BusinessTN

Too often, the media successfully points out the shortcomings of government yet doesn't offer praise when those same entities get things right.

Last June, BusinessTN editorialized that Tennessee--dead last in the nation in per capita personal income growth according to a recent ranking--needed state assistance to diversify the economy into higher wage industries. We argued that the best way to accomplish such diversification was to increase entrepreneurial activity, which requires capital. At the same time, we recognized that particularly for smaller businesses and startups, raising capital is difficult. Despite being the creators of most new jobs, such ventures are often overlooked by banks unwilling to make loans to early-stage businesses with little or no track record, as well as by venture firms inclined to invest in more mature outfits. Thus, we asked, "Who can fill the gap?" And we argued that more public involvement was required, stating:

"States like Pennsylvania, Georgia and Kentucky are doing much more interesting things in capital formation. . .Bottom line--the time to pursue the innovation agenda in Tennessee is now. And preparing Tennessee for real success in the 21st Century is tied in to research infrastructure, entrepreneurship support and capital. It takes doing something different...Lawmakers need to begin in earnest the discussion of a comprehensive capital initiative for Tennessee."

A year later, those same lawmakers deserve a tip of the cap for what they accomplished in the 2009 legislative session. Passage of the Tennessee Small Business Investment Company Credit Act (TSBICCA) will help seed high-growth potential small businesses that have historically fallen through the cracks. And that, in turn, will create jobs.

Here's how it works. TSBICCA or TNInvestco authorizes the state to issue up to $120 million in tax credits to insurance companies. The net effect--an estimated $84 million of new venture capital--will be divided among six established Tennessee venture capital funds to be distributed primarily in seed and early-stage small businesses that are located and headquartered in Tennessee. After seven years, venture funds can begin making liquidation distributions, sharing half with the state.

The new program is modeled after legislation in Alabama that since its launch in 2004 has generated more than $32 million in new annual payroll. (The average wage of each job created by Alabama's seed money was $40,628.) Many experts in venture capital circles in Tennessee say the Volunteer State's tax credit program is superior to those in other states. Outsiders seem to feel the same way. Ben Dupuy, executive director of the National Coalition for Capital, stated at the time of the bill's passage that, "With this legislation, Tennessee has jumped ahead of the pack."

The opportunities this new law creates for investment in Tennessee businesses is nothing short of exciting from an economic development standpoint. It's also quite encouraging to see Tennessee's state legislature embrace creativity and yes, even risk, in an effort to improve the state's per capita personal income growth. Indeed, the state must continue to explore fresh ideas and models for stimulating even more capital formation going forward. But for now, it's worth pausing to give credit where credit is due.