Lessons learned from venture bill demise

Jeff Rusinow

“Interesting, while most of the politicians turned out be very active in their support of entrepreneurs and the people who fund them, the overall environment for angel investing in Wisconsin is challenging even in the best of circumstances.”

So wrote Jeff Rusinow, a pioneering angel investor in Wisconsin, in his 2011 book, “What I Really Think.” After 22 years as a retailing executive, he became an angel in 2000, so that comment came after more than a decade of trying to change the state’s culture from risk adverse to adventuresome.

With a venture capital bill about to die complicated death in the current session of the legislature, it is glaringly apparent that Rusinow’s observations still apply in 2012.

There has been some progress since 2000:

*. The legislature has created Act 255 tax credits for early stage investors, and they have helped angels fund more than 100 deals.

* To the north, Charlie Goff and fellow angels have raised a second fund in the Fox River Valley — $25 million as a sequel to its first $10 million fund, now fully invested. That’s progress.

* Capital Midwest has raised a $40 million venture fund out of its Wauwatosa office, which should spell Wisconsin investments at some point.

* And several other groups are working to raise early stage funds. (Disclosure: I’m helping to raise one in Southeastern Wisconsin.)

* Lastly, BizStarts Milwaukee has tallied about one high growth startup per month, despite no highly active fund in the region.

That said, the failure to create a fund of funds at the state level can only be viewed a major setback in the effort to make Wisconsin competitive in the innovation economy. The $100 million proposal for a fund of funds that would put matching money into venture funds around the state was modest in size compared to other states, but it failed nonetheless.

It fell victim to contamination from the CAPCO scandal of a decade ago, to the political convulsions from the unending recall elections and to a state budget shortfall.

Putting $50 million of taxpayer money through CAPCOs a decade ago created a lousy precedent. Essentially, the state gave three certified capital companies $50 million on the sole condition that they would invest it in Wisconsin startups or expansions. Some of the money is missing (it should be found and returned), and the rest resulted in only meager job creation. The state treasury got little in return.

Recall politics should not have been a major factor in the venture bill, because there has been bipartisan consensus on the need to reinvent the state through entrepreneurship. Still, attention was diverted by the recall theatrics.

The “we have no money” excuse is, of course, circular. If we don’t jump start the ailing Rustbelt economy, state budgets will always be in trouble.

So, what are the lessons learned, so we are better prepared for when the venture bill comes up again in the post-recall legislature?

1. Forget the CAPCO structure. It’s a nonstarter. The taxpayers got hosed.

2. Keep the legislation bipartisan. It’s too important for divisiveness.

3. Treat government/taxpayers like any other limited partner when it provides matching funds. With just average investment performance, the state should get its money back, plus a return. There should be no cost to taxpayers if the right fund managers are selected.

4. Make sure the funds are spread statewide. It’s good politics. It’s not just about Dane County.

5. Deploy the unused Act 255 credits as way to pay for the fund of funds.

6. Remember, if done right, the state and citizens will get a quintuple dip:

• A return on investment (ROI) as a limited partner.

• A return of taxes (ROT) since every $50,000 job created will throw about $5,000 in new sales and income taxes each year.

• New jobs for Wisconsinites who are unemployed or underemployed. Young companies create all net new jobs.

• Wealth creation for investors willing to take the plunge on risky startup companies.

• The societal advances from the innovations brought to market by the startup companies.

If done right, what’s not to like?


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