Early-stage investment – a Catch-22 | submitted by Paul Jadin
Over the last 11 months, the Wisconsin Economic Development Corp. (WEDC) has had numerous requests from businesses for assistance in creating jobs. The state's available economic development tools satisfy a majority of those requests.
Non-refundable tax credits are by far the most used investment tool by the WEDC. However, even when credits are refundable (i.e., paid irrespective of tax liability), as they are under our broadly popular Enterprise Zone Program, they still are not a good fit for start-up companies. Getting to the point where a business can use the credits is problematic, because they lack sufficient capital to create the initial jobs that are required to use the credits. It's a classic Catch-22: Companies need capital to create jobs but can't access state assistance until the jobs are created.
Wisconsin needs a vehicle for responsible, strategic, and rapid deployment of early-stage investment capital to spur entrepreneurial business and job-growth opportunities.
We must recognize that our primary job growth will come from growing the number of businesses in the state, but we do not currently have adequate resources to incent the creation of business because of a critical shortfall in early-stage investment capital.
The Angel Investment and Venture Capital Tax Credit programs are designed to encourage investment in small, high-technology businesses that have high growth potential, but they are targeted to angel investors, angel investment networks, and venture capital funds that invest in these designated companies. Qualified New Business Venture tax and Capital Gains credits are also designed to encourage investment, but those are targeted to the investors in the start-up companies.
While these are all important tools, these tax credit programs still don’t provide the up-front capital that high-growth, early- and mid-stage companies need.
WEDC has researched capital investment programs across the country and has proposed a hybrid portfolio approach to early-stage investment. The concept is to support businesses throughout their continuum from research, to market, to expansion.
We need to think broader rather than just concentrate on a strict venture capital-level strategy. We need a structure that includes angel co-investments at the seed capital level; supports new and emerging early- and mid-stage companies; and supports expansion capital for when companies have proven their products, markets, and management and have begun ramping-up manufacturing and shipping goods to customers.
It is important that a state investment program be structured in a way to keep fund management and investment returns in our state. Our primary objective is to have capital available to fund new businesses and create jobs, now and going forward.
There is a tremendous amount of new business activity going on in Wisconsin that doesn’t fit into the traditional venture capital financing mold. Water and agricultural technology, basic manufacturing, financial services, specialty food and beverage manufacturing, and training and education are all important industries in the state with strong growth and job-creation potential. These areas, along with what we regard as high-tech companies, have a critical need for capital to create opportunities for our workforce and talented entrepreneurs. But again, Wisconsin lacks that availability of early- through expansion-stage equity capital.
Wisconsin has 1.84% of the nation’s population, but attracted only .55% of the nation’s venture capital investment ($70.9 million). If Wisconsin had captured the same percentage of total venture capital investment as the nation as a whole, Wisconsin could have received $450 million. This could have leveraged the creation of more than 259,000 jobs, instead of 60,000 venture-backed jobs created over time.
WEDC is working with the Legislature and others to develop and implement programs to get capital into businesses that will grow and prosper in Wisconsin. Thirty states already have capital investment programs because they realize that new businesses are the foundation for new jobs. Wisconsin needs a similar program tailored to our state’s specific needs and resources and dedicated to keeping our best and brightest talent and business growth opportunities within its borders.
Paul Jadin is the CEO of the Wisconsin Economic Development Corporation.