It’s taking some time to get up and running, but Gov. Phil Murphy’s long-envisioned plan to establish a new state fund to invest in promising New Jersey-based startups has taken a big step forward.
The formal establishment of the Innovation Evergreen Fund was approved by the board of directors of the state Economic Development Authority during a vote held last week.
The new fund will be seeded with cash raised from the auction of state tax credits, with the first auction expected to be held by the end of summer. The plan envisions that about $250 million can be raised as seed money over five years. From there, the state plans to partner with venture capital firms that will also be expected to pitch in matching dollars — pushing the total potential investment to $500 million, or more — all to help nurture small, New Jersey-based startup companies with high growth potential.
The idea is to use the fund to help a promising company get established and potentially take off — all in New Jersey. While there’s still work to do, the fund’s first investments could occur before the end of the year, said Tim Sullivan, executive director of the EDA.
‘If we do it really, really well, and we help find the next Fortune 500 company that grows out of nothing, it could be a big win for the budget, but that is definitely years away.’
“It’s helping companies and helping business plans, that, maybe it’s one or two people today, maybe it’s five or 10 people today, that could be 5,000 or 10,000 people in 10 years,” Sullivan said as he discussed the new initiative during a recent interview.
The hope is jobs will follow
“The biggest outcome here is hopefully job creation,” he went on to say.
To be sure, venture capital investing is inherently risky, and not every company the fund invests in will be expected to succeed.
But Sullivan said there’s also a potential for the fund to generate some big returns, with taxpayers, serving as early investors, sharing in the upside. Under the 2021 law that created the fund some of the fund’s proceeds could eventually be funneled into the state budget’s General Fund.
“If we do it really, really well, and we help find the next Fortune 500 company that grows out of nothing, it could be a big win for the budget, but that is definitely years away,” Sullivan said.
Murphy, a second-term Democrat, first proposed the fund in October 2018, as he put forward a broader plan to reform the state’s economic-development tax-incentive programs. The programs administered by the EDA during former Gov. Chris Christie’s tenure, had come under fire for providing millions of dollars in tax breaks to big corporations for little in return in terms of new jobs or other net economic benefits.
A former Wall Street executive, Murphy called for a more targeted approach to economic development at a time when the state’s existing tax-incentive programs were perceived as being too heavily tilted toward serving the needs of big corporations.
Murphy wants ‘innovation’ economy
Among other goals, Murphy said the state should be doing more to promote startups, tech companies and other elements of the “innovation” economy. And by partnering with venture capital firms, he said New Jersey would be changing its “mindset” when it comes to incentivizing economic development.
However, Murphy’s reform proposals were initially given a cool reception in the Democratic-controlled Legislature. It took until late 2020, the first year of the COVID-19 pandemic, for lawmakers to advance legislation that grew out of the governor’s 2018 economic development plan.
‘That’s kind of the point. Who had heard of Tesla before Tesla was Tesla?’
Among the new or overhauled programs that were authorized in the final draft of legislation that Murphy signed into law in early 2021 was the establishment of the innovation fund. From there, the task fell to the EDA to come up with ways to turn the complex concept into a reality.
By the end of this year, Sullivan said he’s hoping the state will have held its first tax-credit auction and be in a position to make the first investment in an unknown, fledgling New Jersey company that has the potential to grow into the next Amazon or Tesla.
“That’s kind of the point,” he said. “Who had heard of Tesla before Tesla was Tesla?”
‘There’s going to be some home runs, but there are going to be some strikeouts.’
Under the plan approved by the EDA’s board, the state will raise an estimated $250 million over five years by holding annual auctions where bigger corporations will be able to purchase state tax credits that will provide the seed money for the fund. To participate, the corporations must first agree to work with the state to support its innovation goals, including through mentoring, internships and making someone available to serve on the new fund’s advisory board.
NJ attracting investment dollars
New Jersey has made some strides in recent years in attracting more venture capital investments after falling out of the top 10 among U.S. states before Murphy took office in early 2018, according to the EDA. And while the companies that receive funding through the new program will have to be based in New Jersey, the venture capital firms themselves can be located anywhere.
Some other states and big cities have also emphasized venture capital as part of their own economic development initiatives.
But Sullivan said New Jersey’s approach is a “first-of-its kind” in the nation by featuring “this kind of mechanism of partnering with big companies.”
“Across the portfolio, I’m really confident and optimistic that we’re going to do really well, both from a job-creation perspective and a financial-return perspective,” Sullivan said.
“But venture-capital investment is not a sure thing. There’s going to be some home runs, but there are going to be some strikeouts . . . some make it big, and some don’t make it at all,” he said.
