Washington state's getting into the venture capital business.

The state's underwriting a new venture capital fund affiliated with the University of Washington, to provide early stage funding for startups based on research from the UW and other state schools.

Called the W Fund, it's one of three business credit initiatives being funded with a $19.7 million federal grant that the state's announcing today. The federal funding is from the U.S. Treasury's $1.5 billion Small Business Jobs Act of 2010.

"About 95 percent of Washington businesses are small businesses and they need help right now to grow and provide the jobs that will accelerate economic recovery in every community around the state," Gov. Chris Gregoire said in the release.

Loans provided by the program should help create 4,000 to 8,000 jobs over the next five years, according to Rogers Weed, director of the state Department of Commerce. He said the money will be leveraged to generate around $300 million of total lending and more than 1,000 loans or investments made.

"Innovative small businesses are critical elements in rebuilding our economy, but they have struggled to have access to capital," U.S. Rep. Rick Larsen said in a release following the announcement. "Now they will have access to the resources they need to grow, getting people in Northwest Washington back to work."

Washington's dividing the grant between three programs:

- The Craft3 Small Business Credit Initiative, an organization formerly known as Enterprise Cascadia. It will provide loans of $1 million to $5 million to small businesses in "underserved communities, Indian country and to women- and minority-owned businesses." It's getting $8.7 million of the federal grant.

- Capital Access Program Fund, or CAP, which is run by the state Department of Commerce. It will "facilitate" bank loans in the $50,000 to $100,000 range to small businesses that have had difficulty getting capital to grow and create jobs, by providing insurance to banks extending credit to small businesses. It's getting $6 million of the grant.

- The W Fund, which will be managed by Linden Rhoads, vice provost for commercialization at the UW. With contributions from private investors such as venture firms, the fund is expected to have $25 million or more available to lend. It's getting $5 million of the grant.

The W Fund is expected to run for five years, making investments of $250,000 to $500,000 in companies in areas such as life sciences and information technology. Rhoads said the fund will begin considering investments in February.

Companies receiving W Fund investment won't have to provide equity stakes, like they would if taking funding from angel investors or private venture firms. So what's the return to the state from the fund?

"We'll get more companies starting up out of our research bases ... I think the view is that's the primary benefit," Weed said.