A summary of the Texas House Committee on Economic & Small Business Development's hearing on venture capital investment in Texas. The hearing lasted a bit over two hours and focused on what steps the Legislature could take (if any) to bolster venture capital investment in Texas. Several Austin-based investment firms were mentioned, including Austin Ventures, Silverton Partners, and LiveOak Venture Partners. Date: April 3, 2014 By: A.J. Bingham (www.linkedin.com/in/ajbingham/)

1. A.J. Bingham
Summary ­ Texas House Committee on Economic & Small Business Development
April 3, 2014
Please find below a summary of the House Committee on Economic & Small Business Development's
Thursday hearing on venture capital investment in Texas.
The hearing lasted a bit over two hours and focused on what steps the Legislature could take (if any) to
bolster venture capital investment in Texas.
Several Austin­based investment firms were mentioned, including Austin Ventures, Silverton Partners,
and LiveOak Venture Partners.
Topics addressed included:
● Focusing on pre­seed and early stage investment;
● Incentivizing Texas VC firms to be anchor tenants investors;
● Creating a program for Texas to be an anchor tenant investor;
● Past legislation which positively affected the Texas VC industry; and
● Update on the Texas Department of Agriculture's Jobs for Texas program
As background, testimony gathered at interim hearings is compiled into a report with recommendations
for submission to the Legislature. These reports are due sometime before the end of the year, in
December.
The implication of those recommendations is that they may result in some form of legislation being filed
in the upcoming session about that topic.
As background, the Texas legislative session lasts 140 days every odd year. The 84th Legislative
Session will begin on January 13, 2015 and end on June 1, 2015.
Please let me know if you have any questions or comments.
Best,
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2. A.J. Bingham
Summary ­ Texas House Committee on Economic & Small Business Development
April 3, 2014
Hearing Summary:
House Committee on Economic & Small Business Development
April 3, 2014
By: A.J. Bingham
The House Committee on Economic & Small Business Development (Committee) met Thursday to
consider the following interim charge:
Study venture capital investment in the state and determine how Texas compares to other states
in attracting venture capital dollars. Make recommendations to improve Texas' ability to attract
venture capital investment.
Committee Chair Rep. John Davis (R­Houston) commenced the hearing, which included a number of
witnesses from the venture capital and angel investment world.
Mr. Craig Casselberry, President, Texas Coalition for Capital, testified first. He emphasized a dynamic
state economy should include multiple sources of capital, including venture capital. He noted the venture
capital industry was much smaller today nationally than in 2000, with almost $100 billion invested then,
as opposed to $27 to $29 billion in the last three years.
He stated overall Texas venture investment dollars had increased in 2013 by about 37%, however most
early stage funds were not coming from Texas investors. He added that interest in Texas, particularly
Austin, was picking­up from investors on both coasts, with the state currently ranked 6th in receipt of
investment dollars (comprising 4% of all venture capital deals and 5% of all venture dollars).
Mr. Casselberry shared several theories about why this was the case, including lack of availability
among Texas start­ups. He noted Texas investment dollars were dominated by the oil and gas industry,
which were very capital intensive and not quickly scalable. He also noted investment in clean technology
and energy had decreased significantly over the past two years.
He stated there was some sentiment that Texas needed more and better deals to fund. But also that
Texas needed more venture capital firms. He commented that the state had for some time been
dominated by one major player in the market (alluding to Austin Ventures).
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3. A.J. Bingham
Summary ­ Texas House Committee on Economic & Small Business Development
April 3, 2014
Picking up on that, Rep. Jason Villalba (R­Dallas), a venture capital attorney with Haynes and Boone,
noted Austin Ventures had moved upstream into the private equity space. He continued that there were
a handful of new funds emerging in Texas, but they were far and few between. He cited Austin­based
LiveOak Venture Partners as one example. He added one of the constraints he heard from his Texas
venture capital clients was an inability to attract requisite partners from around the country.
Mr. Casselberry noted it was likely a critical mass issue, so if there were enough deals happening in
Texas the money would be attracted here. He believed there was just likely a sentiment that Texas did
not have enough of the right deals. And he noted, there did not appear to be an appetite for the “big
idea" here.
Rep. Villalba asked if there was a way to create a fertile economic climate to attract new capital into
Texas.
Mr. Casselberry stated everybody always falls back on tax credits, but the issue is what would you
credit against? He noted Texas did not have an income tax, so maybe the margins tax, but he stated that
might not exist in the near­term. He stated there were tools through the Governor’s Office of Tourism
and Economic Development (i.e., the Emerging Technology Fund). He stated another possibility was
incentivizing angel networks, possibly through tax credits. And finally incentivizing accelerators and
incubators.
On the latter point, Rep.Villalba cited Mark Cuban who recently stated Texas needed more accelerant
capital rather than incubator capital. Mr. Casselberry noted few firms were in the early funding space,
citing Silverton Partners, as well as the Texas Emerging Technology Fund, but stated there were not
enough of them.
Continuing, Mr. James Poage, President of Startech International (a San Antonio venture capital firm),
testified.
He believed the focus of Texas venture capital should be in pre­seed and seed stage firms. Citing Austin
Ventures, he commented the firm’s move out of the venture capital space was a function of the size of
deals the firm undertook. He noted it took as much paperwork for $100 million deal as for a $5 million
deal.
Mr. Poage explained that with pre­seed and seed funds, one could probably go around to friends and
family to raise a modest fund. However, raises north of $20 million more likely required a nationwide
search. In such cases, he stated it would be helpful for Texas companies to have “anchor tenants”
(state­based investors) for when they went on the road for pitches. He explained a top investor
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4. A.J. Bingham
Summary ­ Texas House Committee on Economic & Small Business Development
April 3, 2014
questions was “who is your big investor back home”? He noted the anchor tenant could be tentative,
and commented the state of Texas could fulfill that role on conditions that the money be raised. He
stated such a program would be a great help to expand Texas’ early stage capital program and establish
a program to be an anchor tenant. He explained the cost would be an amount over a certain time
horizon, typically seven years. Rep. Yvonne Davis (D­Dallas) what the threshold dollar amount would
be for such a program to be viable. He stated $100 million was the minimum. He added that amount
would be committed going in.
Continuing, he stated investors and entrepreneurs typically liked to be in proximity each other, but
investors were not in the relocation business. He suggested creating a mini­enterprise fund to aid
out­of­state entrepreneurs moving to Texas. He explained criteria would be venture capital backing, so
that qualifying the firms took place beforehand.
Rep. Villalba cited states such as Utah, California, and Wisconsin, which crafted plans for outside third
party capital to be drawn in the state, to be used as the guaranty for the states to be anchor tenants. He
explained there was an incentive of some form (e.g. a tax credit) so there was no threshold raise.
Next, Mr. Scott Pospisil, Texas Venture Capital Association, testified. He noted since 2005 there had
been three major state policy making decisions by the Legislature and State Securities Board which
affected venture capital in positive ways.
The first was SB 121 (Relating to a requestor's right of access to investment information of
governmental bodies) in 2005, which defined the information government entities investing in venture
capital funds must disclose, commonly called the Disclosure Bill. He stated it was now a national model
for other states to follow as far a public entities investing in venture capital. The second, in 2007, was
HB 3928 (Relating to technical changes to the revised franchise tax) which clarified the application of
the margins tax on venture capital firms sitting on the board of directors of their portfolio companies.
And he stated the most recent action was the State Securities Board’s enactment of Dodd Frank at the
state level, which he stated did an excellent job of not placing any additional burdens on venture capital
firms as far as filing.
Mr. Pospisil stated as far as the future was concerned his association respectfully requested that any
legislation purporting to address disclosure of public sector investments, such as public retirement
systems of emerging technology fund, should exclude private investment funds (as defined in the
Government Code) and information accepted for disclosure by the Texas Public Information Act. He
also requested that any future legislation not reveal the value or identify of each individual investment in
the public portfolio, but only report performance in the aggregate.
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5. A.J. Bingham
Summary ­ Texas House Committee on Economic & Small Business Development
April 3, 2014
Continuing, Bryan Daniel, Chief Administrator for Trade and Business Development, Texas Department
of Agriculture, testified. He updated the Committee on the agency’s Jobs for Texas program. Started
about a year ago, it was an innovative program designed to increase small businesses access to capital
and enable private entrepreneurs to make market­driven decisions to grow jobs.
He explained Texas received $46.5 million from the Department of Treasury to fund the program, and
had engaged with four Texas­based firms to find the investments. He stated thus far $25.5 million had
been invested in 18 companies representing a variety of industries from energy, IT, and transportation.
He noted the agency had already begun to see returns through earned interest and exits, such as
StoredIQ (through acquisition by IBM) earlier in the year. The total returns presently were about $4.8
million.
Mr. Daniel stated that until 2017 Texas was bound by the federal rules attached to the $46.5 million, so
all the money stayed in that fund and revolved on investments until 2017, when the state could unlock
that money and use that for other investments, or the discretion of the Legislature.
Next, Mr. Stephen Minick Vice President­Governmental Affairs, Texas Association of Business,
testified. He stated the Texas must not be complacent with its success, as other states were continually
competing for jobs and investment dollars. Regarding Texas as an investor, he noted public investments
yielded ancillary economic benefits. He also criticized the state's lengthy permitting process and its
adverse impact on certainty and predictability desired by companies.
Mr. Paul Deslongchamps, Chief Investment Officer Waveland Ventures, testified on how Texas could
establish its own tax credit program to complement the federal government's New Market Tax Credit
Program.
Lastly, Mr. Jeremy Vickers, VP of Innovation at Dallas Regional Chamber and co­founder of Dallas
Entrepreneur Center, also testified on the need for more good deals to attract venture capital
Following the end of testimony, the Committee then adjourned subject to the call of the Chair.
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