Critics Slam Portland Seed Fund on Secrecy, Accountability

Thursday, December 11, 2014

Taya Alami, GoLocalPDX Reporter

While the City of Portland has invested $1.4 million of taxpayer money in new startup companies since 2011, city officials can’t say if those companies are profitable, have been sold off, or have moved to another state.

The Portland Seed Fund is a taxpayer backed venture capital fund that invests in startups in hopes of boosting the local economy. Since its inception, the fund has invested in 48 companies, including Cloudability, Honey Comb and Mobilitus. The fund itself is made up of a number of private investors and several public investors, including the Cities of Portland, Hillsboro and the State of Oregon.

The privately-managed fund, however, cannot publicly disclose data about the companies it has invested in, including information about which companies have failed, which are on the verge of failing, which companies are profitable, details of the companies’ outside investors or details on which companies are close to acquisitions.

The PSF and its arrangement with fund managers has come under fire in recent days. A report released last week by the Cascade Policy Institute slammed the fund for its lack of transparency and public oversight.

“It is not possible to determine whether the seed fund is earning money, despite the fact that it utilizes public funds,” the report stated. “The Seed Fund itself does not post which businesses are still open, and it’s fairly laborious to determine which companies still exist and which have failed or moved.”

John Charles, President of the Cascade Policy Institute, said the city should remove itself as a Portland Seed Fund contributor immediately.

“Someone has to know something here,” said John Charles, President of Cascade Policy Institute. “It’s public money.”

Angela Jackson, Seed Fund Co-Managing Director, said the reason that fund doesn’t disclose information is to protect companies, and comply with regulations put in place by the Securities and Exchange Commission (SEC).

“It’s our policy not to disclose private company data, which can be very sensitive and company-killing,” Jackson said. “They’re playing in a very highly competitive market. That kind of information in the wrong competitors’ hands could be very harmful.”

Critics were unimpressed.

“Well that’s convenient for them, I suppose,” Charles said. “That sort of implies the little people who pay taxes can’t be trusted with information on where it’s all going.”

Jackson said the fund is happy to aggregate and report information, as long as it’s done in a way that’s ‘company-blind.’

“We can tell people the number of failures, we can tell people the number of acquisitions; but I can’t say ‘company A failed, or company B was acquired by X for this much,’” Jackson said.

“Keep following the money, but at some point you can’t, because everyone has some plausible deniability in it,” Charles said. “That’s not going to fly.”

Jackson said that although the companies are partly funded with public money, she didn’t see a conflict with not disclosing the data.

“They’re not investing directly in a company, they’re investing in the Portland Seed Fund,” Jackson said. “Again, we don’t want to hurt the companies. That would defeat the whole purpose.”

According to Jackson, the fund follows SEC regulations that prohibit the disclosure of private company data to anyone who’s not an accredited investor.

“Everything that the SEC is doing is trying to make sure Bernie Madoff doesn’t sit next to your grandma in church and get all her money. They’ve got an elaborate way to do that.”

Charles said that’s not the taxpayer's problem and the fund should “let real investors worry about that.”

Some of Your Money, but None of Your Business

The purpose of the Portland Seed Fund was to create an environment where startups could succeed, according Chris Harder, the director of economic development for the Portland Development Commission, which oversees the project for the city.

The City of Portland contributed $700,000 to the first Seed Fund — approximately 23 percent of the $3 million in total capital. From the first fund, five companies have been bought out, creating a 20 percent return on investment for all the fund’s investors — $140,000 to Portland, Jackson said.

The fund typically invests $25,000 to $50,000 in a startup company and provides it with a number of perks. There’s no limit to how much money the city could potentially make if the fund’s investments are successful, according to Jackson.

Of the 48 companies that have received money, five have been confirmed flops and several others moved out of state.

Jackson said that Charles nor the Cascade Policy Institute reached out to the Portland Seed Fund prior to the publication of its report.

Harder said that fund managers do update the city, but most of the details are left to the fund managers.

“They give us a report every once in a while,” said Harder. “PDC doesn’t make investment decisions into the Portland Seed Fund. They then make decisions about number of companies that receive investment capital; they select them, they manage the investment process.”

When asked to respond to criticism that the Portland Seed Fund arrangement was too secretive, Jenn Lynch, a venture partner with with the fund, said, "I don't have to [respond]. Obviously, that’s their opinion.”

Public Benefit

Despite criticism of the fund, Portland Development Commission said the fund is a worthwhile initiative.

“More than 350 jobs have been created by these companies involved in the Seed Fund,” Harder said, “They’ve attracted more than $50 million in outside investments.”

The Seed Fund has also been the catalyst in creating a network of business mentors that the city hadn’t seen previously, according to Harder.

Sam Pardue, the founder and CEO of Indow, said that beyond investment capital, the Portland Seet Fund awarded his company some added credibility to attract more private capital.

“Even if you’re a really smart person — if you don’t know the ropes of fundraising, it can be an extremely daunting process,” Pardue said. “It’s been incredibly helpful to have them as allies.”

The companies who have received investment through the fund have attracted an additional $53 million in outside investment, Jackson confirmed. Approximately 75 percent of this money came from outside of Oregon.