09 Jan Coalition pushing for expansion of angel-venture investment program
Brookfield, Wis. – Claiming the Act 255 investor tax credit program is too narrowly focused, a coalition of Wisconsin economic development groups is pushing for a major expansion of the program.
The proposal, outlined at the Jan. 8 luncheon meeting of the Wisconsin Innovation Network, is being put forth by the Wisconsin Growth Coalition. The coalition is calling for the state to expand the pool of available tax credits and the number of technology companies that quality for Act 255, which provides tax credits to investors in qualified early-stage deals.
“The problem with this program is that we can’t get enough of it,” said Teresa Esser, director of Silicon Pastures, a Milwaukee-based angel investment group.
Pumping up Act 255
Act 255 took effect nearly four years ago and is given much of the credit for Wisconsin early-stage investments reaching the $147 million mark in 2007. That level of investment was up 43 percent over the previous year, far outpacing the national average in terms of the percentage increase.
Yet proponents say existing limitations should be removed so that the program can provide the stimulus needed to lead Wisconsin out of its slumping economic condition. They call for expanding the pool of credits available to investors, making more Wisconsin companies eligible for the credits, and allowing qualified businesses to select the mix of investments – angel and venture – that is best for them.
“It’s a great program, but it’s of limited size,” stated John Neis, managing director of Venture Investors, a Madison-based venture capital firm.
The coalition’s proposal calls for:
- Increasing the total annual pool of credits from the current $11.5 million ($5.5 million for angel; $6 million for venture) to $50 million, which would leverage an increase in total annual investments from the current $46 million to approximately $200 million.
- Doubling the aggregate cap per qualified new business investment from $4 million to $8 million.
- Removing sub-caps for QNBVs to let companies select the best mix of investments for them. Under current law, angel investments are limited to $1 million, individual angels are limited to investing $500,000, and venture capital firms are limited to $2 million per investment. The proposal calls for allowing the $8 million to be invested by any mix of angels or venture capital sources without sub-caps.
- Extending the expiration of the program from 2015 to 2019.
- Expanding eligibility from the current assortment of research-stage biotech and University of Wisconsin spinout companies to all technology-based, high-potential companies of interest to investors.
Due to existing limitations, Neis said Act 255 has done more to boost early-stage angel investing than it has to generate later-stage venture investment, which typically occurs as companies either bring products to market or, in the case of life-science firms, they need cash to prepare a new drug candidate for human clinical trials. A large venture capital firm is going to invest from $5 million to $7 million over time, which is why the aggregate cap of $8 million was chosen.
Neis believes these changes would make Act 255 much more appealing to the venture capital community, and provide greater incentives for institutional investors such as the state’s insurance companies. “There are a bunch of obstacles right now in terms of the size of investment that a venture firm can make, how the tax credits can be applied, and the kinds of investors that can benefit from it,” he said. “They really inhibit the ability of venture capitalists to effectively use it today.”
Prospects for passage
The coalition includes organizations like the Milwaukee 7, Thrive, and New North. Neis said coalition representatives have pitched their ideas to Gov. Jim Doyle, who last year introduced his own package of Act 255 upgrades. With the state facing an estimated $5.4 billion budget shortfall in the next biennium, the package would not be easy to pass even if Gov. Doyle embraces it in its totality.
Neis said lawmakers should be reminded that tax credits are not provided unless investments are made in Wisconsin companies. He said the Legislative Fiscal Bureau tends to focus on the upfront costs of new programs, rather than the economic growth that drives tax revenue in the long run.
“We think the program can be revenue neutral,” he said.
Neis cited the Madison-based TomoTherapy, which reported $232.8 million in 2007 revenue, as an example of how incentivizing venture capital can pay off. Although the publicly traded TomoTherapy, a portfolio company of Venture Investors, has hit some snags in the current economy, Neis said it still employs more than 600 people.
He said the Legislature has to think in terms of job creation, not initial cost, because the investments eventually lead to to job growth. That claim was backed up by Deven McGlenn, CEO of NeoClone, who said entrepreneurs usually hire more workers when they are able to convince investors to make a commitment.
“That money goes to work right away,” McGlenn stated.
Bill McCoshen, former secretary of the state Department of Commerce and the current executive director of Competitive Wisconsin, Inc., said while passage is not a slam-dunk, the upgrades would be a building block to creating more of an entrepreneurial culture in Wisconsin.
“We have people at the state level that get this,” McCoshen said.
State Sen. Ted Kanavas, who backs the proposals, said $50 million for tax credits is “not too much money” when talking about the state’s economic future. He said it’s incumbent on Wisconsin to leverage its intellectual property to create more velocity in business development and speed to market.
Kanavas also cited the benefits of film tax credits passed in the 2007-09 budget, noting they have led to the Wisconsin filming of the gangster picture “Public Enemies” starring Johnny Depp, and to the opening of a film production facility in Milwaukee.