The House Democrats’ first bill of the session, the Advanced Industries Accelerator Act, has been forced upon Coloradans through the media as offering economic aid to start-ups in select industries.  Every pillar of reasoning supporting this astounding government encroachment is faulty.  We would expect rent-seekers in the so-called “economic development” industry to cheer this legislation, but the idea that people beyond this narrow constituency are taking the bill seriously is troubling.

The first premise of this legislation is that there is a lack of venture capital in Colorado.  That is completely false.  In fact, just the opposite is true:  according to PriceWaterhouseCoopers’ most recent quarterly VC survey, published on October 19, 2012, VC activity in Colorado was actually on the rise, while nationally, venture capital investment activity fell 11% from the prior quarter.

The Rocky Mountain Venture Capital Association (RMVCA) is currently reporting that in Colorado alone last year, $180 million of VC dollars were invested across 28 deals, just in the third quarter.  To add some context to that data, Colorado accounted for 68% of the Q3 VC activity in the entire eight-state region.  During this period, our state’s VC investment volume was almost three times the level of its nearest regional competitor, Utah.  In the prior year, USAToday reported the Denver/Boulder area as one of the top ten areas in the  country for technology startups.  Furthermore, the RMVCA reports that in the past five years, the region has attracted investments from over 400 institutional venture firms.

The reality of venture capital in Colorado today is that it is plentiful, good companies are being funded, and a tremendous amount of cash is waiting on the sidelines for new, profitable ventures.

Another strange misnomer that exists within the government class (and helped drive the creation of this bill) is that the productive class needs venture capital to start businesses.  The fact of the matter is that venture capital is just about the most expensive part of a company’s capital structure, and thus, one of the last sources of funding that entrepreneurs pursue, according to the Kauffman Foundation.  There are many successive steps that entrepreneurs take to fund their enterprises before giving a piece of their company to the VC investor:  personal savings, credit cards, friends and family, cash flow from the business, and, finally, bank loans.

Next in the line of fundamental errors underpinning this bill is that fact that the government has no business competing with private VC investors for deals.  The money that is proposed to be distributed under this bill is actually in the form of grants.  How can a venture capital firm compete with a term sheet coming from the government with clauses such as no repayment and no equity interest?  That is no more appropriate than the government opening a storefront designed to hand out hammers, nails, and paint next to the local hardware store.  But wait, there’s more…

Who will manage this fund or this process?  Is there even a single person in the entire state government qualified to conduct the due diligence, financial statement analysis, financial modeling, valuation, and market analysis for these types of investments?  VC professionals are very specialized businessmen who are highly compensated because of the tremendous amount of value they can create through this process.  The state government simply does not have a bench of people with the requisite skills to properly manage the proposed fund and/or process.

If the Democrat-controlled legislature is serious about expanding economic activity in this state, they ought to go about setting the conditions for success through permissive judicial, regulatory, and tax regimes. The radical notion of legislators appropriating taxpayer dollars to “invest” in private enterprise should not see the light of day.  It is not their role, and they are not equipped to do so.