18 Jun Wisconsin early-stage investments climb to a record $147 million in '07
Madison, Wis. – Investments in early-stage Wisconsin companies rose dramatically in 2007, according to the 2008 Risk Capital Report, but the impact on the Governor’s efforts to further stimulate investment remains an open question.
The annual report, prepared by NorthStar Economics, said total early-stage investment in 2007 was nearly $147 million ($146,984,147), a healthy 43 percent increase from the $102.9 reported in 2006.
The state’s performance far exceeded the 1.8 percent national growth estimate provided earlier this year by the Center for Venture Research, and it surpassed gains made small business innovation research funding from federal agencies, the report said.
Since angel investors fund and grow a new venture to be able to later attract investment from venture capitalists, early-stage risk capital has been identified as critical to growing the state’s technology business sector, and it has been the focus of the state’s strategy to boost investment.
“Overall, I think it proves that Wisconsin’s commitment to the early-stage market, and the public-private initiatives to help it, are starting to pay off,” said Joe Kremer, director of the Wisconsin Angel Network. “We’ve actually seen the numbers grow on the early-stage market consecutively year on year.”
The report linked the gains to steps taken to boost investing in new companies, including the Act 255 investment tax credit program. To further boost capital deployment, Gov. Jim Doyle has proposed expanding Act 255 and he is pursuing a capital-gains tax exclusion.
Key findings
The annual study tracks Wisconsin’s progress in raising risk capital. The 2008 report takes into account early-stage risk capital from individual angel investors, angel networks, informal angel groups, and early-stage and select venture funds.
To Kremer, a key metric is average deal size. There were a total of 36 early-stage investments, compared to 45 in 2006, but the average deal size increased to $4 million per round compared to $2.24 million per round in 2006.
In 2007, deal size was influenced by large deals in the biofuel-driven energy sector, which included $21 million for Virent Energy Systems. If those energy-related deals are removed from the report, the average deal size still grew to just under $3 million.
Even without energy investments, the increase is significant, Kremer said. As Wisconsin businesses move through the finance continuum, it appears they are growing to the point where they need to take on more investment and secure funding during what investors call the “funding gap,” he noted.
“Entrepreneurs are looking for anywhere from $1 million to $5 million, but we have this funding gap because typically the angels cut off at around $1 million and VCs don’t pick it up until about $5 million,” Kremer explained. “The way we’ve tried to help entrepreneurs get across the funding gap is to encourage more co-investing between angel networks and early-stage investors and early-stage funds. I think that is really starting to occur.”
Investments in life science and biotechnology companies led the way with 13 deals totaling $69.3 million, with an average round of $5.3 million. Biotech was followed by the energy sector, which attracted $50.2 million, up from $14.7 million in 2006.
As he touted biotech developments like the World Stem Cell summit coming to Madison, Doyle used his appearance at the BIO International Conference to tout the overall investment in early-stage companies. “In order to grow Wisconsin, it’s important we attract investment and support new high tech start-up companies,” he said in a statement released by his press office. “These businesses will create the bedrock for a knowledge-driven economy and produce the high-paying jobs of tomorrow.”
Other key findings of the report are as follows:
• Of the total early-stage investing, angel network investing accounted for $11.7 million of that total, an increase of 57 percent over the previous year.
• Investments in three information technology firms totaled $7.25 million, compared to $10 million in 2006, but future growth in this area could be impacted by Microsoft and Google opening research centers in Madison.
• Eleven early-stage deals for a total of $10.3 million ($10,247,701) applied for the 25 percent tax credit offered under Act 255. The 11 deals were comprised of those solely financed by individual angel investors, and those solely financed by angel investment groups and early-stage funds.
Under Act 255, Wisconsin has created two investment tax credits – one for individual angel investors and the other for early-stage investment funds. Under the program, angel investors receive a 25 percent tax credit (12.5 per cent per year over two years, with the maximum annual credit of $3 million and a total 10-year allocation of $30 million. For early-stage funds, the maximum annual credit is $3.5 million and the total 10-year allocation is $35 million. To receive the credit, investors must commit funds to eligible companies that are certified by the Wisconsin Department of Commerce.
• Since the Act 255 law was passed in 2004, the number of group angel deals and investment has grown from 10 deals for $3.7 million to 42 deals for $11.7 million. The state now has 20 angel networks and funds.
• State firms attracted $33.7 million in SBIR funding in 84 Phase I and II awards, up 10 percent over the $30.5 million reported in 2006.
• In addition to the $147 million in early-stage investing, Wisconsin companies attracted $90 million in later-stage venture capital financing, up $17 million over 2006. The $90 million was deployed in 21 venture capital deals. (Due to reporting sources, the report noted there may be some overlap between the $147 million in early-stage investment and the $90 million in venture capital.)
• Led by TomoTherapy’s initial public offering, four IPOs raised a total of $343 million in Wisconsin last year, the highest level of IPO activity during the past 10 reporting periods.
Continued investment innovation
To build on these results, the report said the state would need to continue to innovate in the area of risk capital. It identified a goal of being in the top 25 percent of states in angel and venture capital deployment.
Despite ample support in the Republican controlled State Assembly, Doyle’s investment package went nowhere in the State Senate, which is controlled by Democrats. The next time it could be taken up is when the Legislature reconvenes in 2009.
Lawmakers have mentioned the fiscal impact of expanding the tax credits, but Kremer said there isn’t as much of a fiscal impact in the long run. He said while tax credits result in an initial loss in tax revenue, they add to state coffers in the long run because they help stimulate economic growth that leads to an expanded tax base. That initial decrease in revenue, he noted, does not occur unless an investment has been made in a Wisconsin company.
“It’s almost like an investment, in and of itself,” he stated. “This isn’t just the state putting money into a resource that doesn’t pay off.”
State Senator Ted Kanavas, R-Brookfield, believes the report should spur the Legislature to endorse investment proposals put forth by Doyle and Assembly Republicans. While the report indicates progress, Kanavas noted that Wisconsin still raised less than one-fourth of the venture capital that Minnesota does – $90 million in 21 deals compared to $434 million in 54 deals.
“We’re trying to live off of some bills that we did four years ago,” Kanavas said. “The bills were intended to get us started, but it’s clear that we need to take the next step as a state.
“The tax credits worked up to a point, but now we have to create better programs that are more aggressive to take advantage of all the intellectual property that we’ve seen blossom in Wisconsin.”
James Buchen, vice president of government relations for Wisconsin Manufacturers and Commerce, said the state’s economic future clearly lies in growing its own companies, which will require more early-stage investment. WMC has endorsed Doyle’s investment proposals.
“Recruiting a branch of a national company is nice, but at the end of the day, I think our real future lies in growing from scratch home-grown companies that become successful and large and employ lots of people,” Buchen said. “This is the right thing to focus on, and I think the signs are hopeful.”
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