• WisBusiness

Monday, January 10, 2011

State pension fund's creation of venture 'portfolio' could help Wisconsin economy


By Tom Still
If you want to understand the value of venture capital to the nation’s economy – and the challenges facing Upper Midwest states such as Wisconsin – look no further than findings issued a year ago by the Brookings Institution, a leading independent policy research group.

In a report that urged creation of a $1 billion investment fund focused on the Great Lakes, Brookings researcher Frank Samuel noted:

* In 2008, venture-backed companies were responsible for 11 percent of the nation’s private sector employment and 21 percent of the gross national product. That’s so even though venture capital, as a percentage of all business capital, is a fraction of the total.

* Compound employment growth rates for venture-backed companies grew by 1.6 percent during a three-year period, compared to 0.2 percent for the U.S. private sector as a whole.

* Thirty-three percent of all U.S. research and development dollars and 35 percent of National Institutes of Health research grants are spent in Great Lakes states, but less than 14 percent of all venture capital is invested in the region.

* “Even more discomfiting,” the report noted, large public pension funds in the Great Lakes region contribute 40 percent of all venture capital investments by large U.S. public pension funds – but most of it winds up in investment deals on the East and West coasts.

The Brookings report, “Turning up the heat: How venture capital can help fuel the transformation of the Great Lakes region,” was an outside analysis of what many insiders already knew – that the Upper Midwest is a “donor” region when it comes to attracting and retaining start-up capital.

A recent action by the State of Wisconsin Investment Board, one of the nation’s largest public pension funds, may help change that trend.

Spurred by its own 2010 analysis of potential deals in Wisconsin and the Midwest, as well as changing fund-raising patterns among some of the nation’s top-performing venture capital firms, SWIB will commit $80 million to an investment portfolio designed to engage some of those “top 30” funds.

The pension fund board is putting the $80 million in its new “Catalyst Portfolio,” which will invest in one or more blue-chip venture funds. That would give SWIB an opportunity to play matchmaker between the coastal VCs, emerging companies and Wisconsin-based investors, who are usually well-positioned to spot deals that could become profitable while creating jobs.

While there’s no guarantee the desired investor-to-company matches will happen, the odds of pulling more venture dollars into Wisconsin should rise as top coastal investors see the quality of state and regional start-up companies.

Wisconsin’s pension fund has invested in venture capital for years, but not always in amounts that satisfied critics. Because SWIB has built expertise and performance in venture capital over the past decade, its managers concluded the time is right to reach out to coastal VCs – especially when so many of those funds had trouble raising private money during the recession.

With $81.9 billion in all of its funds, SWIB’s $80 million “Catalyst Portfolio” is a sliver of its total assets under management. But it may be enough to persuade other large institutional investors in Wisconsin to get more involved in venture capital, as well.

That would represent a second victory for Wisconsin’s entrepreneurial economy. There are a surprising number of large institutional investors, private and public, managing funds in Wisconsin. Even if a fraction of that money could be invested in emerging companies, Wisconsin could create more jobs.

“Venture-backed economic development is vital to the ability of the Great Lakes region to tell a new, future-oriented story about the region and its communities, rebranding them as innovative and creative talent centers, rather than industrial backwaters,” Samuel wrote in the Brookings report.

The rest of the ingredients are here: World-class research, talent and a creative atmosphere. All that’s needed is for more homegrown money to be put to work at home.

-- Still is president of the Wisconsin Technology Council. To read the Brookings report or SWIB’s 2010 report, visit the newsroom at http://www.wisconsintechnologycouncil.com

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