In a conversation with Aaron Price, president and CEO of TechUnited:NJ (New Brunswick), Tim Sullivan, CEO of the New Jersey Economic Development Authority (NJEDA), outlined the timing for the full implementation of the Innovation Evergreen Fund, which was signed into law recently.
The approved Innovation Evergreen Fund was the centerpiece of the “New Jersey Economic Recovery Act of 2020,” which overhauled the New Jersey’s system for encouraging companies to stay in New Jersey and grow jobs here.
“There are 15 programs in the new bill and we have to stand them all up,” Sullivan noted. “We can’t just stand them up at the same time; it won’t work.” That being said, “this is a super high priority program, but it is also a very complex program,” as it is brand new.
Auctions in Late Summer or Early Fall
“We are optimistic that the tax credit auctions will start in the late summer or early fall if we get it all right, and then investments will flow from there,” said Sullivan. One of the keys to this working is that the auctions have to go well. If they don’t generate sufficient capital, that will be a problem, he added.
Price asked Sullivan if the NJEDA was concerned that the auctions might not go well. He replied that this was something new, and that the NJEDA would be marketing the opportunity to companies during the next several months and spelling out what obligations come with those tax credits.
The Fund is expected to create wealth as well as sustainable job and economic growth over the next 25 years. “We are rekindling our innovation and growing new companies into big companies,” Sullivan said. “This is a really important public–private partnership that uses tax credits in a really different way to support and fuel innovation.”
Over the past 10 years or so, New Jersey has fallen from 10th to 15th place in the rankings of venture capital deployed to its companies, he stated. Other states have grown quite a bit, “but we’ve actually shrunk in the amount of dollars that we’ve taken into venture capital.” Venture capital is not the only ingredient needed to grow an economy, but the lack of it causes a cyclical effect in which there are not enough companies being formed and sustained.
Breaking the Cycle
“We think one way to break that cycle, change the trajectory of that cycle, is with a significant investment vehicle to support more venture capital,” Sullivan said. He added that the secret sauce to startup success in New Jersey will be the commitment of corporations. The state’s proceeds from the tax credit auctions will provide half the cash for the Innovation Evergreen Fund.
The corporations won’t be getting those credits unconditionally. They will have to commit to supporting the entrepreneurial ecosystem in a real way. “We’re still working on how this will work. But if you’re a big pharma company, it could mean partnering with small biotech firms. If you are a big corporation, it could mean committing some of your IT spend to return to startups. It could mean working with secondary education talent in New Jersey.”
The auctions should generate $250 million over five years, and the state will pair that money with funds from private venture capital companies run by experienced investors. “The state will be a coinvestor with these companies in the startups the VCs have brought to the state.” However, these startups must be based in New Jersey, stay in New Jersey and commit to growing most of their new jobs in New Jersey.
The Startup’s Perspective
From the startup’s perspective, “if you are a young technology company and you have the chance to work with either a big financial services company or a fintech player,” or if you are a biotech startup and you have a chance to work with a big pharma or biotech company, “what better place than New Jersey to do it?” Sullivan asked.
Price clarified the startup perspective, saying “If I’m an early-stage company, looking to raise capital, if I decide to make my headquarters and or job growth — and I know you are still figuring some of these things out— focused in New Jersey, [I could] raise capital from an approved venture capitalist” on the NJEDA’s list. That VC will be able to write a bigger check because it’s getting matched funding from the state.
He gave the example of a startup getting a $1 million commitment from a VC who has been approved by the state. Then the state will add $1 million to the round, so the startup has “more firepower to build instantly. And as an entrepreneur, my fundraising process, which many of us know is a very time-consuming process, becomes much more efficient.” Price added that it’s better to go after the approved VCs, because you’ll have more firepower with fewer partners.
Sullivan noted that when companies exit or monetize, “whether through the public markets or the sale … the proceeds of the state’s equity ownership flow back to the Fund and support more investments over time.” He said that if the portfolio over-performs, some of that money will go back into the state government’s “general fund to pay for roads and cops and teachers and other programs” or whatever is decided on at the time.
Price explained that the VCs, who make money through carried interest on their fund’s return and a fee for managing a fund’s capital, will earn money on the state’s contribution, as well. That will incentivize them to leverage this pool of capital. Sullivan added that the state needs the expertise of the professional venture capital firms because his colleagues at the NJEDA are not investors, and don’t know how to evaluate the potential of “the next dating app” or “the next cure for cancer.”
The NJEDA will be opening up a commenting period to help it decide what the program will look like exactly. One open question raised by the audience was the role of strategic investors. It’s likely that investment funds run by corporations will qualify, but direct strategic investments will not, according to Tim Rollender, a technology sector lead at the NJEDA, who was also participating in the phone conversation.
A full-length video of the event can be found here.