Questions and answers about Gov. Evers plan to invest $100 million in state fund of funds
How does a venture capital fund of funds work?
Think of a fund of funds as a pool of venture capital organized under a central fund, which acts much like an umbrella. That central fund would invest in related “recipient” funds – perhaps early-stage funds already existing in Wisconsin – to deploy capital over time in high-growth companies.
Is the proposal by Gov. Tony Evers a new idea, either in Wisconsin or elsewhere?
While it’s new to the governor’s budget bill, similar investments have been made by other states in the Midwest and around the country. Illinois, Indiana, Ohio and Michigan all have larger funds of funds, although their formats and funding sources vary.
A fund of this size and scope has been a specific policy goal of the Wisconsin Technology Council since 2012 and was renewed in the 2021 edition of the council’s “white papers” report.
Why now? Isn’t Wisconsin in a recession because of COVID-19?
The Wisconsin economy has certainly been hit by the pandemic, but parts of that economy have stayed solid and are emerging even stronger. The tech-based economy is one of those places. The National Venture Capital Association recently reported that 2020 was a banner year for U.S. investing, despite COVID-19. Investment opportunities in Wisconsin are growing, not shrinking.
How would such a fund help all of Wisconsin, not just those high-growth companies clustered in a few spots?
First, Wisconsin’s high-growth economy is growing in places outside the traditional centers for such activity. Think cities such as Green Bay, Appleton, Eau Claire, Kenosha, Janesville, Beloit and more.
Second, young high-growth companies buy goods and services throughout the state. The supply chain can help many non-venture-backed companies.
Third, high-growth companies pay salaries that are often 50% above the statewide average – which means more tax revenue, over time, to help pay for other state priorities.
What about those other priorities, like roads and schools? Couldn’t $100 million be put to better use there?
There are always competing priorities in government budgets, but it all loops back to generating tax revenue from a high-growth, robust economy to ensure basic public needs are met. No one wins if the economy fails to innovate, as that kind of slowdown makes it harder and harder to meet public needs.
Would such a fund compete with existing private funds?
Not if it’s well-constructed. Most likely, it will help augment them by providing much-needed capital in Wisconsin. The Wisconsin Fund calls for a 2-to-1 overall private match, which means private investors that want to take part must provide that kind of match. Some of that money will come from sources beyond those being tapped today.
Is the fund targeted in a way that will provide maximum effect?
Angel and seed investors in Wisconsin have carried a lot of the freight over time, often making some of the riskiest early-stage investments. No one wants those investments to get “stranded” for lack of follow-on dollars, often referred to as Series A or Series B rounds. Right now, too many strong, young companies in Wisconsin have trouble crossing the “valley of death” that is most often bridged by Series A dollars.
Is there enough deal-flow in Wisconsin to support such a fund?
Yes. An informal survey of just eight early-stage investors in Wisconsin revealed they could collectively invest between $92 million and $116 million per year in their existing Wisconsin-only portfolios – not counting new companies they have yet to see or consider as investment targets. There is plenty of demand.
How are taxpayers protected?
The proposal is not a loan or a grant. It’s an investment that is designed to generate a positive return. The state of Wisconsin would be a full partner, just like the private investors. The state would have the same opportunity as other investors to follow the progress of investment portfolios. The selection process for fund managers would be competitive.
The Wisconsin Legislature will review the proposal, just as it does other state budget provisions. The Evers proposal also calls for the Wisconsin Economic Development Corp. to establish an oversight board for the new fund.
No venture capital investment is ever guaranteed, but with the right implementation and fund managers, the overall return on investment can be a net positive for Wisconsin taxpayers.
Will under-served communities and people get a shot at investments?
At least 20 percent of the individual companies receiving an investment from a recipient fund must be women-led or minority-led and rooted in underserved communities, under the proposal. Studies indicate investments by such funds perform well in their returns.
Tell me more about the Tech Council.
The Tech Council was incorporated in 2001 to serve as the independent, bipartisan and non-profit science and technology advisory board to state government. Its directors hail from all sizes of private business, the investment community, academic research institutions, health care, law, accounting and other disciplines tied to the tech-based economy.
Over time, many of its “white paper” recommendations have found their way into law or practice.
On the investment side of that ledger, the Tech Council supported the “Qualified New Business Venture” investment credits enacted in 2005 (Act 255) and the Badger Fund of Funds in the mid-2010s (Act 41),