Report On The States: Best Of Show

Minnesota's tax and wage rates are well above tha national medians. But aggressive bank lending and investments by local SBICs make it one of the top states for capital resources. Such assets have boosted Minnesota to the October, #5 spot overall.

 

Capital: Leveraging the Local Assets

1. California

2. New York

3. Texas

4. Massachusetts

5. Minnesota

6. Colorado

7. Connecticut

8. New Mexico

9. Vermont

10. Illinois

Bankers and venture capitalists, no matter where they are based, like to argue that money finds its way to the good opportunities. If a project is worthy of support, the theory goes, it will receive the type of financing it needs. But a growing number of public officials are concluding that there are at least some promising local ventures that the private markets aren't discovering. Invoking the name of economic growth and diversification, some states, including Michigan and Louisiana, have each created their own new venture capital pools in recent months to spur in-state investments. In addition, more and more states are creating programs to guarantee debt and make direct loans to smaller companies.

The amount of funding being made available through such programs is tiny compared to what is possible through the banks. Based on banking industry data, commercial and industrial loans per capita in 1982 ranged from New York's $11,453 to South Carolina's $388, with the 50-state median at $1,078. But however modest the recent public efforts may be, their significance goes beyond their actual size. Even with relatively small programs, state officials are finding methods of unlocking important new sources of long-term debt and equity -- forms of capital most of the nation's banks aren't eager to provide.

Massachusetts and Alaska were two of the biggest innovators in the capital arena when they established an array of programs during the late 1970s to fill private-market "gaps." But the recent recession and declines in such major industries as auto, lumber, and energy have pushed other states to pay serious attention to the capital requirements of smaller companies. Over the past year, for example, auto-dependent Michigan has established a series of new programs to provide small businesses with, among other things, loan guarantees, equity-oriented investments from public employee pension funds, and debt and equity from the state's new strategic investment fund.

Montana, the 11th ranked state for capital, meantime, is making its own attempts to bankroll economic diversification away from a heavy dependency on coal mining and lumber. Under a newly adopted "Build Montana" package, small businesses can now apply for long-term, fixed-rate debt. The state has also authorized equity capital investments in small companies. This money could come from state employee pension funds from the state's coal tax trust fund. To encourage investors to create a larger pool of home-grown venture capital, moreover, Montana is offering state income tax credits of 25% to individuals and corporations supplying funds.

A similar program aimed at boosting the amount of local venture capital was signed into Louisiana law last July. Investors in the new state-chartered "capital companies" are entitled to state tax credits as high as 35% as long as at least 60% of the money they put up goes to Louisiana companies -- and none of it goes to such restricted areas as oil-and-gas exploration and real estate. Before adopting the program, state officials calculated that less than 1% of the nation's venture capital supply was finding its way to Louisiana companies. During the first year, the state hopes to spur investments of at least $20 million from private sources.

State support: Pennsylvania Steps Out Front

1. Pennsylvania

2. Kentucky

3. Michigan

4. New York

5. Illinois

6. Indiana

7. Massachusetts

8. New Mexico

9. Montana

10. Ohio

For the third year in a row, INC. surveyed the states to identify those that provide support through small business assistance offices, ombudsmen, and statewide small business conferences. INC. also conducted a 50-state inventory of standing legislative committees, governors' advisory councils, and formal procurement programs intended to encourage purchasing from small companies.

Last year's top three states -- Kentucky, New York, and Illinois -- continued to demonstrate firm support for small business by maintaining all five programs that were included in our survey. But significant actions by Pennsylvania and Michigan -- both of which established new legislative committees -- enabled these two struggling industrial states to earn positions October, 1983October, 19831 and October, 1983October, 19833, respectively. Another newcomer to the top 10, Indiana (October, 1983October, 19836), advanced in the support category, thanks to its creation of a new advisory council on small and young businesses.