By Tom Still
MADISON, Wis. – Successful tech-based companies become so in different ways, a phenomenon on display of late with the announced $23 billion acquisition of Wisconsin’s Exact Sciences by Illinois-based Abbott Laboratories.
Born in the Boston area and already a public company when it was moved to Madison by Kevin Conroy and Maneesh Arora, Exact Sciences was financially distressed in the early 2000s but held potentially powerful technology tied to cancer diagnostics.
Conroy and Arora saw that promise because they had been among the leaders at Madison’s Third Wave Technologies, also a genetics diagnostic company. When Third Wave was acquired by Hologic in 2008, the duo levered money from that exit to move Exact Sciences to Madison – a risk based on their belief that academic research and other community resources would help them turn promise into reality.
It’s an unusual success story but it worked. For many other young firms in Wisconsin, progress has been aided by the state’s Qualified New Business Venture tax credit program. In today’s startup world, as some entrepreneurs and their investors testified Thursday in the state Capitol, a few tweaks to that 2005 law would help even more.
Here’s how the QNBV law works: It provides tax credits to eligible angel investors and venture capital fund investors who make cash equity investments in qualified early-stage businesses headquartered in Wisconsin. If all other eligibility requirements are met, investors receive a state income tax credit equal to 25 percent of the value of the investment made in the certified company.
In other words, it offers $1 in tax credits for every $4 invested. Some 700 young tech-based firms used the law to attract $882 million in private investment through 2024, according to records kept by the Wisconsin Economic Development Corp.
Two provisions have outlived their effectiveness after 20 years. One is a requirement that least 51% of startup employees must live in Wisconsin, which ignores the advent of remote work as well as the need to find specialized talent that may not be available in Wisconsin.
Employees of state-based companies still pay Wisconsin income taxes if they live in states with a reciprocal revenue agreement. Plus, the companies pay applicable state taxes.
The other provision is a $12 million cap on total eligible investment in any one company. Inflation alone has changed that threshold. A proposal heard Thursday by the Assembly State Affairs Committee would raise that limit to $20 million, more in line with today’s startup capital needs.
Among those testifying was investor Michael Thorson of Wisconsin Investment Partners, one of the state’s oldest angel funds. He noted 72 of WIP’s 85 investments over time were eligible for QNBV credits, which cushioned that multi-million-dollar risk and made it more likely to pay off. Successful companies backed by WIP have a collective multi-billion-dollar value today as well as at least 1,500 employees.
Max Duckworth of FAR Biotech said revisions in the tax credits program would enhance efforts to move that cancer-fighting company from Texas to Wisconsin, where it already has a relationship with the McArdle Laboratory for Cancer Research on the UW-Madison campus.
Abigail Barnes of Amulet Inc., which helps people battle food allergies, said the 51% in-state employee requirement has caused her to delay hiring specific talent needed to propel the state-based company.
Nick Myers of Madison’s Recovery.com said the current QNBV law conflicts with SAFEs, or Simple Agreements for Future Equity, which are commonly executed contracts between young companies and investors. Such contracts provide investors with rights to future equity in exchange for capital, but without the complexities of debt. Because the 2005 program didn’t anticipate the rise of SAFEs, Myers said, it has a “chilling effect” on investors claiming tax credits for money put into companies with SAFE contracts.
Others told lawmakers how state tax credits have been put to work far beyond Wisconsin’s largest cities through companies based in Green Bay, Eau Claire, Janesville-Beloit and beyond.
Wisconsin’s tech-based companies have followed different routes to success, helping the state’s overall economy along the way. Some updating of the Qualified New Business Venture law would pave the road for others to follow.
Still is the past president of the Wisconsin Technology Council. tstill@wisconsintechnologycouncil.com.