By Tom Still
MADISON, Wis. – Leading up to the news of a proposed $100-million state investment in a venture capital fund, the Wisconsin Technology Council informally surveyed a small group of early-stage investors about the “demand” side of the equation.
Our informal query of eight such 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 are at least three-dozen active angel networks, angel funds and venture capital funds in Wisconsin, most of which investing predominantly in emerging companies close to home. That means there’s likely more than enough “deal flow” – a term describing the supply of young, high-growth companies – to merit such a fund.
As part of the 2021-2023 state budget bill, Gov. Tony Evers proposed investing $100 million in a “fund of funds” that would require a two-to-one private sector match. It’s a move akin to what other states, including Wisconsin’s Midwest neighbors, have made over time – and it’s the right move. Here’s how the Evers proposal, which would require legislative approval, would 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.
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.
Given the economic strain of COVID-19 in Wisconsin, some may ask, why now for such a fund?
The Wisconsin economy has certainly been hit by the pandemic, but parts of that economy have stayed solid and are emerging even stronger. The “innovation 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.
Such a fund can help statewide, not just in those cities with mature tech clusters.
First, Wisconsin’s high-growth economy is expanding in places outside the traditional centers of such activity. That includes 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. That supply chain has been demonstrated to 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.
The timing of the Evers proposal is right for another reason: It will build on a strong foundation of previous investments. 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 promising, young companies in Wisconsin have trouble crossing the “valley of death,” which is most often bridged by Series A dollars.
Finally, the $100 million state investment will call out Wisconsin to investors, companies and talent on the East and West coasts, where there’s been something of an exodus in search of greener pastures. Wisconsin could attract more investment dollars – a trend that is already underway – by establishing a larger fund of funds.
The Evers proposal is not a loan or a grant. It’s an investment designed to generate a positive return. The state of Wisconsin would be a full partner, just like the private investors, and oversight would help to protect taxpayers. The proposal would also reach out to people who may not see many early-stage opportunities today.
No venture capital investment is ever guaranteed, but with the right structure and skilled fund managers, the overall return on investment can help to expand the Wisconsin economy while protecting its taxpayers.
Still is president of the Wisconsin Technology Council. He can be reached at firstname.lastname@example.org.