Tuesday, October 13, 2009

TNInvestco Tax Credits Potential Shelter & Subsidy to Solidus & SouthComm

Yesterday I analyzed the venture capital context of local news corporation SouthComm and I argued that the context was not necessarily consistent with priorities of covering local news. In this post I take a look at the dilemmas of the state subsidizing SouthComm's venture capitalism. The Governor's office has perfected the art of giving tax money away to corporations. Phil Bredesen's latest plan, TNInvestco, stands to benefit local media mogul SouthComm by giving tax breaks to insurance companies that invest in its parent venture capital company Solidus, which the state chose as a finalist in the TNInvestco competition. With the spoken intention of producing "the state's next top business models," the Governor's new law provides $120 million to insurance lenders who invest in Tennessee venture capital

But those business models are not simply successful because they provide people with the proverbial widgets that they demand, for which they are willing to pay. The new law minimizes the obstacles that stand in the way of success by providing government subsidies to private businesses. They eliminate risk and complexities of other tax credit programs for insurance companies. They are a form of corporate welfare. Given that Governor Bredesen has always sweetened private deals with tax dollars, TNInvestco cannot be spun into an exceptional exercise in stimulus. But the jeopardy of investment doesn't simply disappear with the new tax credits, it is foisted on tax payers.

In the case of Solidus and SouthComm tax credits are welfare for a media conglomerate that has a readership as large as that of Gannett Corporation's Tennessean. SouthComm also staffs publications in Louisville and has plans to expand to "other cities." Meanwhile, TNInvestco is marketed by its legislative supporters as a means to help small businesses and eventually support the state's "Rural Development Fund." It looks to me like another version of the tale of enough wealth to spread around to everybody. But that is only if the TNInvestcos succeed. There is also no data I've been able to find on how much of a return Middle Tennesseans will see to public programs and services from Solidus, especially if we assume that there may be other forms of tax credits that limit venture capitalists' obligations to Tennessee.

SouthComm reporter E. Thomas Wood described the selection of TNInvestco finalists as, among other things, a judgment about "strength of character," as if investment and speculation are now among the civic virtues. More reliable tests of character in my opinion involve the question of whether SouthComm reporters are transparent by providing disclaimers that Solidus is competing for the dollars on which they report and the matter of how those journalists report the news of Solidus' bid itself. Framing a bid for money as a test of character is itself biased. But reporter Wood acknowledges only one criticism of TNInvestco: the boiler plate corporate sideswipe that government bureaucrats may not be up to the task of evaluating business beauty queens.

Indeed, most venture capitalists say they rely more on "gut feelings" than objective financial metrics to evaluate investments. Since there is no way to operationalize "gut feelings" for the benefit of bureaucrats, the potential for conflict between state and business is clear. Yet, the onus for reform is not put on investors, but on government. The wealthy get their exemptions from reform lest their fragile pocketbooks be disturbed. Investors both want money from the government and want money without strings but with unchecked trust in their judgment.

Should they win the TNInvestco competition, Solidus will be enjoying tax breaks at the expense of tax payers, since some of the financial risk will be passed along to tax payers. The state's justification is that if subsidiaries like SouthComm expand and hire more employees, the new hires will spend disposable income, part of which will come back into state coffers in the form of taxes. Essentially, the state is willing to compel less powerful future employees to pay taxes while excusing powerful investors from meeting their obligation to support public works. Tax payers are tools in the TNInvestco trade.

However, reporters don't seem to be willing to question the TNInvestco double standard. Nor do they seem willing to challenge the attempts by market forces to open government revenues to private interests. But if the costs of expanding start-up businesses like SouthComm are too high to encourage investment, then perhaps the problem is with the market and not the government. Will SouthComm reporters and editors have the will to dissect TNInvestco deficiencies on the market side if SouthComm paychecks hinge on a TNInvestco win?

SouthComm's adopted motto, "Our passion is designing and producing magazines that truly tell your story," seems at odds with the high finance/quasi-government race for money and influence. I'm not convinced that they can ever tell the story of the hundreds of thousands of common Middle Tennesseans who may be jeopardized because TNInvestco removes some of the risks of consolidating newspapers, launching online news services, and making promises to expand local coverage while working to expand to other cities. But even if they could do so, the question remains: is it right to expose Tennesseans to such risk?


  1. I have no affiliation to the state, Solidus, or TNInvestco for that matter. I just read your article and felt a need to clarify one of the responsibilities of a TNInvestco. TNInvestco money may only be used to invest in companies less than 3 years old. SouthComm is over 3 years old and does not qualify for TNInvestco money.

  2. Mike--- Read the statute. Southcomm does not qualify for an investment by any of (likely 6) TNInvestcos schedulled to begin operations in January. TNIvestcos can only invest in companies with less than 100 employees.

  3. So, is there any kind of rule or law that would prohibit Solidus from moving funds that it would have spent on younger, smaller subsidiaries to SouthComm if the venture capital company wins a TNInvestco and gets an infusion of insurance funds?

  4. A clarification, before I post a longer response: Solidus and nine other VC outfits are finalists for the six positions available as conduits of TNInvestco money. The winners are supposed to be chosen on the basis of how innovative, job-generating etc. their portfolio companies' plans for the money are. The six chosen will dole out some $20 million each to ventures that they will choose.

    To your last question, Mike: My (admittedly limited) understanding of the TNInvestco statute is that it would prohibit state money from being funneled into existing Solidus portfolio firms such as SouthComm. The full statute is at ECB's website.

  5. Mike, I'm not the person at SouthComm best qualified to address your critique as a whole. I would like to respond, though, to your comments about my coverage of TNInvestco and your concerns about how my colleagues and I cover stories involving Solidus and its portfolio companies.

    You are correct that my September story on TNInvestco did not address complaints raised by knowledgeable observers -- chiefly, that state-run venture capital programs grossly overcompensate the private entities that serve as conduits for the funding going to entrepreneurs and, theoretically, providing the state with an economic boost from the enterprises thus jump-started. I was unaware of TNInvestco until after the law was passed -- am not proud to admit my ignorance of what was an important legislative issue earlier in the year, but none of us can be everywhere.

    In August, I began to read up on the history of Capco programs (the state VC model that eventually mutated into TNInvestco). I interviewed a Rutgers professor who has been the bane of the Capco firms' existence, Julia Sass Rubin. I gained a good understanding of why so many people consider these programs boondoggles. But the bill was already law at that point, passed unanimously by the legislature, and I would have accomplished nothing by rehashing arguments over whether it should have been enacted.

    My job, as I saw it, was to look forward to the implementation of TNInvestco and examine just how prepared the state was to judge fairly between numerous proposals from highly qualified VC people. The main bar of my story, which you linked above, highlighted areas of concern in the planned approval process. In a sidebar, which you did not link, I put some of Professor Rubin's implementation concerns to ECD's chief talker, along with other questions.

    I ought to note that I also fully disclosed NashvillePost.com's Solidus connection in the chart posted with the story.

    Readers can draw their own conclusions after reading my full story package, but I feel I reported the story soundly and properly.

    [to be continued in next comment]

  6. Now, just a word about Solidus. It has been the owner of NashvillePost.com since its founding a decade ago, and so there is a well-established track record you can look at as you wonder how evil an overlord it will be for SouthComm going forward. I would challenge anyone to produce a single example, from NP's freely available archives going back to 2000, of coverage bearing the imprint of inappropriate influence from the owner. NP has covered Solidus-related business dealings many times, just as it has covered the dealings of other local VCs. From its earliest days, it has always included disclosure statements with such stories so that people can be aware of the connections.

    NashvillePost.com has published both good news and bad news about Solidus, its principals and their friends. When portfolio company Plumgood Food went out of business last year, we carried its obituary. When Solidus chief Townes Duncan was named in a $10 million wrongful death lawsuit last June, I reported on the complaint fully and, I hope, fairly -- even though I consider Townes a friend and have personally obtained VC funding for him in the past (a fact I disclosed, about which more in a moment). NashvillePost.com has published stories that deeply angered some of the most powerful business personalities in Nashville, many or most of whom are associates of Townes. Only long after the fact, generally, will he let drop in a casual conversation the fact that he fielded a blistering phone call from one of his buddies, hearing them out but backing us up.

    Let me speak, finally, as someone who has both raised money from Solidus and worked for Solidus-backed enterprises over the course of the past decade. I arranged for the financing of the multi-author book John Egerton and I produced in 2001, Nashville: An American Self-Portrait. We (and by "we" I mean mainly Solidus) lost our asses on that high-minded venture, despite critical acclaim from Southern Living and the like. Not only has Townes Duncan not borne a grudge over that loss, but he hired me to help re-start NashvillePost.com in 2005.

    For much of the next two years, he and I worked out of the same office. Both while the book was coming together and while NP was re-starting, brainstorming sessions with Townes repeatedly led to major improvements in the product. The guy genuinely cares about editorial quality in a way that fits into his worldview as a venture capitalist: He sees good content as a strategic asset, one rising in value as its competition becomes shoddier. I wish those who are concerned -- quite legitimately -- about SouthComm's corporate ties could spend a little time talking through the media future with Townes and Chris Ferrell, whose vision derives in part from Townes.

  7. tennessee.gov/ecd/tninvestco/faq.html

    Q 6.6 – May a TNInvestco whose affiliates were previously invested (prior to the allocation date) in an otherwise qualified business make new qualified investments in that business out of TNInvestco funds?

    Yes, provided that the entity continues to fulfill its fiduciary duty to the program.

    Q 6.12 – Is a manager or affiliate of a TNInvestco permitted to be employed by a qualified business in which the TNInvestco makes a qualified investment? If so, are payments to the manager or affiliate by the qualified business treated as qualified distributions?

    A manager or affiliate of a TNInvestco is permitted to be employed by a qualified business in which the TNInvestco makes a qualified investment. Remuneration paid by the qualified business to the manager or affiliate is not considered to be a qualified distribution. However, if the TNInvestco compensates the manager or affiliate directly for services rendered to the qualified business, such compensation will be treated as a qualified distribution.

    Q 6.13 – If a TNInvestco affiliate performs interim management services for a qualified business, is the qualified business permitted to compensate the affiliate for such services?

    Yes. The qualified business is permitted to compensate the affiliate for services rendered, provided that such compensation does not exceed fair market value.

    Q 6.15 – May a qualified TNInvestco make a qualified investment in a company if the TNInvestco had previously invested in the company prior to being selected as a qualified TNInvestco?

    Yes, assuming that the company in which the qualified investment is made is a qualified business.

    Q 6.16 – May a qualified TNInvestco make a qualified investment in a qualified business, when the managers of the TNInvestco also manage a separate fund that is already invested in the same qualified business?


    Q 6.17 – May a fund make an investment in a qualified business, when the managers of the fund also manage a TNInvestco that is already invested in the same qualified business?