22 Sep NE Wisconsin would like Act 255 to serve traditional manufacturing
Appleton, Wis. – Is the Act 255 tax credit program biased in favor of life science companies?
That’s the belief of some in Northeastern Wisconsin, where the prototype business tends to be more manufacturing oriented than focused on biotech or information processing.
Of the more than 80 early-stage businesses certified as eligible for the tax-credit program by the State Department of Commerce, none have been northeastern Wisconsin manufacturing companies even though manufacturing companies can qualify for the tax credits.
“One of the things that is a real challenge for us is that even though the Act provides for manufacturing businesses to qualify, we haven’t been able to get any of them to qualify,” said Charlie Goff, general partner of NEW Capital Fund, before a meeting of the Wisconsin Innovation Network’s Northeastern Wisconsin Chapter. “We’re working on that, and hope to be able to get that corrected.”
The Act 255 tax credit program provides tax credits to investors who invest in companies that are qualified by Commerce. At the onset, the total state allocation was $65 million over 10 years, and the tax credits were heavily subscribed, especially on the angel side. There now are 21 active angel networks in the state, and Act 255 gets much of the credit.
It also get much of the credit for Wisconsin attracting $147 million in early-stage investments in 2007, up 43 percent over the previous year and far outpacing the national average in terms of the percentage increase. Most deals were in life sciences ($69 million in 13 deals), but energy was second at $50.2 million in three deals.
Tom Still, president of the Wisconsin Technology Council, said deals get done without Act 255, but the availability of tax credits can push others over the edge. “It’s been very successful, but it could be better,” he said.
Toward that end, Gov. Jim Doyle has proposed expansions under his “Accelerate Wisconsin” package. Under the plan, the state would increase the total amount of angel investor and venture capital tax credits available to businesses to $100 million, which would leverage a minimum of $400 million in private investment. The Governor also would raise the current cap of $1 million in tax-creditable angel investment per business to $4 million, allowing start-up companies to receive financing from any combination of angel or venture investors to the maximum of $4 million.
In addition, Doyle has put forth a capital gains reinvestment initiative would give individuals a limited, 100 percent capital gains exclusion of up to $10 million for long-term capital gains reinvested in qualifying Wisconsin businesses.
Some would simply more focus on the kind of manufacturing done in northeastern Wisconsin. Goff said NEW Capital fund has a promising manufacturing company in a portfolio that includes the likes of Frozen Codebase, a Green Bay electronic game developer; TrafficCast, a Madison early-stage company that provides traffic information and forecasts over modern communications devices like smart phones; and GenTel BioSciences, a Madison bioscience company that manufactures and sells immunoassay products and services.
The portfolio also includes RoFlo Compressors, LLC, an Appleton-based manufacturer of industrial compressors for the oil and gas markets. Goff noted that people in western states are opening new wells, and they need compressors to capture natural gas. As a result, sales are up for the five-person company, and profit margins are much higher than anticipated. Goff called his association with RoFlo, which was acquired from GE Oil & Gas, “a blast.”
“In our case, we’ve done some manufacturing investments, and we’ve been extremely pleased with the results,” Goff said. “It did not involve Act 255, but it didn’t kill the deal.”
Paul Jones, a Fox Valley entrepreneur and president of the Council for Innovation, is not a fan of using tax credits as an incentive to invest in certain kinds of companies. He does not believe government should be doing this anymore than it should be bailing out Lehman Brothers, but if government is going to provide investment incentives, he said the rules should make more sense. He doesn’t understand, for example, why companies that get Commerce Department grants cannot also be eligible for Act 255 tax credits.
“I think Act 255 is a great tool for boosting investment in early-stage, high-tech companies,” Jones acknowledged. “I think there are some strange things about the rules about who qualifies. They were initially, at least, biased towards life sciences and against software.”
Zach Brandon, executive assistant for the Department of Commerce, said there are more than 20 cases where early-stage companies engaged in advanced manufacturing have been certified for the tax credit program, including medical device companies. He also noted that to be eligible for Act 255, companies have to be:
• Early-stage businesses of less than 100 employees.
• In the pre-commercialization phase.
• Seeking private equity.
• Either doing business in Wisconsin or have 80 percent of their payroll here.
“I think there may be a misconception of what the definition of a manufacturer is,” Brandon said. “There are specific definitions as to who qualifies.”
Jones said it would be a good idea to expand the definition of investor to include “pass through” people. In that case, Act 255 would not only apply to an individual who makes an investment, but he said a venture fund that makes the investment should to be able to pass the benefit to the individual investor in the fund.
“I think that makes sense if you’re going to do something like 255 because then it would make sense to have more sophisticated money in these deals, and get professional, sophisticated investors to manage the money in the early-stage deals,” he said. “I don’t think that you should lose the credit because you’ve decided to deploy your money in early-stage venture capital through a sophisticated, professional investor. I think you should be able to pass it through.”
No Wall Street blues
Goff, meanwhile, has been watching the problematic financial markets, but noted that venture capital operates on a separate, long-term track. “The typical venture capital fund is a 10-year process,” he noted. “In the first five years, you put the investments in, then you try to reap the exits in the latter five. The investments are illiquid, and people will always ask where is the exit? It takes years in order for something to go from the back of an envelope to an exit.
“That said, we’re not affected by what’s going on in the market right now because our companies are growing and the valuation isn’t affected by Wall Street. So that’s a real positive.”