With a state-funded venture capital bill headed into its second round in the state legislature, industry experts agree: Wisconsin needs more investment capital.
But they disagree on who should provide the early stage funding to Wisconsin’s entrepreneurs.
Republican state Sen. Alberta Darling (R-River Hills) was part of a group that introduced a venture capital bill in 2011, which failed to pass early last year.
The bill would have created a Wisconsin venture capital authority, which would fund an investment of about $200 million to be distributed by a state fund manager among private early stage firms over the course of four to six years.
The Wisconsin Economic Development Corporation would facilitate a process through which early stage companies could apply for growth capital through a request for proposal.
“The idea is to run this money through WEDC to get it to the companies as well as some fund-to-fund approach, using an outside manager,” said Lisa Johnson, vice president of entrepreneurship and innovation at WEDC. “We would hire an investment manager to run this effort for us.”
The private companies would provide at least a 1:1 match to the state funding, to be invested in promising new businesses at their discretion.
The investment manager could also participate in direct investment with angel investors, Johnson said.
Darling and Sen. Tim Cullen (D-Janesville) plan to reintroduce the bill soon, with hopes Gov. Scott Walker will make room for the program in his 2013-15 biennial budget.
A committee including industry representatives, politicians and the WEDC has also been formed at the governor’s request with the hopes of putting the capital initiative funding directly into the budget, Johnson said.
While the state has lots of funding available for companies just getting off the ground – angel capital – budding companies can struggle when it comes to obtaining venture capital in the next stage of development, said Tim Keane, managing director of Keane D’Souza Venture Capital in Brookfield.
Keane is also an entrepreneur in residence at Marquette University and founder and director of Golden Angels Investors LLC. He supports the state-funded early stage investment plan. It would complement the government’s existing tax credits and loan programs for small businesses.
The indirect funding means venture capital investments would happen in much the same way as normal.
“If anybody invests in venture capital managed by professional managers, it should be pretty effective, and that includes the state investing in professional managers,” Keane said. “That’s what’s being proposed, that the state would invest in venture capital firms, who would make all the decisions.”
The state needs a growth capital initiative because Wisconsin ranks high in intellectual property, but low in the translation of those ideas to companies, Darling said.
“Historically, it’s been proven that we’re an outlier,” she said. “Most states in the country have public-private partnerships to launch new business startups for entrepreneurs.”
The Wisconsin plan was modeled off Ohio’s indirect fund-of-funds program, she said.
“I really felt strongly that we were at a competitive disadvantage and we were losing people to other states,” Darling said.
The hope is that new and growing companies that receive investment capital from the program will then create jobs, she said.
“You can’t guarantee how many jobs are going to be started because we’re going to be investing in the whole continuum – from angel to early stage to later stage,” Darling said.
An investment vehicle for new businesses would work in tandem with economic development programs already administered by the WEDC, Johnson said.
“It really can run side-by-side with other programs that we have that are stimulating business creation and also supporting entrepreneurs,” she said.
Since about 2005, when Wisconsin introduced investor tax credits, the state has seen a lot more angel investment, said Tom Still, president of the Wisconsin Technology Council.
The Technology Council, a nonprofit that works to foster entrepreneurship and innovation and also serves as the science and technology advisor to the governor and legislature, has advocated for the capital investment legislation because there is still not enough venture capital in the state, he said.
According to the WTC, when it started its Wisconsin Angel Network in 2004, there were five angel groups in Wisconsin. Today, there are 22.
“Basically, I think we’re just simply seeing more good companies springing up in Wisconsin across a variety of sectors,” Still said. “Angels in Wisconsin and beyond are finding more good deals here that are worthy of their attention.”
Wisconsin’s first angel investment firm was started just 11 years ago, he said.
“The opportunities are here, in part because the angel phenomenon in Wisconsin is recent enough that the venture side has needed some time to catch up,” Still said.
In 2011, there were 63 angel deals in Wisconsin, with a total of $61.1 million invested. At the same time, there were just 22 venture capital deals, with a total of $91.7 million invested.
“The venture side is difficult, in part because we don’t have a lot of domestic venture firms,” Still said. “There’s really only a handful in the state at best.”
In the proposed early stage capital program, the state would serve as a limited partner investing in funds that would create growth and jobs and provide a larger return over time, he said.
“There’s just not enough venture capital in Wisconsin right now,” Still said. “It really puts more money on the table that would have to be matched by private funds that would want to take part in this. We have a lot of great young companies in Wisconsin, and we don’t want them to die on the vine for lack of capital.”
While Milwaukee has seen an influx of new incubators over the last 18 months, access to capital can be a challenge for new businesses, said Daniel Einhorn, principal at Milwaukee-based Capital Midwest Fund, which focuses mainly on technology companies in Wisconsin, Illinois, Minnesota and Michigan.
Einhorn would welcome a public funding option, but doubts the Legislature would agree to the plan. Early stage companies won’t generate returns for five to ten years, but the Legislature generally thinks in terms of a two-year budget cycle, he said.
So the burden falls on private venture capital funds, and there are few investing in Wisconsin.
If there were more venture capital firms in the area, they would likely be cooperative, serving as syndication partners or focusing on other industries, he said.
“We don’t consider them competitors,” Einhorn said. “There’s very few companies that would come into the area that would be stealing deals from us.”
But it’s not just a Milwaukee thing, he said. There’s less capital available everywhere.
“I would say in the last five years, it’s become much harder to get a new company where it needs to go,” Einhorn said.
The success of venture capital investments is difficult to predict, since investors don’t know which companies will become “gazelles,” or fast-growth firms, said Dan Steininger, president of entrepreneur resource company BizStarts Milwaukee.
“That’s the biggest challenge for venture capitalists – how do they prove that it’s going to result in jobs for the Wisconsin economy,” he said. “For the state to try to pick winners and say who’s going to make it and who’s not and put a lot of money in venture capital funds is a high risk proposition.”
While there’s no doubt Wisconsin is short on venture capital, the state’s resources may be more effectively used on seed capital – the very first investment in a budding company, Steininger said.
While some new companies will fail, the seed funding route would generate a larger flow of companies that could later be funded by private venture capital firms. In the process, those new companies would create jobs, he said.
Without the initial funding needed to make a business sustainable, entrepreneurs are left with grim prospects to make it past the “valley of death” to the venture capital stage Steininger said.
“I support both, but right now all the talk I hear is venture capital and ignoring the valley of death,” he said. “It’s this valley of death that so many entrepreneurs face in Wisconsin – it’s the greatest need.”
State Rep. Dale Kooyenga (R-Brookfield) also thinks the state would do better to make a more sure investment. The state should focus more on policy that affects individuals than on investments that will affect relatively few businesses, he said.
“I just think we would have a more favorable positive impact by doing broad based tax relief than through a venture capital bill,” Kooyenga said. “Let’s put money back in the hands of individuals and let those individuals invest on their own in these companies if these companies are winners.” n
