By Tom Still
MADISON – Wisconsin entrepreneurs and researchers do a world-class job of coming up with ideas that will transform health care, energy, manufacturing and other industries. Finding the investors who can move those ideas forward is too often the problem.
While Wisconsin’s angel capital investments have climbed steadily, the state continues to lag in the next stage of private equity investments – venture capital. These rounds of investment, which begin around $2 million and build upon smaller investments by individual “angels” or networks of such investors, can help turn a start-up into a thriving company.
Look for 2010 to be a year in which there will be more private and public efforts to build Wisconsin’s venture capital supply.
At least three private funds that intend to invest in Wisconsin and the Upper Midwest are busily raising funds now. Two are funds with roots in Wisconsin; the third is a Midwest fund that targets health care and biotech investments. At the same time, large companies with strategic investment arms as well as foundations with investment funds are looking to invest in the Midwest.
An effort to build a ‘fund of funds’ similar to what is working in Indiana, Ohio and elsewhere is gaining momentum, thanks to public and private cooperation. Ohio established the $150 million Ohio Capital Fund several years ago to co-invest with private venture capital firms. The state requires that 75 percent of the Ohio Capital Fund’s investments be in Ohio-based venture funds and that half of all money invested must be pumped into young Ohio companies.
That is unlikely to be the Wisconsin approach, in part because state leaders have been hesitant to invest any serious money in a venture fund – beyond investments already made by the State of Wisconsin Investment Board. Over time, SWIB has allocated $200 million for venture investments out of a total portfolio exceeding $78 billion. All but $15 million of that $200 million has been invested over 10 years, largely through funds with Wisconsin ties, but with no requirements that investments take place in Wisconsin.
During last year’s budget debate, a modest proposal to create and fund a Wisconsin Venture Network using money from higher securities fees was hollowed out when all but a fraction of the money was earmarked for the general budget.
In the long run, maybe the state’s reluctance to get involved in venture investments is the right course. Privately run funds aren’t subject to geographic investment requirements or unrealistic expectations that returns will somehow match the next election cycle.
One state program that has stimulated early stage investments is the Accelerate Wisconsin investor tax credits program. Since 2005, Wisconsin investors in “qualified” state companies have been able to receive a 25 percent state tax credit spread over two years. The program will essentially triple in size in 2011. But a number of companies need investors now, so the Legislature is looking to speed up the expansion by making at least $3 million in additional credits available this year.
Because of how the credits work – it takes $4 in private investment to recoup every $1 in credits – that could attract $12 million in venture and angel investment this year.
And groups such as the Wisconsin Technology Council, the Wisconsin Innovation Network and the Wisconsin Angel Network are providing formats for investors from Wisconsin, the Midwest and well beyond to learn what innovations the state’s entrepreneurs can offer. More than 150 Wisconsin companies have posted executive summaries, which give potential investors a glimpse of start-up firms, online through the Wisconsin Angel Network. They represent a “farm team” of investable companies.
This is mainly a private sector issue, of course, and enlightened self-interest is a powerful tool. But more policymakers are coming to understand that without adequate angel and venture capital, Wisconsin’s innovation economy won’t grow fast enough to replace jobs lost to the recession and global competition.
“The reason people should care about venture capital is that there is a direct correlation between the amount of venture capital and a state’s per capita personal income,” said Lorrie Keating Heinemann, secretary of the state Department of Financial Institutions. Heinemann has been a champion for angel and venture investing in Wisconsin, including the “fund of funds” idea, which can better link the state into major investor syndicates.
As the election year unfolds, look for leading candidates for public office to weigh in with their ideas on how to make Wisconsin a more venture-friendly state. Wisconsin has a strong foundation of ideas, innovators and angel investors. The stage is set to attract and incent the venture industry.
Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal.