Hidden study reveals venture gap

Tim Cooley, the Wisconsin governor’s new man in charge of capital formation, steps into office with his challenge ahead clearly laid out.

A recently unearthed study of economic development reveals a glaring weakness in how venture capital is deployed in Wisconsin, and it will be Cooley’s job to get it fixed.

With long experience in finance in Wisconsin and Silicon Valley, he has the right background and smarts to fill the gap. He also has a passion for financing startup businesses.

Not only did the hidden report rank the state low in venture investment compared to nine other states, including our Midwestern neighbors, but it revealed that Wisconsin venture capital has been heavily concentrated in bio-technology and in Dane County. The rest of the state and other sectors get dribbles.

The study was done during the previous Administration by AngelouEconomics of Austin, Texas to evaluate the organizational effectiveness of the Department of Commerce. The Commerce grades were generally not good over the period of 2003 to 2010. So it should come as no surprise that the old department has given way to a new public-private entity, the Wisconsin Economic Development Corp., which is just getting its feet wet. The new entity is where Cooley hangs his hat.

Angelou compared Wisconsin’s economic development effectiveness to six Midwestern neighbors, Georgia, Oklahoma and Louisiana. For most of the years, Wisconsin trailed all of those states in venture investments except for Oklahoma and Louisiana.

The study never saw the light of day in the run-up to the 2010 gubernatorial elections, probably because the report was less than glowing. The other negative factor could have been the concentration of investment in Dane County, which got 93% of the venture funds over the seven years analyzed.

Further, the bio-tech sector drew 86% of the funds invested from 2003 to the middle of 2010.

Multiply those two numbers and you have about 80% going to biotech in the county surrounding UW – Madison. Note that bio-tech is not yet a major employer in Wisconsin, despite massive investment and major scientific breakthroughs in realms like stem cells.

Other studies point to medical devices, information technology, advanced manufacturing and agri-business as better bets for job creation. Cooley may want to more agnostic than Madison types on which clusters to promote with any new venture capital. Biotechnology, of course, should be part of the mix.

The Angelou analysis is especially pertinent as the Legislature and Gov. Walker get ready to push through a venture capital bill in the fall. No one in the state wants to see anything but success and prosperity for our flagship university, but there is plenty of innovation available for commercialization in other parts of the state as well.

The concept drawing the most political and business support at those point for early stage investing is a state backed fund of funds. Done right, it would invest in early stage sub-funds across Wisconsin – maybe six to eight of them. (Full disclosure: I am helping to raise such a fund for Southeastern Wisconsin.) The fund of fund dollars would be raised from from bonds and would match dollars raised in the private sector.

Importantly, the professionals running the private funds would be making the investment calls, and they would be leading with their own money. Investment choices should never be subject to political influence.

Ohio has taken the lead in the country in putting up major capital to stimulate the creation of an innovation economy. Citizens have backed an increase in funds in that state to $2.3 billion. The funds are disbursed on a competitive basis to regional organizations across the state, thus avoiding the concentration issue that has held back Wisconsin.

There was some good news in the Angelou report on the investment front. In 2008, Wisconsin ranked first in R&D expenditures among the ten states at $196 per capita, fifth in total R&D dollars and fifth in patent activity.

Angel investing, which usually precedes venture investing, rose 1200% over a six-year period to $22 million in 2009.

Stimulus for early stage investing was the biggest piece of unfinished business in the just-completed session of the GOP-controlled legislature. If Wisconsin is really open for business, and if it is going to be one of the best states for launching a business, the proposed fund of funds at $200 million needs to be addressed this fall.

Two civic organizations, the Wisconsin Technology Council and Competitive Wisconsin are analyzing the best models for supporting early stage investment. Virtually all the organizations in the state that fund startup businesses are involved in the two efforts.

They are expected to cover  broad range of investment needs and will have their recommendations ready for the fall legislative session. They will undoubtedly use the Angelou work as a base for their conclusions.

The state has deep entrepreneurial roots – almost all our great employers started here. Cooley and his allies need to get that entrepreneurial ecosystem moving again.

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