Time for Wisconsin to Invest in Innovation

Wisconsin’s CAPCO program has been one of the many ideas for economic growth within the state:

The Wisconsin Technology Council will publish a new set of white papers this month including bold ideas to stimulate venture capital investment in the state.

Inevitably, some may question Wisconsin’s ability to afford these proposed programs. But the better question is whether we can afford not to pursue new ideas as we try to transform the economy.

We have no shortage of innovations. We have one of the world’s greatest research universities, one that became increasingly entrepreneurial in the 1990s. The Wisconsin Alumni Research Foundation began accepting equity in lieu of upfront fees for University of Wisconsin-Madison spinoffs at that time and began investing directly near the end of the decade. Initiatives such as the Burrill Business Plan Competition helped to create a more entrepreneurial culture.

But there was not enough capital to match the demand.

Over the last dozen years, Wisconsin has served as a laboratory for policy experiments designed to stimulate capital formation. Incentives were rolled out to encourage private investors to put their money into Wisconsin’s entrepreneurs, giving the most innovative the courage to make the entrepreneurial leap:

• Wisconsin used tax credits to launch a Certified Capital Company program (CAPCO) in 1999 to create three Wisconsin-focused venture capital firms, managing $50 million.

• In 2000, the State of Wisconsin Investment Board was focused on return on investment, not economic development, when it made the first of $200 million in commitments to invest in venture capital funds with offices in Wisconsin. SWIB officials saw world-class research and early successes, such as Third Wave Technologies, and believed there was an opportunity to generate superior returns.

• The Accelerate Wisconsin program, established in 2004, provided tax credits to encourage formation of traditional venture capital funds and to stimulate angel investor activity.

• The Wisconsin Angel Network was formed in 2005 to foster the formation of angel investor groups.

• The Burrill Business Plan Competition model was adopted statewide with the Governor’s Business Plan Competition.

These catalysts encouraged early stage venture capitalists and angel investors to make seed investments and to launch the commercialization process. The goal was for skilled managers to be hired and for the companies to attract capital from venture capital firms and out-of-state investors. The idea was that as the companies matured, high-paying jobs would be created and investors would receive competitive returns. The new economic activity would generate tax revenue that would exceed the incentives, ultimately shrinking rather than expanding Wisconsin’s budget deficit.

Politicians needed courage to support the programs, because they take more than one election cycle to produce results. The skeptics tried to measure results while the programs were in their infancy, declaring them a failure before they got their footing. But the skeptics were wrong as two announcements in the past month show.

Two of the Wisconsin CAPCOs released a study recently that detailed the payback that their funds provided to the state. The capital investments materialized as advertised, high-paying jobs were created and the companies have grown. Payroll taxes from the new jobs alone have paid back the tax credits offered by the state twofold, and they will pay it back again every 31 months into the future.

The data was made more tangible with the announcement in June that Virent Energy Systems had closed on a $46.4 million round of financing to accelerate its biofuels business. Virent, a spinoff from UW-Madison’s chemical engineering department, is focused on developing the next generation of biofuels. It took advantage of these initiatives. In 2003, it was a winner of the Burrill Business Plan Competition on the UW-Madison campus.

Co-founder Randy Cortright caught our eye at Venture Investors, where we manage a CAPCO for Advantage Capital and have two funds backed by SWIB. In May 2005, we led $1.6 million in angel financing with two of these funds, Advantage Capital and Venture Investors Early Stage Fund III Limited Partnership, a fund that SWIB backed.

In May 2006, the company began to attract capital from outside the state with a $7.5 million round of financing led by CargillVentures. That round included funding from Venture Investors, WARF and Honda. Virent combined the investor capital with federal research grants.

In April 2007, the company began a strategic collaboration with Royal Dutch Shell, and in August 2007, Venture Investors led a $22 million round of financing. This enabled the company to attract Lee Edwards as chief executive, an experienced energy industry executive. The investor dollars were combined with strategic partner support to construct the world’s first bio-gasoline production plant. This 10,000-gallon demonstration facility was completed in late 2009, meeting its objectives and providing the confidence that resulted in June’s announcement of the $46.4 million round of financing.

The result is that Wisconsin has a recognized world leader in the development of biofuels. While still facing the typical challenges of any development stage company in an emerging industry, the company is well-positioned. There is potential for significant growth in high-paying jobs, new tax revenue, a royalty stream to WARF, investment returns that signal Wisconsin is a good place to invest and role models for the next generation of entrepreneurs.

Wisconsin Technology Council has vetted innovative ideas from around the country, advancing the best of them in its white papers. Our political leaders can consider these ideas knowing that they are not just a wish and a prayer. We have evidence that they work.

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