STATES ARE SPENDING MORE time planting seeds these days.For years, they competed to lure companies that were shopping for new locations. Now, they are also stimulating the formation of seed capital -- the hard-to-find investments that companies need to get started.
Almost half the states have seed-capital programs, compared with fewer than 10 in 1983, according to Miles Friedman, executive director of The National Association of State Development Agencies. Unlike companies that move wherever they get the best deals, says Friedman, "homegrown businesses tend to stay put," contributing to economic stability.
Most programs depend heavily on the private sector. Montana offers income-tax credits and matching funds, a move that stimulated the formation of the second venture capital fund in the state's history in March.
Other states are appropriating money and then chasing after private investors. Pennsylvania is setting up four funds with $3 million raised through a bond issue, plus $9 million from private sources, most of which have never invested in seed capital before. Illinois committed $2 million, and now Frontenac Venture Co., a Chicago venture capital firm, is raising an additional $8 million from big Illinois companies. Frontenac, which will manage the new fund, also invested $5 million. A professional manager such as Frontenac provides expertise and helps insulate programs from political interference.
The mixture of public and private money in the same fund, though, could cause conflict over objectives. Fred Beste, president and chief executive officer of a Pennsylvania fund, is aiming for a 20% to 35% annual return. But the state, which will reinvest any profits, has different goals. "Our rate of return is going to be in the number of jobs created and new start-ups," says Cindy Bowes, a Commerce Department spokeswoman.