By Bill MacKenzie

When others are playing with bright and shiny things, it can be tempting to bend the rules to join the game.

A case in point — the city of Hillsboro’s decision to succumb to the allure of venture capital investment.

In 2009, some local investors began advocating a city of Portland fund that would make venture capital investments in local startups.

Portland Mayor Sam Adams and the Portland Development Commission(PDC) were enthused by the idea, but the Oregon constitution prohibits cities

and counties from investing directly in for-profit companies. As the saying goes, however, “where there’s a will there’s a way.”

The PDC came up with an end-run — have Portland’s contribution go to a fund created by the non-profit Oregon Entrepreneurs Network (OEN). Then pick a firm to manage the money as the Portland Seed Fund and make OEN a limited partner in the fund. That way, any return on investment in startups would go back to OEN, not the city of Portland. In 2010, Portland announced it would make an initial contribution of $500,000 — later expanded to $700,000 — and a search began for additional donations and investments. One target — the city of Hillsboro.

In January 2011, officials with the Hillsboro’s Economic Development Department brought the concept to the Hillsboro City Council. The fund would provide seed capital to entrepreneurs, they said, helping to fill early funding gaps for new companies and increasing the job creation prospects for startups.

The officials said their department had already budgeted $250,000 for the seed fund, with the money to come from fees generated by the city’s Enterprise Zone program.

Because Hillsboro was subject to the same prohibition on investing in for-profit companies as Portland, Hillsboro would follow the same circuitous route. Its money would go to the Portland Seed Fund and investment decisions would be left to the fund managers.

“The city of Hillsboro is interested in supporting entrepreneurship and business growth in the Portland region and in Hillsboro specifically,” the officials told the city council. “We anticipate that the proposed seed fund will ultimately generate considerable business investment and job creation in Hillsboro.”

The city council approved the seed fund donation without public discussion.

Venture capital has played a major positive role in innovation, but if its intent in this case was the fertilization of some startups in Hillsboro, the results have been dismal. Of the 36 startups receiving money from the seed fund so far, only one was located in Hillsboro.

That company, Good Works Now, Inc., was developing Cloud-based tools for non-profits to modernize how they manage fundraising, boards and online reputation. In late 2012, the company collapsed, and the seed fund wrote off its investment.

Looking forward, there are no guarantees Hillsboro will see any direct benefits from the seed fund. That’s because no investment recipient is obligated to invest in Hillsboro, and there is no guarantee that any startup supported by the fund in the future will do so.

Hillsboro also won’t get a payoff if a startup becomes wildly successful.

A venture capital fund stands to make money by owning equity in the companies it invests in when the companies are sold or go public. But Hillsboro’s $250,000 was a donation, not an investment in the fund.

Other American cities, including New York and Philadelphia, are heading down the same venture capital route, but not to universal acclaim. Critics assert that private venture capital firms will find promising startups without government interference.

“The question is whether it’s justifiable for government to be involved,” Gary Kunkle, founder and CEO of Outlier, a research firm focusing on innovative approaches to nurturing and retaining high-growth companies, told Inc. Magazine recently. “Markets take care of themselves much more efficiently than governments want to give them credit for.”

Portland economist Bill Conerly agrees.

“Portland would do best creating a good business environment for all companies, big or small, startup or established …” he recently told me. “The idea of city money for seed capital is simply corporate welfare done in small pieces.”

In 2009, Brad Jones, an executive of the Redpoint Ventures investment firm, wrote to President Barack Obama’s economic adviser, Lawrence H. Summers, questioning the wisdom of the government’s $535 million loan guarantee to Solyndra, a solar cell manufacturer.

“I can’t imagine it’s a good way for the government to use taxpayer money.” Jones said.

“I relate well to your view that gov. is a crappy v.c.” (venture capital investor),” Summers wrote back.

In 2011, Solyndra went bankrupt.

The Portland Seed Fund is now raising money for a second round of startup investments. The city of Hillsboro should sit this one out.

Bill MacKenzie is a former congressional staff member, newspaper reporter and communications manager for a Hillsboro company.

Originally published in the Hillsboro Tribune,  May 3, 2013