline provider BPL Global, now-defunct Investor Broadcast Network, and plasma cleaning technology developer Cerionx.

Etc.: McCord says he got a kick out of crisscrossing Pennsylvania on the campaign trail and is looking forward to the travel aspect of the job. He says everyone ought to visit Erie, Penn., in the summer at least once.

Source: VCJ reporting