Although Wisconsin has seen an increase in venture capital over the past 10 years, we are still lacking compared to our neighbors. For instance, Wisconsin-based companies raised $273.1 million in 2020, which is only a fraction of the $2.8 billion raised in Illinois and the $1.8 billion raised in Minnesota, and just half of the $558 million raised in Michigan last year.
The relatively low amount raised by Wisconsin companies was not because of a lack of effort, or even a lack of startups. Instead, it’s a lack of available funding.
One way we can deepen the pool of funds in our borders is by raising the state sales tax from 5% to 5.1%. According to our estimates, the fractional percentage increase would generate $120 million per year, which we propose would be invested in Wisconsin-based startups.
Such a sum could give a huge jolt of capital into our startup ecosystem. To compare, the State of Wisconsin awarded $25 million to Sun Mountain and Kegonsa in 2013 to establish the Badger Fund of Funds, which raised another $10 million from the private sector and agreed to create venture capital firms across the state. So far, the state-backed program has secured a 2.6x investment multiplier, according to a DOA report. Imagine what three times that amount could do for the state’s economy.
Also, let us be clear that the fund would be in addition to, not in place of, existing funds from the state, including the $100 million VC program Gov. Evers recently announced. Basically, it’s a new pot of money, and every year another $120 million would be added to it.
Any profits the fund makes could be put into a pension fund for Wisconsin residents (e.g. anyone who has lived in the state for at least 10 years), and/or the profits could be used to reduce property taxes, similar to what the state lottery does. (In 2019, property taxes in Wisconsin were reduced by $271 million from lotto sales, according to the Wisconsin Department of Revenue.)
Speaking of a pension fund, we could allow people with money in the Wisconsin pension system to invest 5% of their retirement money in a Wisconsin fund that would, in turn, invest in startups. The Wisconsin pension fund currently totals $127 billion, so even if a small number of people elect to do this, it would have a large impact on the startup community.
The $120 million would need to be invested by several VCs throughout the state, such as HealthX Ventures, 4490 and Rock River, in addition to co-investing with angel groups like Wisconsin Investment Partners (WIP). It could also be beneficial to employ (a) fund manager(s) who will work closely with communities throughout the state to make sure innovative ideas and technology have an opportunity to receive funding no matter where they are located. Fortunately, we have programs ideally located throughout the state, such as TitletownTech in Green Bay, Irontek in Beloit and VentureHome in Eau Claire.
So could we actually pull this off? It definitely is in our favor that at 5%, Wisconsin’s sales tax falls in the 10 lowest in the country. Neighboring states Iowa and Michigan are both at 6% sales tax, Illinois is at 6.25% and Minnesota is at 6.875%.
Also, we could try a community-by-community approach. In February, Gov. Evers unveiled a proposal that would allow communities with more than 30,000 people the option to increase their local sales tax by 0.5% through a referendum. We could allocate 0.1% of the tax increase to local startups.
Whatever the approach, it’s clear that additional funding sources are essential for the continued growth and success of our startup ecosystem and Wisconsin’s economic development as a whole. With this fund, we can invest in startups across all 72 counties to help bring back jobs to rural Wisconsin and the inner cities.
