Imagine if entrepreneurs, VC firms and corporations worked together from start: That’s what N.J. Innovation Evergreen Fund aims to do

EDA’s Coviello explains why closed-loop initiative, which got capital funding right before holidays, is unique — and could be transformative

In more than three decades of work at various organizations involved in investing in startups — time spent at the New Jersey Economic Development Authority, in numerous banks in the private sector and as part of the investment firm, Golden Seeds — Kathleen Coviello has seen more than her fair share of initiatives aimed at assisting entrepreneurs.

“I’ve been around this block a few times,” she jokes.

Kathleen Coviello. (File photo)

So, when Coviello says the New Jersey Innovation Evergreen Fund is unlike anything she has ever seen — an initiative that could have dramatic impact on the entrepreneurial ecosystem in the state — it’s worth getting a few more details.

Coviello said she feels the Evergreen Fund is unique in that all parties in the entrepreneurial ecosystem will work together — from the startups to the venture capital firms that want to invest in them, to the private sector companies that want to use or acquire their products, to the state, which wants to create an atmosphere that will attract additional high-tech, high-value startups.

“All of these pieces worked in silos before,” she said. “The Evergreen Fund closes the loop and builds the startup community. It brings everyone to the table.”

More than that, the Evergreen Fund is set up to be self-sustaining, as the funds the state invests will (hopefully) be reinvested after the companies succeed.

“We never had anything like that before,” she said.

The Evergreen Fund had a milestone moment right before the holiday break, when the board of the EDA approved the sale of $50 million in tax credits that will help fund the program.

If you missed it, here’s a Cliffs Notes version of the Evergreen Fund and where it stands now:

  • Raising funds: The sale of tax credits (at auction), which will fund Evergreen, proved to be even more profitable than the state hoped. The state had agreed that the minimum bid would have to be 75 cents on the dollar. It came in at 82 cents. This auction, which raised $41 million to be used in the fund, is the first of many over the next 5-7 years. The state intends to auction off $600 million in credits.
  • Building the community, part I: As part of the winning bids, corporations in the state (Comcast, Verizon and Cross River Bank were the three largest) had to present proposals for how they will help the entrepreneurial ecosystem in other ways, such as helping to fund accelerator programs or support classes that teach science, technology, engineering & mathematics or entrepreneurship.
  • Building the community, part II: The EDA is now accepting applications from investment firms to be considered “Qualified Venture Firms” — meaning they would be certified for participation in the Evergreen program. This designation will enable the firms to have up to $5 million of their investment be matched by the state through the fund. The EDA will then be eligible for a return on its investment down the line.

Still don’t get it? Don’t worry, we peppered Coviello with questions. Here’s a look at the conversation, edited for space and clarity.

ROI-NJ: How important was the auction of the tax credits?

Kathleen Coviello: It was huge. It was a big, big day. It takes us from idea to reality. It was the first — and, I think, the biggest — hurdle. It’s now behind us, and successfully so.

ROI: The EDA seemingly rolls out a new economic development program every month. Explain why the excitement and energy around Evergreen is so great?

KC: Think of it this way: An entrepreneur has to build a business, fund the business and then sell the business — either through (mergers & acquisitions) or an (initial public offering). That’s the cycle of life in innovation and venture. But, how do you build a community that makes all of that happen and proliferates wealth to the folks that build those businesses — and makes them serial entrepreneurs so that they do it again in the state?

That’s what Evergreen can do. And I think this is a really important building block for that to happen.

ROI: How so?

KC: It brings everyone together. When I was in the private sector, working with small entrepreneurial startups, they would always say to me, ‘I want to sell my product to Company X — if you could just get me in to see them, I know I could make the sale.’ And then, we’d talk to them and discover the startup didn’t have exactly what Company X wanted.

It was the same thing with the VCs. They wanted to talk to Company X about having them buy their portfolio — only to discover that Company X was looking for something else.

So, we’re having these isolated conversations and not always getting to what everyone wants.

ROI: How will the Evergreen Fund change this?

KC: We’ll be creating a closed-loop ecosystem. Everyone is going to be at the table — Company or Corporation X, the VC community and the entrepreneurial community. We’ll be building this ecosystem from all three legs of this stool: The large technology companies in the state that are looking to acquire services or companies, the venture capitalists that want to invest in these companies and then sell these companies, and the entrepreneurs. They all will be talking.

In my mind, that’s the secret sauce — this closed loop.

When you think evergreen from a financial perspective, you always think about recycling funds, but, here, it’s recycling the innovation amongst those partners in the state.

ROI: Let’s go through the partners — and how they help entrepreneurs. Comcast, Verizon and Cross River Bank were the biggest buyers of tax credits. What do they get for that?

KC: The bidders in the tax credit auction get a reduction in their New Jersey corporate taxes (in this case, they are paying 82 cents on the dollar). But, they’re also going to support the innovation ecosystem in the state, which they ultimately could benefit from. Take Cross River Bank, for example. They’re going to support the accelerator program that TechUnited is standing up. If you have a software company, you could be part of that accelerator program, so this could be your on-ramp to be part of this community of corporations, investors and entrepreneurs.

ROI: How about the VC firms?

KC: The other on-ramp for the entrepreneur is funding. Now, entrepreneurs can get funding from approved venture capitalist firms — and those VC firms will have the capacity to double their investments in New Jersey companies by drawing matching capital (up to $5 million) from the Evergreen Fund. They will then manage the state’s investment.

The VC firms will be at the same table as the companies who are supporting the Evergreen Fund, so they will get to hear firsthand what types of acquisitions that company or corporation is looking for and what types of problems it is trying to solve. Now, the VCs can manage their investment portfolio in a specific way if they’re looking for an exit through that company or corporation.

ROI: OK, let’s talk about the exit — and who profits. If a VC firm is using some state money to invest, how do they divide any profits?

KC: When the VC invests in a company, they’re cutting the deal to determine how much ownership they’re going to take. It could be 90%, it could be 10%, or seemingly anywhere in between, depending on the deal they have made.

The state’s match of the profits will match the terms the VC gave to any other investor, based on how much money the state put in. So, if the VC put in $5 million and the state put in $5 million, it would be a 50-50 split.

The state will then put that profit back into the fund, helping qualified VC firms invest in other companies.

The hope is that entrepreneurs, seeing that they get more investment here than in other states because of the state match, will start their next company here.

ROI: We’re seeing the win-win-win in all of this.

KC: That’s the reason for all the enthusiasm. The state could have just written a check and said, ‘Go invest $50 million.’ But we would have been missing that engagement and community-building.

We said to our strategic partners: ‘Do something more than just get a discount on their taxes to give us the capital to invest.’ We wanted them to do something bigger to contribute to this community.

What we heard from our strategic partners is having that seat at the table is critical for them. And what we heard from the VC market is that having that integration is really valuable for them. They said: ‘This is awesome. We’re always trying to figure out who’s going to be the buyer.’

This starts that dating process very early. It’s almost like the VCs are the matchmakers.

To me, that’s what is so exciting about this. There are so many interlocking pieces. It really is about building that entire ecosystem and community to the benefit of the state.

ROI: Let’s talk about the state benefits. A naysayer could say the state not only is reducing the amount of tax it is collecting — but it’s not even putting that smaller amount in the tax collection bucket.

KC: They absolutely could say that. As a New Jersey taxpayer, they have every right to say, ‘What am I getting for this investment?’

I’d say this: The legislation put a floor of selling the credit at 75 cents on the dollar. We’re already coming back at 82 cents. And then, when we add in the strategic piece, it’s over 90 cents. So, we’re taking a 10% haircut on tax credits.

We’re then investing that money in a low market. And any good venture investor will tell you that’s where you get the best value and reap the best returns.

But, it’s more than that. Rather than going back to the state coffers every year and saying, ‘I need $50 million to invest in innovation,’ the Evergreen Fund should make money to support continuing innovation, so that we don’t have to keep going back.

From a financial return perspective, that’s what I’d be looking at. That’s why this is so unique.