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Kanavas: Doyles use of Patients Compensation Fund could be illegal
While Republican leaders in the State Assembly and Senate expressed support yesterday for Gov. Jim Doyles Grow Wisconsin program, Sen. Ted Kanavas -- a Brookfield Republican expressed support, but takes issue with the provisions for the state-funded venture capital authority.
Kanavas reserved his strongest criticism for Doyles proposed use of funds from the Patients Compensation Fund a cache of dollars earmarked to pay malpractice claims against state physicians.
Doyle unveiled the program yesterday, and while the plan touches on a number of economic strategies, perhaps the most expensive element is a proposal to invest $300 million in state funds in a new seed and venture capital authority.
Polls on both sides of the aisle have admitted that low levels of venture capital investment have hamstrung the states economy. Figures provided by Pricewaterhouse Coopers Money Tree Survey reveal that with $64.5 million in venture capital investments in 2002, Wisconsin lags behind neighboring Minnesota ($326 million), Illinois ($229 million) and Michigan ($73 million).
Doyles plan would close that gap by creating a new bureaucracy to invest in capital funds managed by experienced investment professionals that focus on early-state companies in Wisconsin. The authority will be funded annually over the next 10 years with $10 million from the state, $10 million from the Patients Compensation Fund and a request from the State of Wisconsin Investment Board (SWIB) for $10 million.
Senate Republicans, however, are pushing for a reduced reliance on state investment.
We just want to make sure private entities are involved in this, Kanavas, who with fellow Republican Cathy Stepp of Racine yesterday announced a response to the Governors plan. Kanavis serves with Stepp on the Special Select Committee on Job Creation. Stepp also chairs the Committee on Economic Development, Job Creation and Housing. We want to make sure local investors have skin -- seed capital -- in the game.
Kanavas pointed out that the allocation from the Patients Compensation Fund may not be allowable under state law. In May of this year, Doyle faced criticism for his plan to raid the fund for $200 million to ease the states budget deficit. Technically, dollars in the fund do not belong to the state as they derive from premiums paid by physicians. The low-cost coverage provided by the fund reduces the amount of commercial malpractice insurance Wisconsin physicians need to pay.
I am not convinced that is an appropriate use of that fund, Kanavas said of the $10 million annual transfer from the malpractice fund. It is not only a disagreement on principal whether it is legal or not is still not solved.
The issue of raiding the Patients Compensation Fund aside, Kanavas said an incentive approach would be more desirable than direct investment of state dollars.
We like the use of tax credits making funds available, Kanavas said. The governor, meanwhile, uses an authority model.State funds necessary?
But sources in the tech start-up field suggest that while private investment can be attracted to promising technology companies, investments in the early stages of a companys development are too risky for most. Leaders in other states recognize this fact and provide funding accordingly.
Wisconsin has phenomenal foundations in innovation through our academic institutions, Techstar Managing Partner Lane Brostrom said. We think we could be a leader in the commercialization of new tech bases. But we dont have the kind of infrastructure a lot of states do for very early stage support for companies.
TechStar is an investment and technology transfer organization formed in collaboration with leading academic institutions in Wisconsin, including the Medical College of Wisconsin, UW-Milwaukee, UW-Parkside, Marquette University, and the Milwaukee School of Engineering.
If you think about seed investment or seed entrepreneurs, that is the riskiest stage to really get involved in a business, Brostrom said. Typical VC players dont get involved until there is a business plan, management is in place and there are proven customers. That is not a seed investment that is really the second round of investment.
Tom Still, president of the governors Technology Council and the Wisconsin Innovation Network, echoed Brostroms concerns.
I think investment capital can come from a lot of sources, Still said. I look at other states and what they are doing to bolster their high tech economy, and there is not one source of capital. It is not public and not private. There is often a mix of strategies to balance dollars from both sides. Obviously, some of those start-up companies may not be able to get some of that private money because the venture capitalists tend to focus on the later round of companies that are a bit more mature.
This lack of seed capital for tech start-ups, according to Brostrom, may be hampering the states ability to attract venture capital.
We have had a real bottleneck in this seed stage, Brostrom said. I think the state is doing the right thing in supporting seed-stage commercialization. Most seed investors are kind of first-fund investors. But venture capitalists tend to start from top down. They are not the hands-on, walk-the-halls start-up types... Seed investors need to be closer to the deal. That is just appropriate to support seed stage work. The later the stage of investment, the further away the investors can be.
Brostrom stressed that as more tech companies get the first jolt of capital, they will be better vessels for venture capital.
With more businesses teed up and we will tee up more businesses through this type of seed initiative -- we will be able to attract more venture capital to the state. I am very excited about the 10-year plan the state has. This is going to put the state on an all-new level when it comes to building a technology base.
Chuck Rathmann is a freelance writer and contributor to Wisconsin Technology Network. He can be reached at firstname.lastname@example.org