State QUESTs for venture capital investments

South Dakota State Roundup

Published April 1, 1994  | April 1994 issue

Keeping investment dollars in South Dakota is the goal of a bill passed by the state Legislature in 1993.

QUEST, which stands for qualified economic stimulation, rewards banks that invest in venture capital funds by giving them a break on their state bank franchise tax, which is based on a percentage of a bank's profits.

QUEST set aside $2 million in bank credits for 1993, and new legislation, QUEST II, extends the original offer until all $2 million is used. While 17 institutions took advantage of the program in 1993, they were eligible for only $600,000 in tax credits. The new bill also offers mining companies gold tax credits if they invest in a capital venture fund.

The bills' sponsor, Rep. Pat Haley (D-Huron), says banks can claim credits over a six-year period, thus diffusing the impact on state revenues and allowing the investor to select in which year the tax credit would be most beneficial.

Haley's interest in creating a vehicle to stimulate venture capital investment was piqued when he learned that 90 percent of money invested by South Dakotans is invested outside the state. "It's important to invest South Dakota dollars in South Dakota," Haley says.

That's a sentiment shared by Don Frankenfeld, the founder and president of South Dakota's first and only venture capital fund, Dakota Ventures. When Dakota Ventures was established about three years ago in Rapid City, it drew commitments from a few banks, but not enough to move forward, Frankenfeld says. With QUEST providing the incentive for banks, Dakota Ventures now has the resources to invest in value-added agricultural businesses and small manufacturing operations. "We're looking for businesses that create primary jobs," Frankenfeld says, "and products or services that are consumable outside the state."

Dakota Ventures is most interested in investments in rural communities and on or near Indian reservations, Frankenfeld says. Not coincidentally, most investors to this point are banks in small and medium-size communities. Charles Eckstrum, president and CEO of First National Bank in Philip, says his bank invested for a number of reasons, including the fact that large communities are not participating in this fund. He also says that participation in a venture capital fund with such a strong economic development focus is one way for his bank to meet Community Reinvestment Act responsibilities.

Frankenfeld sees Dakota Ventures as a prototype. "The dream here is to do something reproducible," he says. "What we will do is a drop in the bucket of capital need."

Kathy Cobb