By Tom Still
MADISON, Wis. – One of Wisconsin’s most successful strategies for spurring the growth of young companies for the past decade or so has been its Qualified New Business Venture law, known as the “Act 255” investor tax credits law because of how the law was titled when it passed.
The program provides tax credits to qualified Wisconsin investors who put money into young companies with some sort of technology base, even if the company is aligned with a more traditional sector such as manufacturing or agriculture.
Since it took effect in 2005, the Act 255 program has prompted at least $466 million in private investments in emerging companies that have earned QNBV status through the Wisconsin Economic Development Corp. (previously, the Wisconsin Department of Commerce) based on standards set by a law that has changed only incrementally over time.
It’s a rigorous vetting process that, once completed, earns the angel and venture capital equivalent of a “Good Housekeeping Seal of Approval” for young companies. Potential investors in Wisconsin often won’t consider companies that are not QNBV-certified because they trust in the process enough to know it’s worth taking a closer look.
They also like the tax credits, which are worth $1 in state relief for every $4 invested. There are scores of examples of investors who took a chance on a young company knowing the credits would help mitigate the risk or allow them to invest more than they had planned.
About $116.5 million in credits have been granted over time, all retroactive to the actual investment, and nearly 1,200 new jobs have been created in the past six years alone. The law has been a model for investment tax credit laws in other states add a major reason why Wisconsin’s early stage investment community has grown from a handful of venture and angel funds or networks in the early 2000s to about 40 such groups today.
In 2016, for example, about $276 million in angel or venture capital was invested in 136 Wisconsin companies – 84 of which were QNBV-certified.
As time passed, however, some parts of the law aged. One update that should be made by the Wisconsin Legislature this fall is lifting the lifetime cap on credit-eligible investments in any single company from $8 million to $12 million.
The $8 million cap has been in place almost since the dawn of the law, and inflation alone suggests it should be raised. The biggest problem is that many tech-based companies, especially those in health care or manufacturing, are so capital-intensive that it takes more money to fuel their growth. The typical venture capital investment of 2005 is not the norm in 2017.
So far, 14 emerging companies in Wisconsin have been “capped out,” meaning those companies hit the $8 million investment ceiling that yielded $2 million in credits for their investors. Another 20 are poised to bump against the ceiling soon, based on an analysis by the Legislative Fiscal Bureau.
Companion bills introduced in both houses of the Legislature would raise the ceiling to $12 million, which would produce an additional $1 million in credits for qualified investors. Those bills (Senate Bill 398 and Assembly Bill 489) have attracted bipartisan sponsorship, with Rep. Mike Kuglitsch, R-New Berlin, and Sen. Tom Tiffany, R-Hazelhurst, taking the lead. Both lawmakers have been champions for Wisconsin’s early stage economy over time.
While there are other improvements that could be made in the Act 255 law over time, this change is most timely because most of the companies at or near the $8 million ceiling are poised for rapid growth – if they can land more investment dollars. Those companies are statistically likely to produce large numbers of good-paying jobs, as well.
Sometimes overlooked is how much those emerging companies buy in supplies, goods and services from other companies across Wisconsin. That supply-chain effect means a company based in Madison, Milwaukee or Menomonie may be buying equipment or other services from firms in Rhinelander, Green Bay or Wausau. In that sense, the entire state has a stake in the success of young, tech-based companies.
Many of the companies that earn QNBV status will be among the presenters at the Nov. 15-16 Wisconsin Early Stage Symposium in Madison, which will showcase about 45 such firms. Applications are being accepted now though the Wisconsin Technology Council website at www.wisconsintechnologycouncil.com.
Some have criticized Wisconsin policymakers for doing too much for big companies. Passage of SB 398 and AB 489 would help companies on the other end of the spectrum.