July 18, 2018

After years in development, a public-private partnership has created an investment fund for early and growth-stage companies that aims to reach $30 million.

South Dakota Equity Partners has closed its initial fundraising, which reached $16.9 million, and is preparing to make its first investments.

The goal is to invest in a variety of projects, primarily research commercialization and knowledge-based companies, said Gov. Dennis Daugaard, who began discussing the need for such a fund almost seven years ago and ramped up efforts starting in 2015.

“It’s definitely a gap we see. We just haven’t had more venture capital available, especially for early stage companies,” Daugaard said.

“The economy increasingly is being driven by software development and biotech and knowledge, which in many cases does not involve a lot of physical assets,” he added. “And most of our economic development tools are debt financing that require physical assets for security.”

Many of the investors in the initial fund are banks, which can use their investment for Community Reinvestment Act, or CRA, credits, as well as individuals.

The state is a partner through a new nonprofit, Enterprise 605, which is governed by a board of business and community leaders and tasked with investing at least 90 percent of its funds into a private equity fund such as South Dakota Equity Partners. The state ultimately will contribute $7 million to Enterprise 605 through its Future Fund.

“We have no say over what companies are chosen for investment,” Daugaard said. “That’s important because we looked at other states and that’s been one error states made when they created funds like this. It became political.”

Daugaard is optimistic South Dakota Equity Partners will be certified by the SBA, which he said will give banks plenty of confidence they can invest and receive CRA credits.

South Dakota Equity Partners is governed by its own independent board and will invest only in companies in South Dakota. The partners also will work with management teams and employees of the portfolio companies to grow the businesses. Any return on the investment as a result of the state’s grant will be reinvested in future equity funds and not returned to the state.

“The fund is more than halfway toward its $30 million goal, and I am optimistic we’ll get there,” said Blaine Crissman, a partner in South Dakota Equity Partners.

The fund is building a strong pipeline and talking to more than 10 businesses about potential investment, he said.

“We began marketing the fund a year ago, and the interest from companies is growing,” Crissman said. “We’ll continue to travel throughout the state meeting with attorneys, accountants, bankers, economic development people (and others) to educate the market on our investment strategy.”

Investments will range from $250,000 to $3.5 million. Investment size will depend on the company’s stage, capital requirements and growth, he said, with smaller amounts being invested in newer businesses and the potential to add to the investment later. South Dakota Equity Partners is looking for “growing companies with solid management teams and defensible, proven products and technology,” Crissman added.

“We are in diligence on several Series A earlier stage opportunities in biotechnology and software,” he said. “We are in discussions with an ag technology company and one financial technology company. We are also talking with several niche manufacturers that are growing rapidly and in need of growth equity.”

The first investment is expected to be funded in the next few months, Crissman said.

“Virtually all of the company we are talking with have raised angel or earlier stage capital but have had difficulty raising a Series A or growth equity,” he said. “There are few equity investors interested in investing with South Dakota companies.”

But it’s important to offer equity in the state as a way to grow future large employers from the ground up, Daugaard said.

“It’s hard to get a very successful company to move their headquarters and operations to South Dakota because they have the workforce and invested assets (elsewhere), but if we can grow them in South Dakota, the likelihood they will leave is very small because our tax and cost environment are so good and our work ethic is so good,” he said.