VC tax credit in works?

Seeking to create a major tax credit program for venture capital investments in Connecticut, proponents met with Gov. Dannel P. Malloy last week in hopes of landing his support.

As reported earlier this month by the Fairfield County Business Journal, the state is also considering lowering the investment bar for early-stage angel funding in startups in an effort to bring more wealthy investors to the table.

The twin lobbying pushes arrive amid mixed signals for venture capital in Connecticut. While PWC (PricewaterhouseCoopers L.L.P.) tallied $200 million in venture capital investments in Connecticut in 2010 in its quarterly MoneyTree Report ”“ the highest level since 2007 ”“ some $85 million of that was pulled in by Pierpont Securities L.L.C. The financial broker-dealer company in Stamford is more akin to the hedge funds whose capitalizations are not considered venture investments, rather than the classic model of the high-tech startup.

Take away Pierpont Securities”™ tranche and the picture appears far bleaker for 2010 ”“ including a fourth quarter that “was kind of weak” according to Owen Davis, a partner in the Stamford office of PWC, who addressed a gathering of the Connecticut Venture Group (CVG) last week.

At the same time, there is significant capital left sitting on the sidelines in 2009 as the recession destroyed investor confidence. For their part, venture capitalists may compensate by accelerating investments in 2011, according to Gary Mathias, a partner in the Westport-based boutique investment bank Carter, Morse & Mathias.

“There is a ”¦ generation of funds that is nearing the end of their lifecycles,” Mathias said. “They need to put that money to work.”

CVG says a venture investment tax credit would go a long way toward improving venture funds”™ ability to raise capital and by extension for their portfolio companies to get it. Executive Director Liddy Kartner said Connecticut is the second largest “exporter” of venture capital funds to other states, after California, but only 14^th in actual venture funds invested here ”“ a fact that illustrates both its tremendous financial wealth as well as its lost knack for grooming entrepreneurs and startups that might keep those funds inside the state”™s borders.

Westport-based Canaan Partners numbered among the 10 most active investors nationally last year with more than 40 deals ”“ save for a small handful of companies that include Shelton-based Spine Wave and Stamford-based Fitlinxx, Canaan Partners has invested the lion”™s share of its funds elsewhere.

“We have an opportunity to change this,” Karter said. “We are hopefully going to be a little more militant about it.”

The question becomes whether CVG has a friend in the foxhole in Gov. Dannel P. Malloy, who is battling on multiple fronts to push through his mix of tax and spending increases largely intact in a legislative session that has only weeks left on the calendar.

And in a potential wild card of unknown impact, the Securities and Exchange Commission reportedly is considering making it easier for such businesses to raise capital from investors.

The Wall Street Journal reported the possibility after obtaining a letter from the SEC to a lawmaker, and confirming the information with other sources.

The newspaper reported the changes would include allowing companies to have more than 500 investors without opening their books to public inspection and making it easier for businesses to publicize share offerings.

The move could spur high-tech companies to delay initial public offerings of stock in favor of selling equity in private deals. In the first quarter, IPOs by venture-capital backed companies hit their highest mark since 2007, according to the National Venture Capital Association and Thomson Reuters, which partner with PWC to produce the MoneyTree venture capital report.