Proponents of the program say it was an innovative attempt to steer venture capital toward economic development priorities like health care, bioscience, music and other sectors. As the Business Journal reports today, some Republicans are questioning the program’s job creation so far and want to evaluate other aspects of its financial performance.
Any audit should first understand the incentives. To do this, lets run through some scenarios. This is what is called a "sensitivity analysis."
Compare the (very approximate) terms of a typical Venture Capitalist (VC) to those of TNInvestco under the following scenarios:
- Scenario A: Good Scenario (Invest $20 million, sell investments for $50 million)
- TNinvestco gets $25 million, State gets $25 million
- Typical VC gets $6 million, investor gets $44 million
- Scenario B: Break-even Scenario (Invest $20 million, sell investments for $20 million)
- TNInvestco gets $10 million, State gets $10 million
- Typical VC gets zilch, investor gets $20 million
- Scenario C: Worse-case Scenario (Invest $20 million, sell investments for $10 million)
- TNInvestco gets $5 million, State gets $5 million
- Typical VC gets zilch, investor gets $10 million
Bottom line, TNInvestco creates incentives for the managers to not lose money, as opposed to the high level of risk taking that is typical to venture capital. One would expect safer investments.