By John Neis, Venture Investors
– Article re-posted from JSonline.com
This week marks the 30th anniversary of the first two investments by Venture Investors LLC, the oldest and largest venture capital firm headquartered in Wisconsin. Those investments in Office Solutions and Promega were successes, and our firm has now invested in its fifth fund and has $200 million under management.
That makes it a good time to reflect on what has been accomplished — and how far we still have to go to create a truly competitive entrepreneurial economy in Wisconsin.
We have seen a dramatic cultural shift since 1984. Nowhere has this been more evident than at the University of Wisconsin-Madison. Back then, few researchers were entrepreneurially minded, the Wisconsin Alumni Research Foundation (WARF) refused to license its patents to start-ups and most students aspired to find secure career paths in large companies. We had to seek permission from the chancellor to help organize a campus seminar on entrepreneurship, a process that took more than a year. There were no buildings in the University Research Park.
Today, the university campus is the heart and soul of a vibrant entrepreneurial community of faculty and students. Many researchers want to start companies to commercialize their ideas, and the university is eager to help them do so. WARF will license to start-ups and co-invest along with experienced venture capital firms. Guidance is available through the newly established D2P program for faculty, the one-week intensive Entrepreneurial Bootcamp for graduate students and post-docs in the sciences, a business school entrepreneurship certificate is available to all majors and there are frequent panel discussions and lectures across campus bringing in experienced entrepreneurs and investors, often attracting hundreds of attendees. The University Research Park is filled and a second location is under development. Throughout the community there are incubators, accelerators, hacker spaces and angel groups. It has never been easier to get a company started.
Brimming with ideas, but…
An entrepreneurial ecosystem is like a combustion engine; it needs three key ingredients in proper proportion: a spark (ideas), oxygen (people) and fuel (capital). We are brimming with ideas and the people who want to run with them. This is a welcome development.
A 2010 Kauffman Foundation study found that all net new jobs were created by companies that were less than five years old. If this continues to hold true, all net new job growth in 2020 and beyond will come from companies that don’t exist today. Earlier this year, U.S. Census Bureau data showed that Wisconsin entrepreneurs ranked 48th in the creation of businesses with employees, an ominous indicator. We need to rev up our entrepreneurial engine now for job growth next decade.
That may be tough without more of the third ingredient: capital. The fastest growing companies with the greatest potential for job growth can have a voracious appetite for capital, commonly requiring $25 million to $50 million over time, far beyond the capacity of angel investors. This is particularly true in the life sciences and medical devices, areas where our universities and state excel and where there are no shortcuts to Food and Drug Administration clearance. We need to help those companies flourish here.
We have some encouraging signs. The state has established a $25 million fund of funds, and WARF and theState of Wisconsin Investment Board created the $30 million 4490 Ventures. Venture capital under management in Wisconsin nearly doubled between 1985 and 2013 from $184 million to $339 million. However, that is less than the pace of inflation, and in the same period venture capital under management in the U.S. grew nearly elevenfold from $17.6 billion to $192.9 billion. We have 1.84% of the nation’s population, 2.15% of the academic research and 2.11% of the patents issued. However, last year we had 0.18% of the venture capital under management, down from 1.05% in 1985. We lost ground.
The Michigan experience
I just returned from the annual meeting of the Michigan Venture Capital Association, and the contrast is remarkable. In the last five years it has outpaced the nation in the growth in venture capital firms, venture capital professionals and capital under management. Michigan has 33 active venture firms and the highest growth in venture deals in the Midwest.
How did the state do it? It operated like an interdependent ecosystem where all the parts had to work together. Michigan had the same strengths of top-tier research universities and entrepreneurial talent, but had the same capital shortage. It created two state-sponsored fund of funds totaling $215 million, compared with Wisconsin’s $25 million. These were big enough to back emerging indigenous funds, but also could attract offices from coastal funds that brought their matching capital and networks. Michigan also was more private-sector friendly in this public-private partnership, not dictating how the matching private dollars had to be invested and not excluding major sectors of interest such as biotech.
A private fund of funds also was established, attracting commitments from corporate treasuries, foundations and endowments. Foundations and endowments began practicing the concept of impact investing, advancing their mission through the power of investing without sacrificing returns.
Government, universities, foundations and corporations in Wisconsin need to band together to invest and fill the capital void. We need to do a better job of tapping the knowledge, experience and investment capacity of our wealthy successful entrepreneurial families and the more than 400,000 alumni of our flagship university. If we don’t demonstrate the ultimate measure of belief and confidence in our best and brightest entrepreneurs by being first to invest in them and their ideas, why should anybody else?
– Article originally appeared on JSonline.com