Who gets what under CAPCO
A typical VCF would invest some of its own money, receive a 2.5% annual management fee and receive 20% of the profits.
Normally, experts say, a venture capital fund attracts money from investors and then returns the principal plus 70% to 80% of the profits to the investors. Under that model, Wisconsin would get back its entire $50 million investment plus most of the profits from its 1998 allocation. Instead, the state got none of the principal or profits.
Normal venture capitalists make their money from the profits they earn for their investors. If they make smart investments, they keep 20 percent of the profits. In all cases, however, they must return all of the original investment capital to their investors.
By contrast, CAPCO managers get to keep almost all of the profits plus the money that they invest. Unlike normal venture-capital investors, the State of Rhode Island would receive none of the investment capital that it had originally provided, and, at best, only a tiny portion of the profits.
The program was portrayed to operate like a private sector venture capital company (VCF) famous for creating Silicon Valley and other high growth areas. Yet this program has such a huge advantage of private sector venture capital company (VCF)
This program crowds out private sector VCFs. The incentives offered are too rich and the program is designed to put private sector VCFs at such a disadvantage they can't compete.
In the words of ?????? In my view, these programs are a recipe for disaster rather than a catalyst for growth.
Under neither program is the fund manager subject to appropriate pressure from the fund's investors to undertake the degree of due diligence or the extent of monitoring expected in private sector VCFs. In both cases, in fact, there is a distinct possibility that CAPCOs or LSVCCs crowd out private sector VCFs.
In both the CAPCOs and insurance companies (in other states) the public assumes all the risk and provides the funding. The private companies are guaranteed huge profits regardless of the programs success of failure.
Those familiar with the venture funding business should readily see how these schemes undermine the very principals make the private sector venture capital funding, due diligence and risk sharing teamwork mentoring the business to success.
These schemes reward the number of companies a CACPCO can sign up and not the quality of companies. Giving the fact that the average success rate is less than 20% for the best private venture capital funds companies lacking proper due diligence, mentoring and stripped of a significant part of their funding for CAPCO profits these companies have little hope for success.
An economic development program other states quickly learned was a scam and stopped continues to operate in secrecy under the protection of Oklahoma state officials. The program known as Capital Company or CAPCO was portrayed to operate like a private sector venture capital company (VCF) famous for creating Silicon Valley and other high growth areas. The CAPCOs had supposedly line up insurance companies as private investors.