Investments

Wisconsins VC Challenge

Bank Of America Investment By John Neis • 01/12/04 Wisconsin has many great assets for building a thriving high technology climate, most notably one of the nations top research universities at the University of Wisconsin-Madison. Yet we continue to hear about the brain drain from Wisconsin because we have lacked one vital ingredient: venture capital to support the development of ideas of our best and brightest.

date results (nine months) for the U.S. for total VC investment were $16.3 billion versus $15.9 billion last year or a growth rate of 3 percent. For the life science sector, VC investment levels were $4.2 billion or about 26 percent of the total investment. This level compares to $4.1 billion for last year or a growth of about 2 percent. It appears that life science venture investing is picking up in the last part of 2005.

Investment Opportunity According to the National Venture Capital Association, Wisconsin, a state with 1.95% of the nations population, has only 0.04% of the nations venture capital. Venture capital is a hands-on form of investment. Without local investors playing an active role in these companies, it is extraordinarily difficult for our emerging entrepreneurs to attract capital from out of state sources.

According to the report, ever round of institutional VC investment during the third quarter (a total of $1.1 billion or an average investment of $5.1 million per company). month basis, 653 companies received their first VC money in 2005 (a total of $4.0 billion or an average of $6.1 million per company).

Banc Of America Investment In a bipartisan effort that began last spring, legislators and the administration have been gathering information from a variety of sources about the best way address this shortfall. In November, two bills passed the Senate and are under consideration in the Assembly. They provide a variety of incentives for investment in Wisconsin, with a focus on angel, seed, and early stage investments in high tech and manufacturing.

According to the MoneyTree report, the life science sector in total had investments in 155 companies in the third quarter for an average investment size of $10.1 million per company versus total VC average investment of $7.4 million per company. Another area of interest to us is the investment by stage of development.

Banking Investment One of these bills renews Wisconsins Certified Capital Company, or CAPCO program. The Wisconsin Legislature passed the CAPCO program into law in 1998 and the program began in July 1999. The demand for this type of investment has outstripped the supply in each of the eight states where it has been enacted, and Wisconsins program, at $50 million, is the smallest. Even so, Wisconsins version of the CAPCO program has been one of the most successful in the nation, with substantial investment in Wisconsins emerging businesses. The CAPCOs have been lead investor in 14 of the 17 companies that they have funded, and they have helped attract co-investment of $125.1 million on top of the $23.3 million that they invested thus far in Wisconsin companies.

Venture Capital Investments typically start at million pounds, depending on the focus of the VC firm. For this investment, 50% of your business. Therefore when your company is eventually sold, they will be taking this percentage of the sale value.

Investment Solution Strategic This 6-to-1 payoff in investment activity has also resulted in job growth during a tough economic period. The CAPCO backed companies have shown a 61% growth in employment to 520 people with an average salary ($58,000) that is double our state per capita average. The income taxes, sales taxes, property taxes, and capital gains taxes generated from these companies are dramatically offsetting the programs cost, and if these companies continue to grow as expected, this investment initiative will be a part of the long-term solution to our states budget problems.

3. We get out of the pile and differentiate ourselves in no more than two technologies. High tech Bio tech Life science Advanced manufacturing Ag tech Wisconsins regions need to decide what they can be best in the world at and then with measured risk align resources and energy behind it. Wisconsins regions cannot be all things to all people.its not a sustainable economic development strategy. regions in the world look at their organic strengths and say, This is our best bet and then they go for it.

Investment Banking Services Two CAPCO-backed companies have been especially successful, demonstrating how these programs can have a dramatic impact.

Bank Investment TomoTherapy, based in Madison, is commercializing a radiotherapy device to dramatically improve the treatment of cancer tumors. Spun out from the university in 1997, the company would not be in existence today without funds from the CAPCOs and investors introduced by the CAPCOs. TomoTherapy has grown to nearly 100 employees it had 28 at the time of the first CAPCO investment. Last year the company began to ship its devices and enters the new with a strong order backlog that will drive continued growth in employment.

Alternative Investment Gala Design, based in Middleton, was running out of money in March 2000 when it recived its first CAPCO investment. Another round of CAPCO investment about a year later enabled Gala to break ground on a new biopharmaceutical manufacturing facility. Gala continued to develop its gene insertion technology and grow the company to the point where Cardinal Health made an equity investment in September 2002 and, in October 2003, acquired the remaining shares of the company to provide the resources for continued growth.

Online Investment Services CAPCO is a good program that is about to get even better, with a stronger focus on high tech and manufacturing and a bigger potential return to the state, if the Senate-approved legislation is passed by the Assembly. It is an important part of Wisconsins total economic package and essential to help us continue building our economy of the future.

Accompany Essential Investment ______
John Neis, CFA, is co-founder and Senior Partner of Venture Investors and heads the firm's Health Care practice. He can be contacted at john@ventureinvestors.com.

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The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.)

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