• WisBusiness

Monday, February 18, 2013

Tom Still: Investment capital is critical part of job creation equation in Wisconsin


By Tom Still
With Gov. Scott Walker poised to outline his state budget proposal for the two years beginning July 1, some components of his economic development strategy are already known.

* He's willing to invest in workforce development, which is crucial in a state that will be hit by a wave of Baby Boomer retirements.

* He supports a phased individual income tax cut.

* He's found a few things to like about the University of Wisconsin System's approach to job creation.

* He wants to invest more in the state's transportation networks, which is vital to moving goods and services.

* He understands that young companies – five years old or younger – are easily the biggest drivers of job creation, and has released a few modest ideas that will help.

One proposal that would go a long ways toward rounding out the budget strategy is a state-leveraged investment capital fund. If Walker adds this idea to the list to be announced Wednesday, it would attract private dollars to Wisconsin while helping to jumpstart a whole generation of emerging companies.

The proposal under consideration calls for creation of a "fund of funds" that would include the state as an investor, with private funds matching state dollars on a 2-to-1 basis. The investment would be spread over multiple years, be tightly managed by seasoned fund managers, and help position Wisconsin to better compete for its logical share of the national venture capital industry.

It's not a grant program or a loans-of-last-resort to struggling companies, but a plan to invest wisely in some of Wisconsin's most promising young companies – especially those that stand to grow the fastest, create jobs and pay back on that investment.

Wisconsin is ripe for such an approach. Consider these figures: The state has 1.84 percent of the nation's population, but 2.11 percent of its annual patent production and 2.15 percent of its academic research and development spending. In other words, Wisconsin over-performs when it comes to producing intellectual property needed in the modern "knowledge economy."

While the state's angel investors have invested in a growing number of companies, the hand-off to venture capital firms hasn't gone as well.

In 2012, a total of $95.2 million was invested in Wisconsin venture capital deals, or a little better than three-tenths of 1 percent of the national investment total of more than $26.5 billion. The amount under management in Wisconsin is even smaller – one one-tenth of 1 percent. That's a fraction of the state's investment potential, given the ideas and talent available.

Is the gap because coastal investors have trouble finding Wisconsin on a map? In part, that's true. But mostly it's because the state has failed to work at attracting dollars from beyond its borders, something other Midwestern states such as Minnesota, Michigan and Indiana do well.

The angel and venture capital industry in the United States is north of $50 billion per year in total investments. Wisconsin has what it takes to compete for its fair share of that industry – if it makes the right moves. That means competing with at least 30 other states that are vying for the attention of investors, who in turn help create companies and jobs.

According to IHS Global Insight, venture-backed companies in the United States account for 11 percent of all private sector jobs – even though the asset class represents about 1 percent of investments. Smart economic development policy is a legitimate role of state government.

That's why the competition isn't standing still. Wisconsin put itself on the national map in 2004 with the creation of investor tax credits, which quickly contributed to an explosion in angel capital deals. In 2010 and 2011 alone, according to the Wisconsin Growth Capital Coalition, companies backed by those tax credits created more than 1,500 direct and indirect jobs.

Other states are catching up, however, and Wisconsin should build on that momentum while it can. If Wisconsin passes an early stage capital plan, the word would spread like wildfire in the nation's entrepreneurial and investor communities.

A well-balanced approach to economic growth in Wisconsin should include an investment capital plan that builds on existing assets, boosts the most vibrant companies and creates jobs that will attract and retain its best and brightest young people. In the state's economic development portfolio, it deserves a prominent spot.

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

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