Political bickering dooms plan that would boost startups
Decades into the relentless decline of the Great Lakes region’s technological strength, the State of Wisconsin in 2014 made a brilliant decision.
Rather than hire one of the national firms that run state-supported programs, Wisconsin chose Sun Mountain Kegonsa to invest $25 million of taxpayer money into high-potential startups. The newly formed partnership was the brainchild of Ken Johnson, a successful investor with a unique idea for growing our own stable of young venture capitalists.
I can’t think of any other state that adopted such a creative way to address the challenges we face in America’s middle, where we’re losing our competitive edge because we don’t innovate as quickly as the venture-fueled ecosystems on the coasts.
Sun Mountain Kegonsa started Badger Fund of Funds, which supported five new funds run by young, homegrown venture capitalists who invest in Wisconsin companies. But politically driven agendas on both sides of the aisle and a cacophony of other players trying to horn in on the action have stymied further state investment.
After months of wrangling, the state’s 2021-23 budget has no allocation to venture capital. Here’s what went wrong.
Prodded by Democrats in the venture community, Gov. Tony Evers in February proposed a $100 million venture fund of funds in his budget. Rather than build on the Badger Fund, Evers proposed a whole new structure that didn’t necessarily include it. And he put the Democrat-led Wisconsin Economic Development Corp. (WEDC) in charge, rather than the Department of Administration, which oversees Badger Fund.
Funny choice. When Republicans tried in 2013 to have the thenRepublican-led WEDC oversee Badger Fund, Democrats accused them of playing politics.
Republicans, who in 2013 championed legislation that led to the creation of the Badger Fund, kept Evers’ proposal in the budget anyway — until June, when four conservative groups dropped the bomb that would kill it. The Free Market Coalition - Badger Institute, Americans for ProsperityWisconsin, MacIver Institute and Wisconsin Institute for Law & Liberty sent legislators a letter urging them to jettison the proposal.
Boom. The venture fund was out of the budget.
Here we go again. Another false dichotomy that government and business are categorically different and shouldn’t be allowed to mingle. Of course, no one on either side of the aisle really believes this. It’s an overly
pious version of a cheap shot at a good idea.
Governments around the world are investing in business with great success. China is the leading example; European governments have been doing it for years. Our politicians support propping up Wall Street bankers and hedge funds — the Federal Reserve’s balance sheet has climbed above $8 trillion — in exchange for big campaign contributions. The Chinese government makes direct investments to encourage innovation in critical technologies that will drive the future economic prosperity of the nation.
Free Market Coalition’s letter is based on a blog by Andrew Hanson, an associate professor focused on real estate at the University of Illinois Chicago and Badger Institute fellow. It relies on a 2012 Wall Street Journal article about a single study to “prove” venture capital investing is risky. Duh.
I’m surprised the conservative organizations’ board members — particularly savvy financial managers like Heartland Advisors’ Bill Nasgovitz and former MBO Cleary executive Maureen Oster — tolerated such an unsophisticated argument. And how can Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce, condone the Free Market letter as a member of the Badger Institute board and have MMAC supporting Evers’ fund proposal through the Wisconsin Fund Coalition at the same time?
Regardless, the letter missed entirely the unique value of Badger Fund. The compelling idea here is that Wisconsin is seeding development of a homegrown venture capital industry — a first step in growing our own high-tech industries.
Ken Johnson has all the experience you could ask for: A chemical engineer and former licensing manager at WARF, one of the world’s biggest academic tech transfer organizations; experience doing tech transfer in private industry; and a record as one of the state’s most successful venture capitalists in terms of return on investment. Instead of grabbing the typical retired Wisconsin executive tax dodge and moving to Florida, Johnson is focused on building out the venture capital industry here.
I’m not sure anyone else would have had the tenacity and singlemindedness to lure Jon Horne back home from Wall Street to run Idea Fund. Or convince Richelle Martin to leave the security of her job as assistant director in UW-Madison’s Office of Industrial Partnerships to forgo a salary for more than two years while raising Winnow Fund. Or recruit the other three Badger Fund managers for that matter. They’re young, ambitious and diverse — and they wouldn’t have had the opportunity to benefit from Johnson’s tutelage and invest in our high-potential startups if the state hadn’t seeded Badger Fund.
Rather than doing less, legislators should do more. If the politicians and other players were looking forward, they’d see that information technology is transforming everything, driving a tectonic change that will soon make entire industries obsolete. Until now, health care, manufacturing, transportation and government have been too complicated to be dramatically impacted. But the explosive growth since 2007 of smartphones, internet connectivity, big data and artificial intelligence has ushered in a new paradigm. We can wish it weren’t so, but there’s no looking back
Wisconsin’s $25 million helped attract nearly $50 million more — including $500,000 from Sun Mountain Kegonsa — for Badger fund managers to invest in more than 25 (and counting) high-potential companies around the state. If every one of those portfolio companies failed — and they’re not all going to — we’d still have this new crop of more experienced venture capitalists who aren’t going anywhere.
Supporters say there’s a chance legislators will introduce a stand-alone bill to revive the $100 million venture fund proposal. Maybe they should add a companion bill for a $100 million fund that provides matching grants to investors in technologies that come out of UW-Madison’s new School of Computer, Data and Information Sciences.
It isn’t enough just to throw bread on the water. We must focus our resources on the critical organizations and technologies that will prepare Wisconsin’s workforce and economy to compete in the 21st Century Information Age.
As part of that effort, why wouldn’t we continue the work we started with Badger Fund?
Kathleen Gallagher was a business reporter at the Milwaukee Journal Sentinel and the Milwaukee Sentinel for 23 years. She was one of two reporters on the team that won a 2011 Pulitzer Prize for the One in a Billion series. Gallagher is now executive director of 5 Lakes Institute, a nonprofit working to grow the Great Lakes region’s high technology entrepreneurial economy and culture. She can be reached at Kathleen@5lakesinstitute.org.