• WisBusiness

Tuesday, May 28, 2013

Tom Still: For proof of how venture capital funds can work, gaze across Lake Michigan


By Tom Still
MADISON – In many ways, Michigan looks a lot like Wisconsin. It shares hundreds of miles of the same Great Lakes shoreline, and usually votes "blue" in presidential elections and "red" when it comes to choosing governors and members of its state Legislature. It also boasts major research universities that rank among the nation's best.

Unlike Wisconsin, however, Michigan began investing in its emerging economy years ago – even as the state's automobile manufacturing base was teetering on the edge of collapse.

The success story of how Michigan has surged on to the national radar when it comes to venture capital investments in tech-based, "knowledge economy" companies should be instructive to Wisconsin policymakers as they prepare to vote on creating a state-leveraged fund.

The Wisconsin Assembly is poised to vote June 6 on a bill that would create a state "fund of funds" seeded with $25 million in state money and built to attract twice that amount in private capital. It would invest in startups and emerging companies over time after a private manager is selected. Senate approval would also be need before Gov. Scott Walker, who earmarked the $25 million in his budget bill, could sign Assembly Bill 181 into law.

Michigan offers a prime example of how such a program can – over time – revitalize entire sectors of a state's economy.

At a May 21 meeting of the Michigan Venture Capital Association, it was reported that Michigan had jumped from less than $100 million in total venture capital investments in 2011 to $242 million in 2012. The number of individual deals in Michigan also climbed from 30 to 47 companies. As a result, Michigan jumped more places in the national rankings (10 spots, to 15th) than any other state last year.

While there may be other reasons to explain Michigan's venture capital surge, those familiar with the state say it's mainly the result of a steady, long-term bipartisan commitment to state-leveraged investment funds. That took place over nearly 10 years, and involved both Democratic and Republican governors and Legislatures.

The state investment over time has been far more substantial that what is being considered in Wisconsin – about $210 million in two main funds – and it took place at a time when Michigan's state budget was in far worse shape than Wisconsin's budget is now.

"The bottom line is they have done a great job in Michigan through a patient, sustained public-private effort," said John Neis, managing director of Madison-based Venture Investors LLC. "They found the will and the way to stick with it, and now they have the results to show for it."

Venture Investors opened an office in Ann Arbor, Mich., in 2007 after receiving an investment from Venture Michigan Fund I. With the University of Michigan a stone's throw away, it was a strong fit with the Wisconsin firm's practice of investing in technologies and companies tied to academic research.

Venture Investors was not the only investor firm from outside Michigan to be drawn to the state because of the state-leveraged fund. Since 2008, the number of venture capital professionals in Michigan has grown from 43 to 62, and the number of firms headquartered in the state has risen from 15 to 20 – with nine out-of-state firms opening offices there.

Total venture capital under management in Michigan has grown to $3.7 billion, up $700 million in one year alone. The amount of money available in those funds for new investments has climbed from $367 million in 2011 to $456 million last year.

In contrast, Wisconsin has only a relative handful of venture capital funds by any description and about one-tenth of 1 percent of the nation's venture capital under management in the state.

"It didn't happen overnight in Michigan, but there's no reason we can't learn from their success and follow their playbook," Neis said.

Wisconsin is competing for its share of a $50-billion industry: annual angel and venture capital investments in the United States. While some progress has been made, mainly due to Wisconsin's tax credits for angel investors, it continues to lag in venture capital investments. Passing Assembly Bill 181 will jumpstart that process.

-- 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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