Nothing ventured

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A Wisconsin Political Fix
not just another blog
December 22, 2009

By Bill Kraus

John Torinus and Tom Hefty have weighed in and given the state an 'F' on their economic test. They are tough graders, but it is hard to argue with their facts about lost jobs, low family incomes, shrinking wages.

So what will reverse these discouraging trends? I don’t hear anyone suggesting that the mainstays of the 20th century Wisconsin economy like paper, heavy machinery, and auto-related manufacturing are likely to return to their glory years.

The same article touts the cluster strategy that would build on still lively assets like GE’s medical equipment and Milwaukee’s hundred plus water related companies. They do not emphasize the prospects of the small, fledgling idea-driven companies being spawned by Wisconsin’s research universities and institutions in, mostly, Madison and Milwaukee but they have in the past.

Happily they do not dwell on the usual government suspects: taxes, fees, regulation, attitude. They lament instead the lack of a new economic strategy for the state and by the state.

They do view the dismal state of providing the kind of high-risk, venture capital that is mother’s milk these aforementioned start-ups and early second stage enterprises need with rightful alarm.

This, happily, is something that state government can do something about. Or can it?

The Democrats in the state Senate have put together a stimulus proposal that would put modest amounts of state money into the hands of entrepreneurs to nourish and encourage job creation.

Why not a full fledged venture capital program which would grow the state’s economy with a tiny percentage of the money (more than $70 billion at the moment) being invested by the state investment board on behalf of the thousands of people who have retired or will retire from their jobs in state and local government and education?

As it happens, I can tell you why not. This idea surfaced some 30 years ago and was immediately and vigorously opposed by the state employees’ union, the directors of local government organizations, and the state teachers union.

These risk-averse organizations preferred investments in the blue chips like, say, General Motors. So how well did that work out?

It would be foolish to pretend the safety firsters (if indeed there are any safe places) don’t have a point. Venture investing is a risky business, and the rules of venture investing make its operatives easy marks for the advocates of the more traditional AAA stocks and bonds, even though these are unhappily in some disrepute these days.

But this doesn’t make venture investing less risky or protect it from criticism.

This is why: Venture investing, not unlike baseball, is mostly about failure. Even the best of the best in baseball and in venture investing rarely bat .300. This is bad.

What is worse is that those venture investments that go bad do so quickly. So right out of the box, the most canny practitioners have to own up to and abandon--this is another unpleasant aspect of successful venture investing--the early losers.

To succeed, venture investors have to spread their money around. If they want to get three successes they have to make 10 investments, seven of which will either fail completely or simply mog along and produce little if any in the way of earnings and growth. Those that fail, what’s more, have to be jettisoned. Successful venture investors are ruthless about adhering to a “no good money after bad” strategy.

It is not hard to imagine what kind of public outcry will ensue from early failures and fast reinvestments with what is essentially public money because the public will have to replace those losses with more tax money if the three winners in this hypothetical example don’t come through.

Can any elected official stand up to this kind of criticism? These are the same people who caved in on indexing the gas tax when the talk-radio people raised the decibel level on that penny ante burden during the $4-a-gallon trauma.

If they can and will, however, the rewards are provably worth it. Those three winners and the one heroic success of those three represent the future, the next Wisconsin economy. No one knows what they will be. No one knew a century ago that a salesman and a hardware dealer in the Fox River Valley would have an idea that would become Kimberly-Clark, or that a man who built a dam in Wisconsin Rapids would find a way to use the excess power it created to make coated paper.

Wisconsin has the money. What Wisconsin needs is the will and the expertise and the guts to stand up to the inevitable criticism.

The alternative is another richly deserved 'F.'


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