Regulations still stymie business investment in high-growth companies

Regulations still stymie business investment in high-growth companies

Madison, Wis. — Wisconsin has made significant progress in improving business conditions in the state but must do much more to relieve investment restrictions if the state is to better capitalize on high-growth industries, a state Senate committee heard on Tuesday.
“Today it is easier to legally gamble your life savings away than it is to invest in emerging, growth Wisconsin companies,” said Terry Grosenheider, a US Bank private banker who formerly worked for the Wisconsin Department of Commerce and the Wisconsin Department of Financial Institutions.
Grosenheider made his comments as the Senate’s Job Creation, Economic Development and Consumer Affairs Committee took testimony on the progress of Act 255 – legislation passed in 2003 intended to stimulate expansion of Wisconsin’s technology-based economy.
The testimony came as the Senate considers updates to the legislation and to give the committee a progress report on the act’s provisions. Another update will be given in another six months.
Meanwhile, Sen. Ted Kanavas, the committee chairman from Brookfield, said additional legislation would be drafted this fall to “clean up” Wisconsin’s business incorporation regulations to facilitate business start-ups.
At yesterday’s hearing, Grosenheider was among several people who urged the committee to make Wisconsin more attractive to business investors, with Grosenheider saying demographics don’t bode well for the state.
Citing statistics that put Wisconsin 47th in business creation among the 50 states, trailing the nation in the percentage of citizens with masters and doctoral degrees, and lagging the nation in per capita income, Grosenheider said, “This is hardly the recipe for success.”
The state must act to stimulate the creation of new jobs that offer higher incomes, he and the other hearing speakers said.

Anti-business image is changing

Act 255 and other legislation have made it easier to do business in Wisconsin, but the state still bears a national reputation as an uninviting place to make business investments because of overregulation, said Joseph Hildebrandt, an attorney at the Madison office of the law firm of Foley & Lardner and founder and national co-chair of the firm’s Private Equity & Venture Capital team, as well as a member of its Emerging Technologies Industry team.
Provisions of the act are helping change the perception, Hildebrandt said, saying new, higher-paying jobs have already been created due to the legislation. But more must be done to alleviate the state’s historically burdensome investment regulations.
“You can point to these restrictions and say that’s why people don’t have the opportunity to succeed here,” Grosenheider said, adding that the lack of opportunities leads people with higher education degrees to leave the state.
“We have an historic prejudice against wealth creation in Wisconsin,” added Ron Kuehn of the Wisconsin Biotechnology and Medical Device Association. “That’s fine in a farm economy, but we need to change that mindset if we are to move ahead.”

It’s easier to gamble than invest

Wisconsin’s “conservative and restrictive investment environment” contrasts sharply with its restrictions on gambling, Grosenheider said, noting “there are more restrictions on investment in legitimate emerging growth Wisconsin companies than there is on gambling in the state.”
With Act 255, Grosenheider said, the Legislature created a $65 million package of investment tax credits spread over 10 years – or $6.5 million per year. Meanwhile, “Wisconsin residents will legally wager $6.5 million in the next 32 hours,” he told the committee.
He and others offering testimony said changes to Act 255 would help change that scenario, making business investment more attractive.
See a list of some of their recommendations here:
Suggestions offered to foster high-growth business investment
“More must be done to improve the risk/reward ratio for Wisconsin investors,” Grosenheider said.
Aaron Olver of the Department of Commerce suggested an addition change would be to allow a tax-credit-qualifying investment to be recorded in a subsequent year if the credit cap had already been reached. Without that change, investments could be unnecessarily delayed, he said.

Tax credit incentive is working

Aaron also said a higher level of annual tax credits might be needed based on the larger than expected number of companies – 34 — that are currently qualified for tax credits as “Qualified New Business Ventures.” More are in the pipeline for qualification, he added.
Act 255 established a number of programs and initiatives to stimulate Wisconsin’s high-growth economy. Those include:
• Early stage investment tax credits;
• Technology assistance grants;
• Technology bridge grants;
• Technology matching grants;
• Technology venture fund loans;
• The Wisconsin Angel Network;
• The Wisconsin Entrepreneur’s Network.
Through the act, 16 start-up companies have been supported with assistance for patenting or for applying for federal grants, or with seed capital, according to Olver.
Regarding the tax credits, Olver said four fund managers have completed or are in the process of becoming certified to use Act 255 venture capital tax credits. Three of those are new funds to Wisconsin that did not exist prior to Act 255. One has closed and made two investments, which did not draw credits yet because of their structure. “There may be additional funds forming, as well,” Olver said.

Angels organizing

The Angel Network has been successful, said its director, Joe Kremer, citing its effect on opening communications among angel investors throughout the state and the prospective deals that have come before the state network. The angel network is working to help new, local networks form and is gathering metrics to get a better handle on the angel investment picture. A metrics report is expected in the first quarter of the new year.
Olver said $1.07 million in angel tax credits have been awarded so far under Act 255, with tax credits related to the act leveraging $4.3 million in angel investments.
The Wisconsin Entrepreneurs’ Network is expected to assist more than 10,000 clients during its first year. Four regional angel network directors are in place – Milwaukee, Madison, Eau Claire and Green Bay, with specialists in place in other areas. In addition, Olver said, 50 outreach centers have been established.
The Entrepreneurs Network is now tracking entrepreneurs as they move through the system, and its Resource Navigator has 130 service providers listed.
Kremer also noted that the quality of funding solicitation pitches is improving, and that those improvements should lead to more deals being made. And, he added, angel investors are becoming aware of Act 255’s investment tax credit, which is expected to stimulate investment by reducing their risk.

David Niles is senior contributing editor for WTN. He can be reached at