CAPCO Programs

A venture capital initiative in Wisconsin may be funded by a combination of a CAPCO program and fund of funds program.

In the venture capital arena, Wisconsin has long been a laggard.

Despite some growth in its venture capital pool during the last 25 years, Wisconsin still ranked just 25th among all states in 2010, with $234 million under management, according to the National Venture Capital Association’s Yearbook 2011.

Wisconsin ranks 20th in population, U.S. Census Bureau data shows.

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Gov. Scott Walker is pushing to develop a venture capital fund under a CAPCO Program in Wisconsin:

At the request of Gov. Scott Walker, former state Sen. Ted Kanavas is taking the lead in developing a venture capital fund for Wisconsin.

Saying the creation of such a fund would contribute significantly to Walker’s goal of creating 250,000 jobs, his staff is laying out an aggressive schedule that would have venture dollars being invested in high-potential, entrepreneurial companies by July 1, according to a memo written by Jason Culotta that was obtained by the Journal Sentinel.

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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.

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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.

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Dennis Murphree of Murphree Venture Partners in Texas participated in the state’s CAPCO Program in 2002:

Venture capitalist Dennis Murphree has joined a small band of fund managers in the country who participate in a little-known but rapidly expanding program called CAPCO.

A handful of states have passed legislation to create programs called CAPCO, an acronym for certified capital companies. These programs spawn investment funds, some as large as $175 million, that are designed to spur economic development.

The program itself is complicated, but it wasn’t difficult for Murphree and his partners to decide they wanted to be involved.

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A report discussing the success of Wisconsin’s CAPCO Program was recently released by a professor at the University of Wisconsin-Madison:

The National Coalition for Capital, a non-profit nationwide coalition of supporters of public policies that promote access to capital for small businesses, today announced the release of a report detailing the success of the Wisconsin Certified Capital Companies (CAPCO) program. This program encourages the flow of investment capital to promising companies located in the state, creating and preserving good jobs, and generating significant state tax revenue.

In the newly issued report, Professor Donald A. Nichols of the University of Wisconsin-Madison conducts an analysis of the Wisconsin program, which was enacted in 1998.

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Wisconsin’s CAPCO program expired in 2009, but it provided excellent job growth:

A program that used state tax credits to invest in promising Wisconsin technology businesses has paid for itself several times over, according to a study by Donald Nichols, UW-Madison emeritus professor of economics and public affairs.

TomoTherapy, Virent Energy Systems, Alfalight and Cellectar are among the Madison companies boosted by the program, called Wisconsin Certified Capital Companies, or CAPCOs.

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In 1998, Wisconsin established its own Certified Capital Companies (CAPCO) program:

On April 28, 1998, Wisconsin added a new tool to its economic development program when it enacted legislation authorizing tax incentives for investments in Certified Capital Companies (CAPCOs). CAPCOs, organizations whose primary business activity is investing in “qualified businesses,” have been used in a handful of other states as a method of promoting venture capital investment within the state. With the enactment of 1997 Wisconsin Act 215 (the Act), Wisconsin joined Louisiana, Missouri, and New York in offering premium tax credits to insurance companies that make a certified capital investment in a CAPCO. Florida joined the group shortly after Wisconsin by passing its own CAPCO legislation on May 28, 1998, and CAPCO legislation has been introduced in both houses of the Illinois Legislature.

This article reviews the development and operation of these CAPCO programs and the enabling legislation in Wisconsin, exploring the roles of the CAPCO investment vehicles, the qualified businesses that will receive the venture capital funds, and the insurance company investors. The article also focuses on how attorneys can help their clients in any of these three categories take advantage of Wisconsin’s new CAPCO program.

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Back in 2002, Representative Reilly introduced the Rhode Island Certified Capital Company Act:

Rhode Island, said Rep. Donald O. Reilly Jr. (D-Dist. 67) of Cumberland, currently ranks 36th in the nation in the amount of venture capital it receives for small businesses.

“Increased venture capital investments made in small businesses located in Rhode Island will lead to job creation and increased tax revenue for the state. That’s not wishful thinking. It is happening in other states all around the country and it’s time it happens in Rhode Island,” said Representative Reilly.

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Small businesses can turn to their local CAPCO programs for funding:

Fostering new businesses in your county (with their new tax revenue potential) is obviously a much better way to deal with state budget cutbacks and dwindling local revenues than increasing taxes or cutting services or both. And it doesn’t necessarily take a new automobile assembly plant in your community to turn the revenue slide.

For most counties, small businesses are the economic engines for their communities. The National Association of Small Business Owners reports that small businesses employ 51 percent of private sector workers; provide two-thirds to three-quarters of the new jobs; and represent 96 percent of all exporters of goods.

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