Foundation of business innovation grants helps pave way for private capital

It’s no secret that Wisconsin falls well below average among the 50 states when it comes to attracting venture capital, a class of private investment dollars vital to building small startups into jobs-producing companies. However, other building blocks already in place could improve the state’s venture picture over time.

The first such foundation is angel capital, which is also private money but is usually invested by individuals, networks, and small funds earlier in a company’s growth cycle – after founders and friends get things started but before venture capitalists get involved. Since the mid-2000s, Wisconsin has experienced a burst of angel investment activity, and preliminary figures from 2011 indicate that investment class held up in Wisconsin despite troubles nationally.

Competitive research grants represent a second building block. A fresh report from PricewaterhouseCoopers on the state of the biomedical industry in California offers a glimpse at another Wisconsin strength – its ability to win merit-based federal grants targeted at young, tech-based businesses.

Wisconsin ranked sixth in 2010 among the 50 states in attracting Small Business Innovation Research grants for commercializing biomedical research, according to the report, with $23.9 million in total grants. California was first with $100.6 million, followed by Massachusetts, New York, Maryland, and North Carolina – states that are larger than Wisconsin or otherwise centers of the U.S. biomedical industry.

The report demonstrates that emerging Wisconsin companies are attracting the eye of federal R&D experts, who have used the SBIR program for nearly 30 years to incubate technologies and processes that have the potential to become business successes. For most young companies, the grants represent only a fraction of the money needed to move discoveries to market – but such grants are essential to attracting private dollars from angels and venture capitalists, whose investments often follow SBIR grants.

Wisconsin’s ability to win SBIR grants is not confined to the biomedical industry. For the fiscal year that ended March 31, 2011, Wisconsin companies won a collective $45.4 million in competitive grants across a broad spectrum of technologies. That dollar total and the total number of grants (96) were the largest in the history of the program for Wisconsin.

Eleven different federal agencies make grants to researchers whose researchers, often tied to major universities, are helping push innovations closer to the marketplace. In Wisconsin, the federal agencies most active in making SBIR grants are the National Institutes of Health, the Department of Defense and its various branches, the Department of Agriculture, the Department of Energy and the National Science Foundation.

There are warning signs ahead, however. While the SBIR program was recently reauthorized by Congress, total federal investment in research and development is likely to level off or decline due to the pressures of the federal budget deficit. The SBIR program represents only a fraction of total federal spending on R&D; most takes place around “basic” research, an area where Wisconsin institutions such as the UW-Madison, the Medical College of Wisconsin, and the UW-Milwaukee shine.

In addition to urging that Wisconsin companies and researchers compete for SBIR grants, the state’s major research universities will likely step up their efforts to attract industry R&D dollars. A report by the State Science and Technology Institute in 2011 revealed that Wisconsin’s research universities rank 48th among the 50 states in their “share” of industry research as a percentage of the state’s total academic R&D spending. The state ranked only 28th among total dollars spent, falling behind neighbors such as Illinois, Indiana, Michigan, Minnesota, and Iowa.

David Krakauer, the new director of the Wisconsin Institute for Discovery, stressed the importance of attracting industry research during a Feb. 28 meeting of the Wisconsin Innovation Network in Madison. Krakauer, who arrived last fall from the private Santa Fe Institute in New Mexico, said researchers in Wisconsin and elsewhere must face the reality that federal R&D dollars alone won’t support their future work.

Krakauer’s hiring and other trends at the UW-Madison indicate that change is underway, some of which may be as simple as handling industry requests for research through a more streamlined administrative process. Other universities are figuring out better ways to enhance industry research, which only makes sense in an era when more companies are willing to contract for such services than keep them in-house.

With merit-based grants and angel capital, Wisconsin has the right foundation for starting companies. Now it needs to work on growing and keeping them.

Sign up for the free In Business Wisconsin Report – your weekly resource for local business news, analysis, voices, and the names you need to know. Click here.

Sign up for the free IB Update – your weekly resource for local business news, analysis, voices, and the names you need to know. Click here.