Panel Sees Opportunity for State-Financed Bonds to Boost Investment in Start-Ups

Wisconsin’s CAPCO Program, which began in 1998, provided investments quickly to state-certified companies:

Wisconsin has done a good job assembling pools of angel investors with deep pockets to fund nascent companies here in the Badger State.

When it comes to raising additional money to back start-ups as they begin to grow, however, Wisconsin has fallen behind its neighbors.

But the state may be poised to create a so-called “fund of funds” worth between $100 million and $500 million – possibly backed by state-financed bonds – a panel of experts said Tuesday at a Wisconsin Technology Council luncheon.

Money from that program could help close the financing gap for young companies often seeking to raise from $500,000 to $2 million, an amount many large venture firms don’t like to go below.

Tom Still, head of the Wisconsin Technology Council, said his group has had success bringing together angel investors.

“Now Wisconsin needs to be more aggressive and take the next steps,” he said. “After this coming election could be the time to move. We will have a new governor and Legislature. We’re laying the groundwork now, so the time could be right.”

Keith Bozarth, executive director of the State of Wisconsin Investment Board said his agency already has $700 million of its nearly $80 billion in assets dedicated to venture capital funds.

He said the Badger State might consider following Ohio, which has used its bonding ability to create a fund valued at $2.3 billion to create new technology-based products, companies, industries and jobs. In May, the states “Third Frontier” was extended through 2015.

Lynn Allen, president of Kentucky-based Capital Innovations, also praised the Ohio effort, which has helped turn start-ups into going concerns.

Like Wisconsin, she said Kentucky does not have a fund of funds program, but she said the Wisconsin is in a good position to create one and avoid mistakes that others have made.

“You are fortunate because you have a huge inventory of technology here in Wisconsin, but you’re not commercializing it to benefit your state,” she said. “You need to be bold and create a fund like Ohio.”

Ohio officials say the initiative supports applied research and commercialization, entrepreneurial assistance, early-stage capital formation, and expansion of a skilled talent pool. The initiative’s strategic intent is to create an “innovation ecosystem” that supports the efficient and seamless transition of great ideas from the laboratory to the marketplace.

John Neis, managing director of Madison-based Venture Investors, praised Wisconsin’s certified capital company (CAPCO) program, in which state-certified companies were quickly funded by insurance firms.

As an incentive to invest in CAPCOs, insurance companies receive a $1 credit on premium taxes for each $1 invested (tax credits are spread over a 10-year period). The CAPCOs must invest in specific types of businesses according to an established time schedule to ensure the availability of tax credits to the insurance companies.

He said the program, which started in 1998 but was not renewed, resulted in 23 businesses — including TomoTherapy and Virent Energy — receiving financing to create jobs for 3,500 full- and part-time jobs paying an average of $68,650 in 2009.

Neis said he is hopeful a fund of funds can be created in 2011, but he said a potentially divided Legislature fighting over economic development and investment policy could doom the program’s launch.

If the fund of funds is created, he said it could build on the success of the Act 255 tax credits that Wisconsin began offering five years ago, which the panel said have helped spur investing in early-stage Wisconsin companies.

Brian Birk, a founder of New Mexico-based Sun Mountain Capital, said his company manages successful investment programs for the states of Utah and New Mexico.

He said $100 million in capital in Utah brought in another $900 million in outside investments for the state that funded 50 high-tech companies, which created 1,000 jobs paying an average of $66,000 – twice the state average.

Likewise, a New Mexico fund worth $250 million brought in another $1.4 billion in venture capital investments, a huge amount for a state with only 2 million residents.

He said each dollar invested by New Mexico brought it $6.80 from outsiders. But he warned that states need to be careful to separate decision-making about investments from the politics of the region by hiring professional managers.

“You need to have a firewall,” he said. “But it takes more than capital to create a vibrant early stage economy. You need to have the right policies in place.”

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