Tom Still column No. 14-07
“Wisconsin IPOs are a harbinger of growing tech economy”
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By Tom Still

MADISON – For the second time this year, a tech-based company in Wisconsin has announced plans to offer its stock for sale to the public. Called an “initial public offering,” this kind of business activity is not only important to the companies and investors who are directly involved, but to others who may follow in their footsteps.

NimbleGen, a Madison-based biotechnology company, has filed papers with the Securities and Exchange Commission to begin the process of raising up to $75 million through sale of stock. The registration statement filed with the SEC did not specify the number of shares or their price range, but indicated the money would be used to increase research, step up sales and add production capacity.

NimbleGen makes gene “chips,” which are tiny platforms for researchers who test for genetic differences. They’re used in drug discovery, basic research and more. The company has 135 employees, which about two-thirds in Madison and smaller numbers in Iceland and Germany. Founded in 1999, NimbleGen has raised $70 million from private investors and recorded $13.5 million in sales last year.

In February, another Madison-based company – TomoTherapy – announced it had begun the IPO process. TomoTherapy has grown from about 22 employees to nearly 550 in about seven years. TomoTherapy builds equipment that allows image-guided radiotherapy of cancer patients, a process that could revolutionize treatment and save lives as well as costs. With the help of five rounds of investment totaling $42 million, TomoTherapy sales grew sharply to $152 million in 2006. Through its IPO, TomoTherapy seeks to raise $201 million.

While most people have at least a passing idea of why IPOs are a big deal to the companies and investors are their core, what is less understood is why these events are vital to the larger tech economy in Wisconsin – or wherever they take place.

Taken together, the TomoTherapy and NimbleGen IPOs are a reflection of the maturing “life sciences” tech sector in Wisconsin. These are companies that were little more than an idea in a UW-Madison laboratory 10 years ago; today, they are poised to be traded on a public exchange.

For the companies, it means an infusion of capital to continue their growth. For the original investors, it represents the Holy Grail – a profitable “exit” event. All those years of investment are finally rewarded in the form of stock, cash or both in return for their faith in the company and its products.

Stock offerings are one of the reasons the American economy retains its overall vibrancy in the face of global competition. If there were no IPOs, venture capitalists and other investors would be much less excited about investing in long-shot companies. The risk would simply not justify the expected return.

“IPO availability explains why innovation-based spinoffs occur in much greater numbers in the United States than in Germany or Japan,” wrote Professor Merritt Fox of Columbia University and Professor Joseph McCahery of the University of Amsterdam. “The optimal contract between the entrepreneur and the venture capitalist is structured around the availability of venture capitalists’ exit through an IPO.”

Once the initial investors are repaid through an IPO, they often reinvest much of their gain in similar enterprises. That’s good news for up-and-coming companies, who may attract investors already experienced in the highs and lows of startup firms.

It sends a broader signal, as well, that companies can see the light at the end of a long and sometimes tough startup tunnel.

“Success stories of companies that have gone from idea to IPO are also important components of an entrepreneurial culture,” wrote Roger Wyse and G. Stephen Burrill, principals in the San Francisco-based Burrill & Co. “It helps to create an ‘I can do that, too’ attitude among other entrepreneurs.”

In Wisconsin, startup activity in tech sectors has been on the rise for several years. Angel investing is up – and that should yield more venture investments. As that cycle progresses, more companies will reach the point where IPOs are possible.

Initial public offerings create wealth and they create opportunity by releasing wealth. By doing so, they foster the all-important cycle of innovation and company creation.

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