Illinois Treasurer is Investing for Total Returns

Illinois Treasurer is Investing for Total Returns

By John Carpenter
 
October 16, 2018


Most venture capitalists, operating as they do at the cutting edges of free-market innovation, cast a cold eye on talk of government involvement. But an Illinois-run investment program, started more than a decade ago and re-upped in 2016, is creating jobs, fueling the state’s venture financing engine, and generating strong returns for the state.
 
The Illinois Growth and Innovation Fund, supporters say, is that rare example of a government program that succeeds on multiple levels.
 
“It doesn’t just do good for Illinois,” said Hyde Park Venture Partner’s Guy Turner. “It does well.”
 
The idea was simple. Take a small chunk of the state’s $30 billion investment portfolio and earmark it for backing of Illinois start-ups. It wouldn’t be the first program that attempts to use government cash to spark investment. But a key decision was made early on. The program would not seek to find individual Illinois companies to back. It would instead work through professional investment funds, and would itself be managed by a private vendor.
 
“We don’t pick winners and losers in terms of companies,” Illinois Treasurer Michael Frerichs said. “That’s not our skill set … I didn’t get elected because I have experience running VC firms.”
 
The ILGIF is administered by Northern Trust, through its 50 South Capital Advisors. It is also overseen by the ILGIF Advisory Council, made up of leaders in the Chicago and Illinois VC community. All ILGIF funds, therefore, are reviewed and fully vetted by professional investments manager who recommends funds to the Treasurer’s office. This is to make sure taxpayer funds are well-invested.  Those recommendations are reviewed by the Advisory Council of venture capital and private equity professionals who can provide counsel on the terms, the investment theses and the histories of the people associated with the investment fund – all safeguards are critical to the integrity of the program.
 
Darren Snyder, partner at Prairie Capital, said this is the heart of the success of ILGIF.
 
“I’m one of those people who is very skeptical of any government’s ability to do it as well as the private sector,” he said. “By investing in a fund, the state has a very strong alignment of interests. As soon as you start putting artificial constraints, you wind up making bad investments.”
 
Andrew Perlman, partner at GreatPoint Ventures, said it’s not just that the ILGIF works with venture funds. It’s that the state is spreading the money around many funds. Not only does this work from a standpoint of diversification, it keeps any one fund from becoming too influenced by the state investment. In his case, he said, the ILGIF money is “a very small part of a larger fund.”
 
“It helps steer funds toward Illinois companies,” he said. “But, at the same time, it doesn’t steer them so much that they invest in bad companies.”
 
“Venture capital investing,” said Spot Hero Founder Mark Lawrence, “is not a core competency of the state of Illinois.” But backing local fund managers, Lawrence said, lets the state “leverage some of the best and brightest” professional investors.
 
The ILGIF was established in 2005, and authorized a funding round of $74 million. Known as Technology Development Account I (TDA I), it created approximately 6,300 jobs and sparked more than $150 million in private investment. A second TDA was authorized in 2011, but it was not activated until Frerichs used it to establish a $222 million fund renamed Illinois Growth & Innovation Fund (ILGIF) in 2016. ILGIF began making investments in 2016.
 
Frerichs said he saw the need firsthand when he was in the state legislature, representing Champaign-Urbana. The home of the University of Illinois’ flagship campus has become a buzzing start-up hub, as entrepreneurs team with U of I researchers to monetize various ideas. As recently as 10 years ago, Frerichs said, Chicago’s venture capital community was not strong enough to support these new companies, who had to look to the coasts – primarily venture capitalists from California’s Silicon Valley – for crucial backing.
 
“I represented Champaign Urbana for eight years,” he said. “I saw companies leave our state, and realized it didn’t have to be.
 
Coastal VCs, he said, will often pressure startups they back to move closer to where the money is. But “when Chicago-area firms invest in Champaign firms, they almost never suggest that they move. So we’re more likely to retain companies.”
 
One example of the success of the program is Cartavi, a Naperville-based startup that developed a document management platform for real estate transactions. The company was bootstrapped by founders Glenn Shimkus and Paul Kosiarz until 2012, when they needed cash to finance growth. Eleven Chicago-based investors, including OCA Venture Parnters, signed on to a $1.25 million round.
 
In 2008, the ILGIF invested $5 million in OCA’s second fund, the same fund that backed Cartavi in 2012. That cash allowed the company to grow to the point where, in May of 2013, they were acquired by DocuSign. Most Chicago investors took stock in the company, betting on its continued growth. This paid off in 2018, when DocuSign went public.
 
The State of Illinois is expected to earn a 15X return on its original investment with OCA Ventures. DocuSign currently has 50 employees in Illinois, a number that is expected to double in the next few years.
 
 
 
Prairie Capital is another success story, according to partner Darren Snyder. The company had success working more with banks and high-net-worth investors. But in 2010 it began building a fund with more institutional investors.
 
Getting ILGIF backing, therefore, was a key slide in their pitch deck for other institutional investors.
 
 “That was a real seal of approval,” Snyder said. “Those are very important.”
 
GreatPoint’s Perlman agreed.
 
“They have been fantastic, certainly one of our leading institutional investors in the funds,” he said. “They added a certain level of credibility that helped us as we developed the fund.”
 
“Having the state really helped validate us for institutional investors thinking of investing in our second fund,” he said. “For us, it’s been phenomenal. For our companies, it’s been great.”
 
Patriot Capital Managing Partner Charles McCusker said an investment from the ILGIF led directly to the Maryland-based firm opening a Chicago office in 2008  – an office that has been very successful.
 
“There are certain types of money that are more strategic than others,” McCusker said. “This has been one of the most strategic success stories we have had.
 
The Chicago office, which was opened after Patriot receivied an ILGIF investment, has “represented probably 40 percent of our investments over the last 10 years,” McCusker said.
 
Snyder and others noted that the ILGIF isn’t just about putting cash in the hands of Illinois startups. There is significant multiplier value in growing the state VC ecosystem.
 
“The VC community has continued to grow into a well-networked and successful group,” he said. “A lot of that money stays in Illinois.”
 
Indeed, since the state began investing ILGIF funds in the second round of the program in 2016, the measured benefits have been significant.
 
-       4,000 new jobs have been created.
-       It has lead to investments of more than $840 million in Illinois companies
-       It has lead to more than $8.4 billion in GAAP certified revenue.
-       It has lead to more than $77 million invested in monirity and women-owned funds.
-       Forty-nine businesses owned by veterans, minorities, women and disabled persons have received backing
 
Among the other company success stories is Farmer’s Fridge, which sells ready-made salads and other healthy lunch options in refrigerated vending machines. Founder Luke Saunders said the company was originally bootstrapped, renting kitchen space for more than a year. Because of the physical nature of the product, and the fact that the company supplies its own distribution infrastructure, cash was key for growth, Saunders said.
 
He had an investment offer that he almost took – which would have been disastrous. But he was able to secure a more generous round that came in from Illinois-based backers.
 
“It was critically important,” he said. “Had we taken that other offer, we would have been way under-capitalized. We wouldn’t have made it.
 
The company recently raised a third round of $30 million, and now employs more than 130 people, with plans to hire more, and expand beyond Chicago and Milwaukee, where it currently operates.
 
In August of 2018, the Illinois General Assembly expanded the program, authorizing the Treasurer to earmark up to five percent of the state’s portfolio for investments with venture capital firms backing tech companies either based in Illinois or looking to move here.
 
Funds that receive ILGIF backing are expected to invest a minimum of twice the amount received from ILGIF in Illinois companies. Participating funds must also demonstrate a commitment to diversity with regard to minority, women, veteran and disabled status.
 
The list of ILGIF portfolio companies reads like a who’s who of the robust Chicago start-up scene. It includes:
 
-       Uptake, the smart tech juggernaut started by Groupon founder Brad Keywell
-       tock, the restaurant reservation and payments platform
-       Shiftgig, which connects hourly workers with employers
-       Spothero, the growing parking app
-       Farmer’s Fridge, which sells healthy meals from conveniently located refrigerated vending machines
-       Shoprunner, which connects retail brands with online shoppers
-       Avant, a digital financing platform
-       Cartavi, a cloud-based document management platform that was acquired by DocuSign.
 
Turner said the ILGIF program has been instrumental in growing Chicago’s startup scene from a small group of outliers to a healthy ecosystem.
 
“There is a tremendous stock of (startup) companies, and a healthy turnover of companies,” he said. “The companies that aren’t performing well don’t last long.”
 
As for the Chicago and Illinois VC community, Turner said it is “an order of magnitude higher now than it was 10 years ago.”