The legislation was announced on Wednesday, April 24, and a public hearing was held on May 1. The bill’s funding of $25 million is included in the Governor’s budget.

I attended the public hearing and provided written commentary on the bill on behalf of Accelerate Madison.

Before we get to specific recommendations, let’s break down how the program would work.

Under the bill, the State Investment Board (SWIB) and Wisconsin Economic Development Corporation (WEDC) would pick an “investment manager.” WEDC would give the manager $25 million of State money to invest into venture funds, which in turn would invest in companies.

The investment manager would:

• Add $300,000 of its own money and $5 million raised from other sources, for a total of $30.3 million in the “fund of funds.”

• Invest in at least four different venture funds, with no more than $10 million in any one fund.

• Pay 100% of the first $25 million of profits back to the State, and 90% after that.

The venture funds would:

• Match the State money invested in a company with their own money at least 1:1 and preferably 2:1 or more

• Get at least half of the money into eligible companies within two years and have all of it invested within four years

• Recover all invested money if a company becomes ineligible

Then the venture funds would invest in eligible Wisconsin companies. To be eligible for investment, a company must:

• Be headquartered in Wisconsin

• Have at least 50% of their full-time employees here

• Be in one of the target industries: agriculture, information technology, engineered products, advanced manufacturing, medical devices/imaging

There are also reporting requirements at all levels. WEDC would monitor compliance by the investment manager, which would in turn monitor compliance by the VCs.

Presuming at least a 2:1 ratio for the venture investments, the net new investment in Wisconsin companies would be $60 million or more.

This all sounds good, and it has the potential to be good if a few problems can be resolved.

• A $25 million State investment is below the need and insufficient to create the kind of game-change required to boost Wisconsin out of the basement in job creation and company creation. While the initial capital could be added to later, there is a risk that the legislature will simply declare victory and turn their attention elsewhere. An even larger risk is that critics could point to the inevitable meager results as proof that such public investments in startups are futile. To truly be effective, the State investment should be increased. The ideas and the entrepreneurs are out there. The University of Wisconsin is in the top tier nationally in research, but in the bottom tier in company creation. Further research is needed to determine the sweet spot of an amount that would not crowd out private investment.
• There’s a potential for confusion or overlap with the new $30 million SWIB/WARF fund. It’s unclear how these would work together, if at all, and whether there might be overlap or market confusion.
• Without getting too deep into the general controversy over WEDC, the bill should ensure independence of the investment manager’s portfolio decisions from WEDC to avoid conflicts of interest and provide confidence to the public. WEDC’s role in selecting the investment manager should be reduced or eliminated.
• There are too many target industries and they are overly broad. With a small portfolio, focus is important. Getting an investment manager with industry expertise is critical, and finding a firm with deep expertise in all five of the proposed general categories would be difficult. There would be no State brand equity created. Focus on one or two more specific industries, or eliminate the target industry mandate altogether, and let the investment manager make these decsisions.
• The clawback provision has the potential to backfire. The bill requires the VC investors to remove their investment in a company if it moves out of Wisconsin within the first three years. We understand and support the goal of keeping the companies in Wisconsin, and the existence of this fund should reduce the relocation risk, but that must be balanced with the State’s financial interests. There may be valid management reasons that the company must relocate, and requiring it to stay arbitrarily could hinder its growth and reduce the value of the State’s investment. Worse, the clawback provision could put the VC investor in a terrible negotiating position if the company is on a high trajectory, it could actually incentivize the company to move out of state so that it can regain its equity at an under-market rate. The bill should be modified to provide incentives to remain in Wisconsin, but not force a sell-out that could be contrary to the State’s financial interest.

With some time, an increased financial commitment and the leadership to fix these issues, Wisconsin could have a venture capital program that would boost our economy and help the state fulfill its potential for creating successful companies.