By Tom Still

MADISON – In the August edition of “Inc.,” anchored by a photograph of Wisconsin entrepreneur Beth Donley, is a story on programs in Wisconsin and a few other states to connect investors to promising start-up companies.
Two weeks before the Inc. story hit, the State of Wisconsin Investment Board issued its first-ever white paper on Wisconsin’s private equity landscape and concluded the state “is closer than ever to forming the critical mass necessary” to grow its venture capital culture.

A few weeks before that, a report on private equity financing in Wisconsin showed total early-stage investments reached $146.9 million in 2007, up 43 percent from 2006.

The streak is no accident. Years of hard work and coordination at the public and private level is finally paying off for Wisconsin’s entrepreneurial and investment communities, which are providing much-needed momentum in a state economy that has felt it share of pain.

As much as the progress is being noticed by Inc., SWIB and others nationally (the Venture Capital Journal and Forbes have also recently focused on Wisconsin’s efforts), the gains remain tentative. There are ways the state can still mess this up.

A little more than three years ago, the state Legislature worked with Gov. Jim Doyle to create a new category of tax credits for investors who took a risk in qualified start-up companies, mostly in the high-tech sector. The program has worked by encouraging the investment of much-needed capital into emerging companies that have a chance to produce wealth and jobs for Wisconsin’s economy.

But the program was dramatically under-funded, given its value to Wisconsin’s growth economy and the investment capital that sector attracts. For every $1 in state tax credits provided to investors, the effort reels in $4 in investment. On top of that is the money generated by the growth of the companies themselves – all of which hire tax-paying, high-wage employees.

Doyle and some far-sighted legislators have pushed to expand the tax credits program, as well as round off some rough administrative edges, but their efforts have fallen short of the mark so far in corners of the Legislature. Policymakers who need convincing should take a hard look at the results.

The Inc. story is headlined, “Who needs Silicon Valley? Thanks to new state programs, companies are finding funds outside of traditional VC hubs.” It describes Wisconsin’s investment stimulus effort as “one of the most successful so far,” with rapid growth in the number of angel networks (from six to 20 in 3½ years), deals and dollars invested.

“For a state like Wisconsin, a dozen extra angel networks can make a big difference,” the Inc. story noted.

The SWIB report charts the same growth in angel financing and describes Wisconsin as ripe for venture capital investments – the next level of investing beyond angels – because of an “imbalance in Wisconsin and Midwest between the recognized high levels of research and development occurring in the region and the disproportionately low levels of venture capital dollars seeking investments.”

That imbalance, SWIB analysts added, “creates a highly inefficient market that offers an advantage to investors with deep connections to the research channels and the experience and skill to build companies to commercialize that research. The lack of competition for deals gives early investors the opportunity to invest at attractive valuations and to select the best opportunities.”

Since 2000, SWIB has allocated $200 million to be managed by four firms through its Wisconsin Venture Capital Portfolio. That’s a fraction of the $83 billion in total SWIB assets under management. Those firms have put a combined $30 million of that allocation to work in Wisconsin venture deals. It is expected SWIB will soon announce another venture capital commitment of up to $25 million to a venture capital manager, plus up to $15 million in so-called “side-by-side” investments that could be made by other qualified firms.

Wisconsin needs to expand its proven tax-credits program and to get behind those programs that are working, not reinvent wheels that already run smoothly. We’re finally on the map; let’s not slip back off the edge.

Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.