Top administration official says state-backed VC fund shows commitment to start-ups
In the world of venture capital, $25 million – the amount the state is putting into its new "fund of funds" -- isn’t a whole lot of money.
“It doesn’t have the ‘wow,’ factor,” state Department of Administration Secretary Mike Huebsch acknowledged Wednesday at the 2014 Governor’s Economic Development Conference.
“But it does give us some skin in the game,” added Huebsch, a 16-year Republican legislator and Assembly speaker from La Crosse.
“This is what Legislature wanted to do,” he said “At the start, we are not going to build a number of businesses with $25 million. But what we are going to do is build a relationship with our investment manager, who is going to have to bring $5 million that they will raise as well as $300,000 of their own money into this venture.”
“This is really to prime the pump,” he said. “To make sure that in Wisconsin, venture capitalists, businesses and others recognize that there is a commitment from the state and the governor to make Wisconsin into a business friendly environment where there is a recognized desire to expand our economy and do it through small businesses and venture capital.”
Huebsch said start-ups are often starved for money. Last year, Wisconsin had $162 million in venture capital investments, up 6 percent from 2012. However, that figure paled in comparison to investments on the coasts.
With the new, state-backed fund here in Wisconsin, he said “when the next Bill Gates wants to start in his garage in Whitehall, that’s somebody we want to see invested in. The best place for that to occur is in the private sector. But we also realize we are in competition with other states. So we need that (fund of funds) tool… we now have the ability to provide that.”
The bill that created this fund last year requires that the state’s $25 million be invested in a minimum of four venture capital funds and be matched on a two-to-one basis with money from private sources, meaning a total of $75 million would be invested in Wisconsin start-ups. The funds, Huebsch said, would focus on young information technology, engineering, advanced manufacturing, medical devices and agriculture companies.
The state’s money would be invested under the same terms as the private funds and the manager wouldn’t be permitted to put more than $10 million in any single fund. That means most of the money would go to Wisconsin-based venture capital funds that would back start-ups with $250,000 to $300,000 individual investments.
The fund will be managed by Sun Mountain Kegonsa. Managers have said they foresee seeding as many as 100 early-stage companies and in the process creating thousands of new jobs and fostering the next generation of venture capitalists. Sun Mountain Kegonsa is a partnership of Wisconsin-based Kegonsa Capital Partners and New Mexico’s Sun Mountain Capital, which manages regional venture funds.
Huebsch echoed Gov. Scott Walker’s oft-repeated mantra that “government does not create jobs.”
“People create jobs,” he said. “But government can create the environment where those jobs may be created. It can create the environment whereby people where they go somewhere else or they decide not to open up that business in the first place."
Huebsch said Wisconsin only needs to look at other Midwestern states such as Ohio and Michigan to see how similar, but more “mature” programs with state-backed funds have helped new companies get the initial capital they need to grow.
Brian Birk, managing partner of New Mexico-based Sun Mountain Capital, told the audience of mainly economic development officials that he hopes his firm – now negotiating the final details of its contract with the state – can take advantage of the “terrific technology” that is coming out of Wisconsin but has not been backed by coastal venture capital firms in the past.
“We see Wisconsin as being a very promising market,” who went to college and worked in the Midwest for many years before moving to Santa Fe, New Mexico. He said he began talking to Kegonsa officials about working together four years ago on some kind of project in Wisconsin.
In addition to Huebsch and Birk’s discussion of the fund of funds, Chris Prestigiacomo – a portfolio manager for the State of Wisconsin Investment Board, explained “4490 Ventures.” It is a separate early stage venture capital fund that is focused on information technology start-ups. These companies often need financing in the $500,000 to $2 million range.
This $30 million fund, capitalized jointly by SWIB and WARF, is aimed at aiding new IT companies while generating profitable returns for state retirement fund participants and WARF’s main beneficiary, UW-Madison.
He said the reasons for SWIB and WARF working together on 4490 are similar to those for creating the fund of funds. He said he believes the two efforts can augment each other and tap into financing from Chicago and the coasts as well.
“There are a lot of good opportunities here, but just not a lot of capital,” he said. “In terms of my venture stage portfolio, we were seeing a lot of early stage IT companies struggle to find capital here. I didn’t really have a vehicle to invest in those companies.
“Similarly, WARF was literally seeing good ideas come out of students’ dorm rooms. But because they didn’t have any intellectual property that WARF could patent, WARF didn’t have a vehicle to invest in those companies as well.”
That’s now changed and he said SWIB and WARF are now within a week of signing an agreement with a fund manager who will move to Madison to manage the new fund to invest in IT start-ups that focus on IT consumer and enterprise technologies.
-- By Brian E. Clark