Venture capital in Wisconsin needs a Wisconsin solution

Wisconsin is on the verge of standing on its own two venture capital feet, but the Legislature is going back to work to create better footing.

A key measure, Senate Bill 94, has been sent back to the drawing board due to justifiable concern over the use of certified capital companies, or CAPCOs, particularly the out-of-state variety.

The lesson we should have learned long ago is that we should not go to either coast, or perhaps anywhere else, hat in hand. Given our paltry share of venture capital deployment – our companies are involved in less than 1% percent of the nation's venture capital deals – Wisconsin’s attempt to romance them has been a colossal flop. It’s past time to realize they aren’t just playing hard to get. They are hard to get.

Now that the Legislature has made Wisconsin more inviting for high-net-worth individuals to keep their wealth here, we need a venture capital complement to Act 255, which has done wonders for angel investment.

Senate Bill 94 would have created two funds totaling $400 million – the $200 million Jobs Now Fund and the $200 million Badger Jobs Fund – under a new Wisconsin Venture Capital Authority. The Jobs Now Fund would have provided tax credits to insurance companies, here or elsewhere, in return for investments in CAPCOs.

A couple of alternative measures have been put forth, but lawmakers should take a closer look at Wisconsin CAPCOs, which in the past have gotten a bum rap. A venture capital program launched in 1999 was tailored to stimulate venture investments by reducing the tax liability of Wisconsin insurance companies that invest in venture capital firms certified by the old Department of Commerce, including Madison’s Venture Investors.

It fell out of favor in part because $10 million – at least $10 million – cannot be accounted for, according to a report in the Milwaukee Journal Sentinel. Another criticism of CAPCOs, this one from a 2007 legislative audit, was that tax credits claimed by insurance companies that invested in the CAPCOs resulted in a high cost, about $90,000, per new job created. Venture Investors’ John Neis noted that the Legislative Audit Bureau used outdated job figures, failing to take into account that businesses receiving CAPCO investments would continue to add jobs as they grow.

The recession probably tested that prediction, but at the time of the audit, Venture Investors managed one-third of the state CAPCO money, and had created more than 500 jobs in the companies it invested in.

Neis also believed the audit was unfair to out-of-state CAPCOs, citing the use of old information and incomplete information that distorts the effectiveness of the CAPCO programs. Again, the recession of 2007-09, and the sluggish recovery that has ensued, did not help the performance of any industry sector, but due to my preference for a Wisconsin-centric solution, I’m fine with excluding out-of-state CAPCOs. Same thing for out-of-state insurers.

However, a little more due diligence is required for in-state CAPCOs before we completely dismiss them. Does anyone really envision a solution that does not include participation by Venture Investors?

Once the state budget is signed into law, and perhaps even before the recall elections are over, the Legislature should focus on vetting various proposals. That includes a measure by Boscobel Republican Gary Tauchen that incorporates the use of CAPCOs. Mr. Tauchen may have a big selling job, especially if outsiders are part of the mix, but his plan should get a fair hearing.

The Be Bold Wisconsin proposal called for a fund of funds that would raise $1 billion for venture deployment. While current legislation would fall well short of that, it’s a start.

But whatever we do, let’s make sure it has a Wisconsin brand. We have the sophisticated science and, I would argue, impressive information technology under development, so why not invest in ourselves?

In particular, we need it to close the funding gap known as the “Valley of Death,” which according to Wisconsin Technology Council President Tom Still, falls between $2 million and $5 million for many start-up companies and can be a job killer. A killer of good-paying jobs to boot.

That’s why generating home-grown venture capital should be the Legislature’s next order of business. Oh, we might still take calls from outside VCs, but I’d rather be in a position to make them make the first move.

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