High-tech is a fiercely competitive space, especially when it comes to funding. Fortunately, high-tech entrepreneurs have a fantastic asset in Wisconsin’s Qualified New Business Venture Program (QNBV), established in 2005 to stimulate investment in early stage Wisconsin companies. Since then, the state has certified over 315 companies, which have raised about $321 million in investments that qualified for over $80 million in tax credits. These companies have also attracted nearly $890 million in other investments and grants.
This represents an impressive rate of return for the state of Wisconsin. In 2014, for example, 21 new companies received QNBV certification, bringing the total number of companies in the program to 178. Investors received $12.8 million in tax credits that year, in return for investing $51.1 million into QNBV-certified companies. These companies were also able to attract an additional $123.1 million in outside investment, resulting in an overall 14:1 return.
How It Works
To qualify for the QNBV program, companies must be early stage, high-tech companies seeking equity investments from independent investors. Ideally, Wisconsin wants game-changing ideas – the more potentially disruptive, the better. “Most applicants are from the information technology (IT), biosciences, medical devices, alternative energy and advanced manufacturing industries,” said Chris Schiffner, technology investment manager for the Wisconsin Economic Development Corporation (WEDC), which administers the program. “One of the fastest-growing sectors is medical-related IT.”
Investors (individuals, angel investment networks and venture capital funds) can claim a tax credit equal to 25 percent of the amount of the equity investment. Businesses can receive up to a total of $8 million in tax-eligible cash equity investment (up to $2 million in tax credits for the investors).
Companies approach WEDC for QNBV certification at all different stages of fundraising. “Some companies talk to investors prior to applying to WEDC and only start the application process if it’s something the investors are interested in,” said Schiffner. “Other companies get certified shortly after organizing as a company, with little more than an idea, and hope QNBV certification will help them get in front of investors and score a deal. There is no right answer for when a company should get certified.”
Making It Happen
QNBV certification does not ensure success. “These types of investments are one of the riskiest that can be made by private investors,” said Schiffner. “Finding the right investors is a difficult process that takes even experienced entrepreneurs months to put together.”
But finding the right combination can really pay off.
Madison-based Shoutlet, a company that creates social media management tools, has grown from 24 employees to over 120 since it attained QNBV status in 2010 (it was acquired by Texas-based Spredfast in August 2015). Healthfinch, a developer of software for the medical industry that was certified for the QNBV program in 2013, recently announced a Series-A round of $7.5 million, bringing the total funds raised by the company to more than $10 million.
Some entrepreneurs don’t realize two separate tax credits are available under the QNBV program: the angel tax credit and the early stage seed tax credit. Angel tax credits are awarded to angel investors and can only be claimed against a person’s individual income tax returns. The early stage seed tax credit is available for venture funds and can be used against personal tax liability, corporate tax liability and insurance gross premium taxes. It can also be sold or transferred to a Wisconsin taxpayer.
This flexibility was especially helpful for Milwaukee-based Promentis Pharmaceuticals during its recent funding rounds, which totaled about $5 million. Promentis develops novel compounds for the treatment of central nervous system disorders.
“We have been told by some of our investors that without the 25 percent tax credit they would not have invested in our company,” said Dan Lawton, chairman of the board for Promentis Pharmaceuticals. “WEDC understood the complex reality of our successful funding strategy – in-state angel investors, national angel investors and a qualified venture fund in Europe – and worked with us to maximize the impact of the QNBV program. This has allowed us to make extraordinary progress and grow in a way that might not have otherwise been possible.”
- Be headquartered in Wisconsin
- Have at least 51 percent of employees based in the state
- Have fewer than 100 employees
- Be in operation for 10 consecutive years or less
- Offer significant potential for increasing jobs or capital investment
- Not have received aggregate private equity investment in cash of more than $10 million