San Jose first to dip toes, dollars in VC pool

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By Timothy Roberts - Silicon Valley / San Jose Business Journal /

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Everybody wants to find the next eBay Inc. Even the city of San Jose is getting into the game.

It's a long shot, but the San Jose City Council voted unanimously Nov. 14 to create a $3 million fund that it will invest in local companies that it hopes will go on, in the long run, to create wealth and jobs -- in San Jose.

San Jose apparently would become the first city in California to get into the venture capital field and probably the first in the nation. Neither the League of California Cities nor the National Venture Capital Association could name another city that's gotten into the business.

That puts San Jose on the cutting edge of investing -- and ethics. The program is a page from the history of failed state-run economies, and it raises questions about using tax dollars to support hand-picked businesses.

The city hopes to avoid conflicts by working with a partner, Pacific Community Ventures of San Francisco, to do the picking and to leverage the city's money. The non-profit will match the city's investment 5.7 to 1.

The city's Office of Economic Development would not comment for this story. Spokesman Steven Brewster said he wanted to wait until he could write a press release on the issue and that couldn't be done until the office had returned from a week-long Thanksgiving holiday. Pacific Community Ventures said it would make someone available to talk about the program, but did not.

Mayor-elect Chuck Reed says the investment program is a variation on a loan program that the city has had.

"Basically it is a small-business loan program," he says.

The staff will make the decisions on what companies to invest in.

"There will be no hint of political involvement," he says. "It will be part of my job and the manager's job to make sure these decisions are made on the merits and not on politics."

The big issue that arises is the use of taxpayer money to invest in businesses, says Bill Whalen, research fellow at the Hoover Institution. A similar issue came up in connection with Proposition 87 this year. That measure would have taxed oil production to create a venture capital fund which would invest in green energy development. Voters said no thanks.

"The question is taking out bonds and using those bonds to benefit specific industries and the people holding the bonds," Mr. Whalen says. "It's a conflict of interest."

Private venture capital investors are unlikely to feel threatened by the small investments that San Jose will be making, says Mark Heesen, president of the National Venture Capital Association.

He finds San Jose's idea interesting, in part because of the city's proximity to a lot of venture capital activity.

"There are more entrepreneurs and more fundable ideas in San Jose than anywhere else in the country," Mr. Heesen says. "If there's a place where a program like that could have success, it would be San Jose."

But he also warns that investments usually fail.

"The success factor is not going to be very high, but success (when it occurs) could be quite dramatic," he says.

Pacific Community Ventures has invested primarily in businesses that would employ people in low-income areas. According to information on its Web site, the non-profit looks for companies that have 10 to 100 employees and experienced management teams.

These companies have annual revenues of at least $5 million and have "clear paths for growth," according to its Web site.

Speaking to the city council Nov. 14, Paul Krutko, San Jose's director of economic development, said the city will be looking for "gazelles," companies that could rise to become significant employers.

Although he questions government involvement in investing, Mr. Whalen says the city will be "tapping into a very bright community. Any time government turns away from bureaucrats and toward private investors, it's probably better."

TIMOTHY ROBERTS covers public policy, corporate governance and Internet security for the Business Journal. Reach him at (408) 299-1821.