By Tom Still
The Georgia State Senate voted, 49-3, earlier this month to approve a $100-million venture capital fund to invest alongside private investors in that state’s emerging companies.
In Colorado, Gov. John Hickenlooper – an entrepreneur and former mayor of Denver – announced two weeks ago that his state is forming a $150-million venture capital fund with public seed dollars and a hefty private match.
In Indiana, the Indiana Public Retirement System announced in early March it has selected a private fund manager for its new $150-million venture fund, which will invest in a mix of Indiana companies and other private equity funds. In Ohio and Michigan, the creation of state-leveraged funds has spurred higher venture activity in recent years – with investments exceeding U.S. averages.
Across the nation, at least 34 states have either launched venture capital funds, created investment tax incentives or both to leverage private investments in startups and emerging companies. If the Wisconsin Legislature embraces an early stage capital plan at least as large as what has been proposed by Gov. Scott Walker, it would not be plowing new ground.
Walker earmarked $25 million for an early stage fund in the $67-billion state budget bill, but essentially invited lawmakers to design a larger fund if they can agree on how it should be constructed. Such a fund would likely come with provisions that would require a private match by angel and venture capital groups, define how much should be invested in Wisconsin companies, and build administrative firewalls to prevent political meddling.
The state would be an investor in such a fund, earning returns (or sustaining losses) over time just like the fund’s private investors. But as policymakers in other states have figured out, a privately managed fund seeded with state dollars stands a strong chance of earning financial returns – all the while keeping young companies at home.
“With the exception of Alabama, all our sister states have such funds,” said state Sen. Tim Golden of Valdosta, the main sponsor of the Georgia plan. “Other states, because of these funds, are raiding Georgia companies after we get them established… This bill would help solve that problem once we get it up and running.”
Sound familiar, anyone? Wisconsin startups often get money from friends, family members, founders and angel investors, but they are occasionally lured away by bigger financing rounds.
In Colorado, Hickenlooper said venture capital is a problem for Colorado startups – even though that state’s five-year venture capital average is $595 million per year. That compares with about $75 million per year in Wisconsin.
“When I got elected, we looked at our economic development program. People wanted less red tape and more training, but access to venture capital came up all over the state,” Hickenlooper said.
States such as Georgia, Colorado and Indiana recognize that virtually all job creation is tied to young companies, and that high-growth companies usually need capital. While most of that money comes from private investors, states can play a catalyst role while effectively managing risk through privately managed funds. Not only do states stand to recoup their investments – something other economic development programs rarely do – but they benefit from job growth and the higher tax revenues that come with it.
Some critics disagree, noting that all angel and venture capital is risk capital and therefore not a safe playground for state governments. By investing in a fund that is privately managed, however, government gets the security of co-investors and a market-based approach to selecting investments with the best chance to succeed.
Other states also seem to realize they are competing for a share of the national angel and venture capital “industry.” About $25 billion is invested annually in the United States by venture capital firms, but less than half of 1 percent of that amount is invested in Wisconsin. A state-leveraged fund would help Wisconsin compete for more outside dollars while incubating new funds at home.
Wisconsin’s existing investor tax credit program, used primarily by angel investors, has produced solid returns for investors and helped to create companies and jobs. Other states have taken it to the next level – investing in early stage funds – in an effort to build their economies. Wisconsin should do the same.