Those who follow Wisconsin’s economic development scene know the state suffers from a lack of investment dollars to help new companies get off the ground.
One figure often cited is that Wisconsin is home to 1.84 percent of the U.S. population and receives 2.15 percent of the nation’s academic research spending but attracts just 0.11 percent of the available venture capital.
For more than 25 years, John Neis has been working to change that. As managing director of Venture Investors, Neis has been involved in many of the state’s high-tech success stories.
Founded in 1982 by Roger Ganser as Venture Investors of Wisconsin, the firm today has offices in both Madison and Ann Arbor, Mich., putting it literally in the backyard of the two largest public research universities in the world. About 60 percent of Venture Investors’ activity is now based on spin-outs from the UW-Madison and University of Michigan. Venture Investors is now running its fifth fund and has over $200 million under management.
Neis currently serves on the board of Virent Energy Systems, Deltanoid Pharmaceuticals and Novelos Therapeutics, a Boston firm which in April acquired Madison-based Cellectar. He’s also served on the board of TomoTherapy, Third Wave Technologies and NimbleGen Systems — three of the most successful technology companies to come out of UW-Madison research.
Most recently, Neis has been involved in discussions at the state level over how to generate more investment capital for early-stage companies in Wisconsin, including the controversy over using a Certified Capital Company program or “CAPCOs” to leverage more investment dollars.
A Wisconsin native, Neis, 55, holds a B.S. in finance from the University of Utah and an M.S. in marketing and finance from UW-Madison. He’s also a chartered financial analyst. Neis spoke recently with The Capital Times about his work.
Capital Times: So what exactly is “venture capital” and how does it work?
John Neis: Venture capital is a professionally managed pool of high-risk capital that’s invested in nascent companies that are taking ideas or scientific discoveries and trying to transform them into products and services. But it’s not like picking stocks. In addition to bringing in outside dollars, venture capitalists become actively engaged, typically serving on the company board of directors, bringing their experience, advice and network of contacts.
The companies we work with are usually competing internationally. Most require $20 million or sometimes much more and need five to eight years to be launched. Investment funds come from institutions capable of making non-liquid investments with long-term investment horizons: pension funds, foundations, endowments, insurance companies or high net worth individuals.
We package those monies into a 10-year fund. The first five years we spend doing deals and the next five waiting for things to happen.
CT: What kind of returns are your investors expecting to generate?
JN: Investors are generally looking to double or triple their money. But it’s a risky asset class. Once you’re in, you’re in until the 10 years are up. At the same time, these are the fastest growing companies with the greatest potential, like CISCO Systems, Google or our own Third Wave.
CT: Much of the venture capital activity is based in the Boston and San Francisco areas. But Minnesota has managed to attract a lot more VC than Wisconsin. How come?
JN: You’re right about the coasts having most of the venture capital activity. They have major cities with both financial and banking centers and major research universities.
Minnesota is helped by having a bigger population center with banking and a research university all together in one city. And they had two early successes in Control Data and Medtronic. Both of those companies spawned a lot of offshoots. In this business, success begets success and so they got a lot of things going a lot earlier than we did.
CT: Explain the big fight in Wisconsin about CAPCOs. Critics say it’s a taxpayer-funded boondoggle that ends up costing more than it’s worth in terms of job creation.
JN: CAPCOs are very specialized state-only focused venture funds. All the money is raised by a debt instrument which is secured with tax credits granted by the state. But since they can only invest in the state in which they operate, and many more economic development constraints are imposed on them, they tend to be more expensive. We did have a CAPCO program here in Wisconsin in 1999, which had some nice success stories out of it, but these programs have evolved tremendously since then.
The other approach, which is even more popular of late, is a “fund of funds” which uses tax credits to secure debt financing from banks or other institutional investors. The state then takes that money and invests in traditional VC funds. But when you think about the jobs that are created — and these are high-paying jobs — you end up paying off the tax credits by the new tax revenues that are generated.
The bottom line is that there is agreement we need to attract more capital but it’s not a one-size-fits-all. There are tradeoffs in terms of cost and speed and matching private dollars. All the parties are making a legitimate effort to address the concerns.
CT: Still, it seems like when a promising Wisconsin or Madison company starts to take off, the company gets bought by a larger firm in Boston or California. I suppose that’s good for early-stage investors who cash out. But what about the jobs here at home?
JN: Just think how much money we spend trying to attract big companies to our state. But the most effective way to get them here is to create a very attractive company for them to buy. Roche, Hologic and Cardinal Health have all come here because they bought a company and ended up saying, “Wow there are really a lot of talented people here and it’s a low-cost place to do business so let’s expand here.” Also, the companies that get acquired tend to be so rich in intellectual property and know-how that they can’t be easily moved. What they are really buying more than anything is what’s going on between the ears of the employees. I actually think when these companies get acquired the economic benefits continue to flow.
CT: So what is a typical day in the life of a venture capitalist?
JN: There is really no typical day. Sometimes it’s a board meeting. Some days I’m meeting with new companies. The next day I might be working on reports for our investors. But what I really love is that I get to work with some of the brightest people around who have big ideas and are very passionate about changing the world for the better. Who wouldn’t want to do that?