Investments

Investment tax credit bill is a good start, but Wisconsin must confront other barriers to capital formation

Bank Of America Investment By Tom Still • 04/21/04 MADISON Now that Gov. Jim Doyle has signed a bill to promote investment in Wisconsins small start-up businesses, will the states technology sector blossom like a spring flower?

Based on this law alone, dont count on it. The bills creation of tax credits for angel and early-stage investments as well as grants and loans for technology start-ups is welcome news, but its only one step toward easing Wisconsins chronic shortage of investment capital.

Wisconsin has historically lagged behind U.S. and regional averages when it comes to investments in start-up businesses, such as those typically found in life sciences and information technology. The often-cited comparison is Minnesota, a similar state in many ways but not when it comes to investment of venture capital in start-up firms. Minnesota attracts five to six times as much venture capital as Wisconsin, in part because the Gopher state has a risk-taking tradition imbedded in its economic culture.

The bill signed last week by Democrat Doyle, and co-authored by a group of legislators headed by Republican Sen. Ted Kanavas of Brookfield, was a move in the right direction. Some other promising trends and programs are in place. But Wisconsin must take stock of other barriers that block investment.

For starters, some of the states largest institutions either dont invest in start-up companies at all, or their organizational charters prevent it.

The State of Wisconsin Investment Board was basically dragged kicking and screaming into investing $90 million in a fund to be managed by two private capital firms, even though recent studies have shown that SWIB invests far less of its portfolio in alternative investments than most state-based pension funds. If SWIB invested the U.S. average for such funds in alternative investments, the amount of venture money available in Wisconsin would grow exponentially.

The University of Wisconsin Foundation has well over $1 billion in assets under management, but it doesnt invest directly in companies. In contrast, the Wisconsin Alumni Research Foundation has found a way to invest more of its $1.3 billion in assets in start-ups, even though WARFs charter limits such investments to companies with UW ties.

Wisconsin also fails to fully leverage one of its largest private sources of capital insurance companies with state headquarters. The Legislature killed a bill to extend a program that gives insurance companies incentives to invest in start-ups and new technology. The bill may not have been perfect, but opposing lawmakers essentially turned their backs on a multi-billion source of capital. Would lawmakers in New York ignore IBM or would Washington state legislators pretend Microsoft doesnt exist?

There are some promising trends. The growth of angel investor networks in Wisconsin appears headed in the right direction. Just a few years ago, such groups of small investors werent even formally organized. The creation of TechStar by Milwaukee-area academic institutions has helped fund some emerging companies in southeast Wisconsin. Some large state companies, such as Kimberly Clark in Neenah, have launched their own venture capital arms. Efforts such as the Wisconsin Entrepreneurs Conference, the Wisconsin Life Sciences and Venture Conference and the Governors Business Plan Contest are all aimed at connecting the states best entrepreneurial ideas with a network that can include investors and advisers.

The Doyle administration and far-sighted legislators should be congratulated for hammering out a program to increase venture investment in Wisconsin over time. Specifically, the bill provides $65 million of tax credits over the next decade to encourage investors to invest money, time, and expertise in new Wisconsin companies. The credits are targeted at seed and early stage companies where investment is especially scarce. When fully deployed, the credits will leverage more than $260 million of investment from the private sector.

Other strategies must be pursued, however, so that Wisconsin can create and attract enough capital fast enough to make a real difference. Good ideas wont wait forever. If they arent funded at home, they will leave home or wither away.

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Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.

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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.

Essentially, Wisconsin venture funds can now qualify for tax credits on the entire amount of investment, exempt investors. For angel investment, up bill makes only minor changes to simplify the administration of the tax credits for groups of investors. "[Most] angel gropus in the state are still operating under what I'll call the individual choice approach, " said David Ward, president of NorthStar Economics and an angel investor. "Very few of them have formed funds, in which everyone's in or everyone's out."

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