These days, there’s one thing politicians of all stripes agree on: Wisconsin needs to add tens of thousands of jobs for the state to emerge from its economic downturn.
Economic development experts say one way to get more people working is to encourage the growth of promising young businesses in high-impact fields such as biotechnology. Those often-risky endeavors can accelerate their growth with a boost from investor "angels" and companies that provide venture capital.
State lawmakers have spent a lot of time in 2011 trying to determine if taxpayer money should be used to boost such companies. The most controversial strategy calls for the use of state certified capital companies, or CAPCOS, that would serve as an investment conduit between the state and the anticipated job-creators.
Millions of dollars are at stake, especially for the firms that would be allowed to use the state money. One proposal called for $500 million to be invested in state firms over the course of six years. That’s 10 times the size of the last state venture capital plan, which had a spotty outcome.
In October, one group of Assembly Republicans, led by Rep. John Klenke (R-Green Bay) pressed ahead with a plan they had been working on all year that included CAPCOs. The lawmakers made the rounds, including to the Journal Sentinel, where they laid out their case to solve what they called the "capital crisis."
Klenke argued that the level of venture investment in the state was woefully low, one of the worst in the country. His presentation included a PowerPoint chart with this statement: Wisconsin ranks "48th out of all 50 states in venture capital investment."
Well, that would be pretty low.
Do we really stink as a venture capital state? Let’s peel the onion.
First, let’s look briefly at why the idea of including CAPCOs is so controversial, and why those firms have pressed so hard to be included in a Wisconsin program.
Journal Sentinel reporters Kathleen Gallagher and Mark Johnson have investigated the performance of CAPCOs in a previous, much smaller venture capital program. They found that one of the CAPCOs invested only about half of the $16.6 million it got under a Wisconsin program designed in the late 1990s to create jobs, taking advantage of loopholes in what some lawmakers are calling a poorly written, badly monitored law. Some $8 million in state money remains unaccounted for.
Klenke argues that CAPCOs would get money to companies faster and focus more on younger companies than conventional venture investors.
By citing the 48th-place ranking, Klenke makes the need for his plan seem even more urgent.
There’s one problem: He’s wrong.
When Klenke was questioned about his figures by Journal Sentinel reporters, he vigorously defended them. When we asked Klenke -- repeatedly -- about his assertion that Wisconsin ranks third from the bottom, he offered a brief emailed explanation five days later: "This was a typo from the slides. It was intended to reference the Kauffman Entrepreneurial Index."
The Kauffman index measures new business creation in the U.S. The report Klenke mentioned was for the period 1996-2010. It does show Wisconsin ranking 48th.
So where do we rank on venture capital?
That information is readily available. The venture capital industry is carefully studied with data broken down by state, dollar amount and so forth. The "gold standard" is the quarterly "MoneyTree Report" issued by PricewaterhouseCoopers LLP and the National Venture Capital Association.
In the first nine months of 2011, venture capitalists have invested $66 million in 12 Wisconsin-based companies, making us No. 25 nationally for the amount of venture investing, the report says.
For comparison purposes, California is No. 1 at $10.6 billion, followed by Massachusetts at $2.2 billion. Wisconsin is sandwiched between New Hampshire ($80 million) and New Mexico ($58 million).
John Neis, managing director of Venture Investors LLC, the state’s largest venture capital firm, said the level of venture investing here lags when compared with other factors, such as our population. We’re 18th in that category.
Part of the problem is geographic. Venture capitalists generally like to live near the firms they invest in and help run. Those firms are predominately on the east and west coasts.
Venture capital plays an "absolutely critical role in a number of key industries," including information technology, clean tech and life sciences, Neis said. Those are among the fastest-growing sectors with the highest paying jobs.
For 2010, there was $121 million in venture investments in Wisconsin -- and $84 million went to two companies, Neis said.
As Neis puts it: "We’re way behind." But, he also notes there are a dozen states that have no venture capital under management at all.
Klenke says the Legislature should approve a venture capital plan that includes the use of controversial out-of-state investment firms -- and, to make the case in presentations, he emphasizes the sorry state of venture capital investing here.
But we’re not 48th of 50, as he claims. He’s overstated our situation, and confused his reports.
We rate Klenke’s statement False.
"Risk Capital in Wisconsin: A Progress Report" North Star Economics, March 29, 2006
Center on Wisconsin Strategy Wisconsin Job Watch, Sept. 2011
National Venture Capital Association 2011 Yearbook
Interview, emails John Neis, Venture Investors LLS, Nov. 2, 1011
Emails Rep. John Klenke (R-Green Bay), Oct. 31, 2011
Milwaukee Journal Sentinel, "CAPCOs resurface in proposal by 3 GOP Assemblymen," Oct. 25, 2011
Milwaukee Journal Sentinel, "Venture capital executive calls for Wisconsin to drop CAPCO plan," Oct. 27, 2011
Kauffman Index of Entrepreneurial Activity, 1996-2010
PricewaterhouseCoopers, National Venture Capital Association MoneyTree reports
Building Companies and Jobs: The Case for a Venture Capital Program in Wisconsin, Wisconsin Growth Capital Coalition, Sept. 15, 2011
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