Will Capital Ideas Die Again?

Talk to any Wisconsin economic development guru and he or she will tell you that all the essential pieces are in place for an economic renaissance, except one. We've got thriving academic research and development and patentable ideas. We've got strong industry clusters that export goods all over the world. We have a well-developed network of angel investment groups. We have everything except enough early-stage capital to drive growth.

The current session of the state Legislature will demonstrate whether lawmakers have the will to overcome a toxic environment under the dome, as proposals for a state leveraged venture fund are considered. "The overriding focus is how can the state and the Wisconsin Economic Development Corp. best encourage new business and the resulting job formation while getting the best deal for the taxpayer," said Tim Cooley, director of capital development for the WEDC. "We know that capital is the lifeblood for new businesses, and that the lack of it is constraining growth and jobs."

Fund of funds

The Wisconsin Growth Capital Coalition estimates that if Wisconsin captured a percentage of venture capital equal to its share of the national population – 1.84% of 330 million people – it would secure $450 million annually, enough to leverage the creation of more than 259,000 jobs.

In its 2011 report titled The Case for a Venture Capital Program in Wisconsin, the coalition compared Wisconsin's average venture investment to seven peer states with roughly the same sized workforce. Looking at the five-year period from 2006-2010, the coalition found that only Missouri raised less on average than Wisconsin's $70.9 million. The highest-ranked state in that peer group was Colorado, whose total average of $592 million is more than eight times that of Wisconsin's.

With only $72 million invested in 2011, state officials fear Wisconsin will lose ideas and jobs unless the Legislature passes a state-leveraged program. Last spring, there was skepticism about the value of a program involving certified capital company programs, or CAPCOs, that scuttled a venture capital bill. While there still is concern that CAPCOs, which have been discredited due to the failure of a previous law, could be revived in the Assembly, the measure with the best prospect is a Senate proposal that would allocate at least $100 million to a "fund of funds" approach.

The measure would use bonds or tax credits and take capital formation further into core Wisconsin strengths like agriculture and manufacturing. It also seeks to achieve a broader geographic disbursement of capital, co-investments with angel networks, and seed funding. "The bill supports a whole continuum of investments," said State Sen. Alberta Darling, R-River Hills. "It includes the incubators, angels, seed, and early-stage through the more mature stages. We want the continuum of opportunity because that balances our risk and our needs."

To get bipartisan support, State Sen. Tim Cullen, D-Janesville, said the bill would have to exclude CAPCOs and be governed free from politics. "It's going to have to be squeaky clean, and it will have to pass the smell tests after the CAPCO mess," he said. "We are going to need some firewalls so that fund-of-fund managers have protection from the political system."

Zach Brandon, director of the Wisconsin Angel Network, said the success of Wisconsin Act 255 in stimulating angel investment is proof that a government-leveraged program can work here. According to Brandon, 181 companies have qualified for the program since 2005; those 181 companies sought $552 million in qualified investments, and 105 of those companies received market validation in the form of private investment. Those 105 companies were seeking just shy of $450 million, and they raised $141.5 million. "So even with a very successful program that has been replicated in other states, one that has helped raise nearly $150 million over five years in the earliest stages of companies, there is still a five-year unmet need of over $300 million," he noted. "We know the program has been successful and brought $150 million in investment to Wisconsin companies, but we also know we need another tool because there is a $300 million-plus gap."

Ross Bjella, CEO of alithias, an accelerator company located in Milwaukee's 94labs incubator, noted the bill would provide state funding to incubators that attract investment. "Having this type of support is critical in our entrepreneurial support environment," he said. "If you do not have that additional lift at this (early) stage, it puts Wisconsin further behind other states that have had 20 or 30 years to build this up."

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