How do small states or states not traditionally strong in vibrant high-tech industry sectors catch up? In some cases, they focus the resources of the state to provide an investment spark. Is this a good idea?
West Virginia entered into an experiment in venture capital investment a few years ago by divvying up $25 million into seven VC funds, including one public entity, the Jobs Investment Trust, or JIT. Some investments seem promising (see the individual fund web sites to view their portfolio of investments), but some believe the number of new high-growth start-ups fueled by this effort is underwhelming. In some cases, investments went to out-of-state companies because not enough high-potential start-up firms could be identified in the state. So a new effort (not funded by the state) to develop "angel", or early stage, investment from the private sector has begun.
Wisconsin has taken a middle approach. Rather that strictly leave the development of an angel investment network up to a relatively risk-averse, conservative private sector, they have aggressively developed the Wisconsin Angel Network, or WAN. Within two years of its launch, angel investing in the state more than doubled from $67 million to $146 million in 2007. The number of organized angel networks in Wisconsin tripped from six in 2005 to 18 in 2007.
But Wisconsin is serving more as the organizer and trainer of networks, not an investor. Instead, they target wealth individuals and help them become more comfortable with the concept of riskier early-stage investing. Other states such as North Dakota (which recently shot up from 44th to 31st in new economy state rankings in just four years), Georgia and Oklahoma have similar programs.
Wisconsin's program is one of the most successful. The state has added a 25% tax break so investors can write off their investments on state income tax.
Oklahoma has gone a step further and started a $7 million seed fund, but will only invest if other private sector investors are secured first. The practice of using taxpayer money for risky early stage efforts remains controversial, even with such caveats.
What role would you like to see West Virginia state government take in this arena? What is the proper balance between acting as a spark for much-needed high-growth startups (and hopefully stirring private sector investors to join in) and potentially losing taxpayer dollars on risky investments?
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