09 Aug Wisconsin seeks to develop $10 million angel investment fund
MADISON, Wis. — The Wisconsin Department of Financial Intuitions has traditionally maintained a low profile, although its actions have a significant impact on the state’s consumers and industries. The department is going through a renaissance and increasing its visibility and service offerings under the leadership of Secretary Lorrie Keating Heinemann.
The DFI is taking an aggressive and creative approach to encourage more investments in start up businesses and to measurably improve Wisconsin’s financial literacy scores. The agency is preparing to roll out Web-based “yellow-pages” and resource portals for both angel investors and individuals seeking financial literacy information. The DFI is lending its full support the creation of a “robust angel community” in Wisconsin, which could help fuel the rapid development and expansion of high-growth industries in Wisconsin.
Heinemann, appointed by Gov. Jim Doyle in 2003, is responsible for coordinating the state regulation, licensing and enforcement activities for more than 100,000 financial service providers in Wisconsin. She also administers the state corporate filing activity, the Uniform Commercial Code lien filing activity and serves as administrator of the Wisconsin Consumer Act.
Her agency received quite a bit of attention earlier this year, as it played a role in investigating the scandal that rocked Strong Capital Management. It is now turning its focus to economic development.
Transition from public to private sector
Previously, Heinemann, a Wisconsin native, served as the director of corporate services for Valley Bancorporation (now M&I Bank) where she developed an investment fund for municipal treasurers, for which she served as the fund’s president of the board of trustees. She also worked for Associated Trust Company and Virchow Krause Capital where she served as an investment advisor and co-fiduciary to non-profit boards, pension plans and wealthy individuals.
“It has been an incredible learning experience to be on the other side of the table,” Heinemann said of her transition from the private to public sector. “People have come in and told me about their issues, and hopefully we are being very responsive.”
DFI: A catalyst for economic development
In addition to her daily regulatory responsibilities to protect consumers of financial services and ensure the soundness of Wisconsin’s financial institutions, Heinemann is taking an active role to foster economic growth. She is involving the DFI in the development of a support organization which will help angel investment funds form and thrive. Wisconsin start-up companies often need new sources of funding when they are not yet ready for bank financing.
Wisconsin receives a great deal of press for trailing surrounding states in the amount of VC dollars invested. In 2003, Wisconsin had $45 million in VC investment, as compared to Minnesota, which had over $203 million, and Michigan, with over $103 million.
“DFI collects a great deal of information of the different types of corporate entities being formed in the state. We see private offering memorandums, so we know when companies are moving into their next stage of growth and have additional capital needs,” Heinemann said.
The DFI has observed that there is a funding gap between the bootstrapping and the venture capital stages of business formation.
“Access to capital is an initiative that I am supporting through the Department of Financial Institutions. DFI is encouraging the creation of angel networks, which have historically helped fund the gap and we hope to connect interested angels to private and public resources that will help their networks form and thrive.”
Heinemann is focusing her department’s efforts on the grassroots investing of angel investors, who provide early stage investments and guidance to new businesses. These investors usually provide capital ranging from $10,000 to $250,000, while angel networks might invest $250,000 to $1 million (“the funding gap”) whereas venture capital firms invest $500,000 to $1 million or more.
Govenor Doyle signed ACT 255, effective January 2005 that will encourage more private equity investments in the states businesses, by offering tax credits to early stage investors.
Heinemann is studying how other states such as Minnesota and Washington have created state-wide angel networks. She wants to create a centralized resource where entrepreneurs can post their ideas and angels can find deal flow. The goal is to create a state-wide angel network fund for emerging Wisconsin businesses that would provide the much-needed capital required for growth.
As a first step, the DFI is creating a new online portal called “The Angel Capital Resource” on its Web site and is planning to launch it before year’s end. It will direct angels to the networks and other resources in the state including lawyers, accountants and technology transfer organizations such as the Wisconsin Alumni Research Foundation, CATI and the Medical College of Wisconsin Research Foundation.
State agencies collaborate to create angel network
The department is also collaborating with other state agencies, including the Department of Commerce, to produce an annual study of Wisconsin businesses that will capture the trends in entrepreneurialism and obstacles faced by new businesses. The goal is to recommend changes in government policy in order to accelerate economic development.
Heinemann envisions the creation of a Wisconsin entity that would create at least a $10 million state-wide angel network fund by the public and private sector investment. She said the University of Illinois helped create a private $20 million fund, Michigan has a publicly financed $100 million fund and Pennsylvania has an impressive package of incentives which includes a capital investment and venture guarantee programs.
“We need to encourage the creation of this fund and the accompanying deal flow,” Heinemann said. “The private sector needs to step up to the plate so we can move this forward. It would probably require the collaboration between the private and public sector as well as the legislature,” she added. “Matching funds are needed to grow a $50 to $100 million size fund that would be competitive with other state’s efforts, but I’d be happy to start with a $10 million fund if it meant we could bring more seed dollars to start up businesses in rural areas of Wisconsin.“
Although there are quite a few angel networks in Wisconsin, and more being formed, Heinemann said 70 percent of the investments are based on individual decisions on a deal-by-deal basis. These investments tend to be around $25,000. She desires a larger fund with the working capital waiting to be invested. She is excited about the creation of a fund in Milwaukee, which is being proposed for inner-city and minority-run businesses.
Heinemann is also encouraging more banks to receive designations as “Community Development Financial Institutions,” under the U.S. Treasury program. This would allow them to apply for grants and tax credits through the that agency. Heinemann said Johnson Bank has been awarded $52 million in tax credits under the new markets tax credit program.
DFI is also trying to increase financial literacy in the state by training Wisconsin’s teachers to bring financial curriculum into their classroom and creating an online resource at the department’s Web site to be titled the “Financial Literacy Resource Center.”
This fall, Wisconsin intends to offer a free, Web-based program called “Money Skill.” This is a fun and results-based interactive course for high school seniors to learn how to make better and more informed financial decisions. Wisconsin was chosen by a Washington, D.C.-based organization as the only state to test pilot the 36-module course. Each course is 40 minutes long and covers subjects such as income, money management, spending and credit as well as saving and investing. At no cost to the taxpayers, the program will rolled out to other states following the evaluation of the initial program.
That’s not the only federal assistance the DFI is bringing to Wisconsin. The department is also working with the Department of Commerce to apply for federal and private grants and resources from agencies such as the U.S. Department of Treasury, CDFI program and the U.S. Department of Commerce to help get Wisconsin’s state-wide angel network up and running.
“We need to do a better job of tapping federal dollars,” Heinemann said. “Our role is connect people to resources.”