Ok, there is a need for start-up companies...why is BrightStar Wisconsin unique?
A: There are some great early-stage funds in Wisconsin as well as angel groups. We could use many more of each. Both of these sources though are made up of investors, and additionally the funds charge management fees and take a percentage of the profits.
The decision to donate to BSW is a charitable decision, as the donor wants to see our State prosper for the ultimate benefit of its citizens. We compliment the efforts of these investors in hopes that we provoke more to happen for the state of Wisconsin, and we do it without the management fees and percentage profits charged by the funds.
Why invest mainly in technology-based companies?
A: It is well documented that these kinds of companies produce the fast growth businesses that we need to grow our State economy. Additionally, Wisconsin has an abundance of ideas to capitalize on due to our premier position as a research and development hub. As technology companies are also mainly idea based, it is very hard to get traditional bank financing.
According to the Wall Street Journal article by Enrico Moretti dated September 18, 2013:
"For each new software designer hired on Twitter in San Francisco, there are five new job openings for baristas, personal trainers, therapists and taxi drivers. The most important effect of high tech companies on the local economy is outside high-tech...
Most industries have a multiplier effect. But none has a bigger one than the innovation sector: about three times as large as that of extractive industries or traditional manufacturing. Clearly, the best way for a city or state to generate jobs for everyone is to attract innovative companies that hire highly educated workers."
Why not have a Hybrid BrightStar for-profit fund with no fees and try to encourage more early-stage investing that way?
A: There may be some demand for a low or no fee for-profit investment vehicle. The philanthropic universe of donors is larger though and those people do not want their estates dealing with 5-10 year payout time horizons required by illiquid early-stage funds. Also, these involved with foundation and corporate giving are not looking for financial returns on their donations. Finally, if we were to even offer a piggyback for-profit fund it would compete with the very groups we are trying to co-invest with and that might not end up with greater capital formation in total.
How do you pick the companies to invest in?
A: The Foundation has an investment committee and investment criteria. These are people with significant knowledge of, and experience in, the early-stage space. Investments will obviously be made in Wisconsin companies but an extra effort will be made to solicit opportunities outside of our two metro hubs. As job creation is our mission, the foundation will at times take on higher risk investment opportunities if the potential for job growth is substantially greater. We will source some investments directly, but will work with the State’s angel groups and early-stage funds to pool due diligence and to co-invest.
Where might there be a conflict of interest and how do you mitigate it?
A: A strength of the BrightStar Foundation is the early-stage experience of the people involved in donating, administering and investing the funds. They also make personal investments in the space and share due diligence information and co-invest with others in the State. When BSW makes an investment into an early-stage company it is to everyone’s advantage to promote co- investment—you need enough critical mass and diversity of funding sources for later investment rounds. However, if a new potential investment already has any member of the investment committee involved in the funding, ownership or entity creation, then there could be an appearance that the Foundation investment was made with a bias. Those conflicted individuals would recuse themselves from any decision-making on that investment.
How many jobs will this create and what will be the cost per job?
A: Unlike a municipality granting a tax abatement designed to entice a corporation into its city, we do not expect a real “cost” associated with creating these jobs. Early-stage investment return data suggests we should expect about a 2.1X return on our invested capital for approximately a 26% annual return. If we can achieve anything like these statistics our real cost will be zero. We do have plans though to develop our own index like the sports power ratings (RPI) to help show us where we are getting the biggest bang for our buck over time. Early-stage companies we invest in would be required to report their year-end FTE count. Annually we would compare the change in jobs to our amount of invested funds and come up with a Jobs Power Ranking per invested company. Over time this data may suggest which industries or other criteria may get us our best job creation value.
What is the Foundation’s involvement with Wisconsin State government?
A: For BSW to be a valid 501(c)(3) organization it needs to show that it assists government by reducing its burden. As the Wisconsin Department of Economic Development (WEDC) is responsible for job creation in Wisconsin, that is the agency that we naturally would work most closely with. WEDC has assisted us immeasurably with sound advise in forming our foundation’s by-laws and articles of incorporation, provides invaluable assistance to helping us achieve our mission of growing high tech jobs in Wisconsin and is appropriately awarded a board seats. The State does not ever have access to, or control of our donated funds.