Mitch Daniels and State Government and Scott Jones and 21st Century Fund and Politics and Government & Economic Development

Jones calls quid pro quo insinuation 'ridiculous'

November 26, 2007

For a preview of how Indiana's 2008 gubernatorial election will play out, look no further than the emerging tussle over entrepreneur Scott Jones' $4 million in awards from the state's 21st Century Research & Technology Fund.

In September, Jones' automatic-lawn-mower business, Precise Path Robotics, landed $2 million from the fund, which doles out awards to spur high-tech job growth. On Nov. 14, Jones announced his human-assisted Internet search engine startup ChaCha had attracted $2 million of its own from the program.

In between, on Oct. 9, Jones held a highly publicized political fund-raiser at his Carmel mansion for Gov. Mitch Daniels, generating more than $1 million in contributions for the Republican's re-election war chest.

Indiana Democratic Party spokeswoman Jennifer Wagner is making political hay out of the time line. Her blog, www.takingdownwords.com, has hosted a scathing public discussion, questioning whether there's a connection between Daniels' campaign cash and Jones' 21st Century Fund awards.

She also questioned whether a wealthy businessman like Jones needs this type of help, or if it should be reserved for entrepreneurs who lack his financial firepower.

Thus an election issue was born. And now it's being test-marketed online.

"Isn't it just a bit too convenient that Jones raised a million smackers for the Guv and then got twice as much in return?" she wrote in a typical Nov. 14 post titled, "Double the Fun: A Million Bucks for the Guv, Two Million for ChaCha."

Indiana Secretary of Commerce Nathan Feltman, whose Indiana Economic Development Corp. oversees the 21st Century Fund, bristled at Wagner's suggestion of political favoratism.

Every applicant--including Jones--has to go through the same rigorous process, one with numerous checks and balances, Feltman said. He called the idea of quid pro quo between Daniels and Jones impossible.

"From day one, we've operated this place as a business and never have or would make any decisions based on campaign contributions," he said.

Since its inception in 1999, the 21st Century Fund has used a selection process modeled after one in place at the federal government's National Science Foundation.

To help ensure that only the best ideas get money, applicants are first considered by panels of independent scientists from other states. Karl Kohler, the 21st Century Fund's deputy director--and a holdover from the O'Bannon-Kernan administration--still oversees the makeup of the panels.

Under Daniels, IEDC introduced a new layer of scrutiny: a business case analysis. Applications that survive the technical litmus test then are assessed internally by IEDC for commercialization prospects.

The state weighs such factors as job potential, market risk, existing competition and strength of management. IEDC's Entrepreneurship Committee, a subset of its board of directors, makes the final call, then forwards picks to the Indiana General Assembly for ratification.

"We look not only at the idea, but also at the management team," said Sally Rushmore Byrn, one of the four members of the Entrepreneurship Committee.

The "bottom line" is an applicant's potential to create lots of high-paying jobs, said Byrn, CEO of West Lafayette-based contract research firm SSCI Inc. "And that comes back over and over again."

Opinions split

Campaign finance watchdogs disagree whether the awards to Daniels' highest-profile supporter in the business community are cause for concern.

Stefanie Miller, executive director of Common Cause Indiana, called the situation "fishy."

And she noted that the awards aren't the only way the Daniels administration has supported Jones' efforts. The ChaCha search engine this year was embedded into the state's Web site, www.in.gov.

"He who pays the piper calls the tune," Miller said. "This is a perfect example of why our campaign funding system should be changed. Big money buys access and influence. It makes citizens cynical that the government is all about favors for big campaign donors."

But Edwin Bender, executive director of the Montana-based National Institute on Money in State Politics, said the selection process appears sound.

"It seems like [Jones is] a guy that's just offering some good businesses. He does have political connections, but that's not against the law," Bender said.

"I don't see any major evidence of a quid pro quo here. There's just too many in-betweens. I think someone's trying to make something where there's maybe not a whole lot. But that's politics."

Voice mail pioneer

Jones, 47, is best known as the co-inventor of voice mail. In a recent Forbes Small Business magazine article, he estimated his net worth at $150 million. In Indiana, his businesses have included investment fund Gazelle TechVentures and consumer electronics firm Escient Technologies.

Jones said the idea that ChaCha and Precise Path's awards were payback for his Daniels fund-raiser is "bordering on ridiculous."

"I don't know how anyone would make a correlation," Jones said. "It's like a, 'Have you beat your wife lately?' allegation."

The 21st Century Fund awards to Jones represent about 6 percent of the $66 million the program has doled out since Daniels became governor in 2005. The average size of the 52 awards under his administration has been $1.26 million.

IEDC requires recipients to pay back awards, plus a portion of their financial gains, if they successfully reach an "exit event," such as an initial public offering or change in ownership. If the companies fail, the 21st Century Fund's loss is forgiven.

Discouraging entrepreneurs?

The 21st Century Fund is far from alone in identifying Jones as worthy of substantial financial backing.

Including his own money, Jones now has raised $14.5 million in equity capital for ChaCha. Precise Path has attracted about $1 million from investors.

Jones' track record of entrepreneurial success gave him a boost during IEDC's due diligence, which he called "grueling."

But now Wagner is using it as ammunition against him.

"ChaCha already has attracted some big-name investors, including Jeff Bezos of Amazon.com and Rod Canion of Compaq, and Jones supposedly has tons of money," she wrote in her original Nov. 14 blog post.

"Should we be spending 21st Century funds on that kind of heavily backed project when other new companies might need the money more?"

Jones said he sought 21st Century Fund awards because startups often need lots of outside cash before they're profitable. He said he could have raised more from outside investors, but doing so would have meant giving outsiders larger ownership stakes.

Give up too much, and it won't be long before outside investors begin pushing ChaCha and Precise Path to move elsewhere, Feltman said.

"A big function of the [21st Century] Fund is to ensure that our best innovations and opportunities don't leave the state," he said. "Lots of venture capital funds require innovations to move."

'Blood, sweat and tears'

The dustup over Jones' awards disgusts angel investor Bob Compton, a Memphis resident who co-hosted the Daniels fund-raiser at Jones' mansion.

"It is damn hard to build a company in the first place without having political peons shooting at you," said Compton, who has invested in some of Indiana's most successful high-tech firms but is not involved with either ChaCha or Precise Path. "People on both sides of the aisle ought to be cheering every day for people like Scott Jones, entrepreneurs who put at risk their money, blood, sweat and tears."

Such comments might further fan the political fires. Democrats' general strategy for the governor's race is to cast Daniels as an isolated autocrat, in the pocket of big business and out of touch with everyday people.

The leading contenders for the Democratic nomination are Jim Schellinger, an Indianapolis architect, and Jill Long Thompson, a former congresswoman from northern Indiana.

Wagner, of course, hopes the controversy helps put one of them in office. She said her role is to be the "loyal opposition," raising provocative questions, even if she doesn't always prove the answers.

"I work in politics. I don't know if there is any connection. But this is an area that is all about perception," Wagner said. "I pretty much just posted it to throw it out there: 'Doesn't this look a little bit cozy?'"

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