16 Aug MoneyTree Survey reports no venture investment activity in Wisconin in Q2
MADISON—The recently released Q2 MoneyTree Survey figures show no reported venture investment activity in Wisconsin between April and June of this year. Both total venture capital and initial venture investments were reported in the survey, which was released by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. Ten other states also showed $0 activity.
The East and West Coasts collected the most money, according to the survey, with California receiving 47.6 percent and Massachusetts getting 13.7 percent of reported initial capital. States that met or surpassed the $100 million investment level include Texas, Washington, New York, Pennsylvania, New Jersey and Georgia.
Of the overall $5.6 billion invested in 761 companies during the second quarter, $1.3 billion constituted initial investments. Initial investments are defined as the first reported infusion of money into a company, regardless of its stage of development.
During the first quarter of 2004, Wisconsin was reported to have had six deals totaling $32.3 million in venture capital investment.
Last year Wisconsin found itself trailing surrounding states in venture capital dollars. In 2003, Wisconsin revealed $45 million in venture capital investments, as compared to Minnesota’s $203 million and Michigan’s $103 million.
Despite the figures, some Wisconsin investors believe the “lumpy” nature of venture capital in the state is skewing the survey’s data.
“In Wisconsin, because there is not a huge amount of venture capital that comes through the state, the activity that does happen isn’t necessary smooth — it can happen in bunches,” said Dennis Winters, vice president and director of research at NorthStar Economics in Madison.
John Neis, co-founder and senior partner at Madison-based Venture Investors, has also observed Wisconsin’s uneven investment schedule and recommends analyzing data on a yearly—rather than quarterly—timeframe.
“I wouldn’t be concerned about this because one of the issues we have on a quarterly basis is that it’s really lumpy,” Neis said. “There are only a few venture capital firms in the state and variability from quarter to quarter to quarter is pretty significant. It’s much better to look at information on an annual basis.”
Others in the investment community point out that not all venture deals are reported to indicator surveys, such as MoneyTree.
“There’s a number of surveys that are done within the industry and it’s hard to tell how many respondents there are,” said Roger Ganser, managing partner at Venture Investors. “Like any vehicle like that, you’re not going to get 100 percent.”
Furthermore, Tom Still, president of the Wisconsin Technology Council, recalled the biggest venture capital deal of 2003 went unreported in MoneyTree. The $72.5 million that La Crosse-based Logistics Health Inc. received from TA Associates, an East Coast equity firm, was one of Wisconsin’s investment capital highlights of last year.
The MoneyTree survey data are based upon a voluntary-response mailing sent to venture capital firms nationwide. Verification processes follow the initial questionnaire and there are qualifications a deal or firm must meet to be counted in the survey.
George Lipper, editor of the National Association of Seed and Venture Funds, said he believes the MoneyTree survey is probably the most common reference in the institutional venture capital industry but emphasized its voluntary nature.
“People should keep in mind [that MoneyTree is] still a voluntary thing,” Lipper said. “The MoneyTree does capture a lot of people who don’t report. Typically, venture capitalists will invest in a company with three to four other venture capitalists participating. If even one of them reports, then PricewaterhouseCoopers tracks the others down and verifies the information and that’s one of the ways it becomes more thorough.”
Legislative Act 255, passed earlier this year, is expected to help remedy Wisconsin’s investment malaise. Backed by State Secretary of Commerce Cory Nettles and Gov. Jim Doyle, 255 is designed to attract and infuse investment dollars into the state through tax credit incentives. The legislation offers tax credits of 25 percent of an investment in a company certified by the Department of Commerce. These credits equal $3 million per year for angel investors and $3.5 million per year for investors in certified early stage seed funds for the next 10 years. This total of $6.5 million is predicted to leverage $260 million in emerging high-tech businesses and other qualified companies.
“I think Act 255 will help create a foundation for more venture investment because a lot of what 255 will target are early stage investments and they begin part of the deal flow and the whole pipeline,” Still said.
Although the bill is primarily aimed at angel investors, many venture capitalists in the state are encouraged by the legislation.
“We applaud Gov. Doyle and Secretary Nettles with their leadership with rule 255, it’s a step in right direction,” said Dan Broderick, managing director of Mason Wells, located in Milwaukee. “But it’s not end all save all.”
This summer, the act is going through the rule-making process, where the intricacies of the bill’s wording will be smoothed out. Nettles has previously stated he plans to have the act ready for review when the legislature reconvenes in winter. Winters, of NorthStar Economics, believes this time gap may influence potential investors to wait out the remaining months before financially backing a Wisconsin company.
“255 doesn’t kick in till January of ’05 so that might have a dampening effect on activity as [investors] wait to take advantage of the tax credits,” Winters said.
In order for Wisconsin to start cashing in on the investment activity so frequently seen on America’s coasts, some investors believe there simply needs to be more venture capital firms in the state and, as Broderick says, “the ones that are here need to raise larger follow-on funds.”
“A lot of it has to do with continuing to build the number of venture capitalists and dollars in the state,” Neis said. “Now with there being only a few active investors with operations in the state, there is the challenge of only so many people doing deals.”
Many companies, grown by venture infusions, have succeeded in the state and Neis believes there is no reason to believe that trend will stop.
“I look at a lot of venture capital-backed companies in the state,and I find myself very encouraged by some of the success they have achieved in the first six months of the year,” Neis said. He cited Deltanoid Pharmaceuticals, NimbleGen Systems and TomoTherapy as successful Wisconsin companies. “I think we can be encouraged by the fact that companies that have been venture-backed in the state are showing tremendous success. It sends the message that there are quality investments in the state.”
Approximately a year ago, the State of Wisconsin Investment Board announced it had committed $30 million to Milwaukee’s Baird Venture Partners and $60 million to Seattle-based Frazier Technology Ventures, which operates an office in Madison.
Monica Jaehnig, portfolio manager for SWIB, said the state’s investments into the firms are designed to allow for investment in Wisconsin companies.
“In the case of Frazier, there’s $50 million that goes into the Frazier Technology Venture fund and we made another $10 million available to them outside the fund,” Jaehnig said. This “side-by-side” investing dictates the $10 million has to be in a Wisconsin company. If an investment were to use the whole $10 million, SWIB’s money would be pooled with matching funds from the firm, she said.
Baird has a similar arrangement, but its fund is $25 million and $5 million is available on the matching basis. SWIB has similar understandings with Mason Wells and Venture Investors, also.
“That’s how we’ve chosen to get some leverage in the state without limiting their choices,” Jaehnig said, in reference to the investment firms.
Jaehnig added the firms have five years to make first investments then another six years to make additional investments.
The Baird fund closed last June and SWIB finished all negotiations with Frazier in late January. Frazier is still raising funds, however, and the firm has another couple months to find additional investors. At present, that fund is worth about $90 million, Jaehnig said.
“We’re looking to the fund managers for Baird, Frazier, Venture Investors and Mason Wells to do the work they need to do to make good investments, and the timing shouldn’t be pushed or forced,” Jaehnig said. “The rate at which the funds make investments is spread out.”
She added that she was personally aware of an investment made by Mason Wells into OpGen in during the second quarter.
So, even with earmarked funds from the state, Wisconsin’s venture capital firms are taking their time researching and investing in companies. According to Ganser, venture firms will often bring in co-investors to help with financing. This limited capital, he said, is not just a problem in Wisconsin, but the Midwest.
“We’ve got two deal offers out there and those both could pop this quarter but we don’t place investment on quarters,” Ganser said. “It’s a very long incubation period. Just because deals aren’t happening doesn’t mean there’s no activity.”
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Kristin V. Johnson is the Associate Editor of WTN. She can be reached at kristin@wistechnology.com.