Bruce Murphy
Murphy’s Law

Maybe We’re Not So Bad At Startups

Conflicting studies raise doubts about state’s “worst in nation”rating for new companies.

By - Nov 29th, 2016 11:36 am
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The 25,000-square-foot Innovation Accelerator building brings researchers together with industry partners and startups to encourage academic research with commercial potential. Photo courtesy of UWM.

The 25,000-square-foot Innovation Accelerator building brings researchers together with industry partners and startups to encourage academic research with commercial potential. Photo courtesy of UWM.

In the world of venture capital, Wisconsin barely exists.

As a recent analysis by City Lab found, about 60 percent of all venture capital funding startup companies in the United States goes to just four metro areas: San Francisco, San Jose, Boston, New York, Los Angeles, San Diego. “The top ten metros alone account for more than three-quarters (77.6 percent) of all venture capital investment across the United States, while the top 20 account for more than 88 percent,” the story noted.

In short, when it comes to the startup economy, most of America is simply flyover country. As City Lab notes, “Venture capital investment is found in just half of America’s 366 metro areas.”

Just a teeny trickle of the nation’s venture capital money drips into Wisconsin: of $58.8 billion raised nationally in 2015 the state got just $87.8 million.

The dearth of venture capital for Wisconsin, we’re told, means fewer startup companies and less commercial innovation, an anemic “new economy” and fewer jobs. And so we’ve seen lots of stories and chest beating about the problem.

While I don’t doubt we have a problem, I’m not convinced it’s quite as bad as we’ve been told. Is Wisconsin really the worst state in America, as the Ewing Marion Kauffman Foundation has repeatedly found? We’re worse than Mississippi? Worse than West Virginia? That’s hard to believe.

Key factors in this ranking were that “Wisconsin ranked last, with 170 of every 100,000 Wisconsin adults becoming entrepreneurs per month, on average,” Milwaukee Journal Sentinel writer Kathleen Gallagher reported, and “Wisconsin had 100.6 start-ups per 100,000 people, better than West Virginia’s 81.4 start-ups per 100,000 people, but still in the bottom 10 states.”

But there is another way of looking at the issue that the prophets of doom, like Tom Still, president of the Wisconsin Technology Council, tend to deemphasize. A typical column by Still clucks about the state’s last place ranking, but in passing notes that when startups do arise in Wisconsin, they are more likely to survive. “The U.S. Small Business Administration reported in mid-2014 that Wisconsin has a 10-year new business survival rate of 41%, the highest survival rate in the Midwest and 6.5 percentage points ahead of the U.S. average,” he wrote.

That high survival rate of startups might explain why Wisconsin has less of them in the first place: a more conservative culture about finances that tends to award funding only to startups that seem less risky.

This is a state whose citizens don’t like debt: Wisconsin consumers, for instance, have the best median credit score among all 50 states, a recent study found, “evidence of something bankers here have long said: Wisconsin residents are more serious than many about paying their bills and debts on time,” the Journal Sentinel reported. “The people in the state of Wisconsin are thrifty. They take their debts seriously. When they sign a contract to repay, they intend to repay,” said James McKenna, chief executive of North Shore Bank.

Wisconsin also ranks among the top states for households that have checking or savings accounts, only 3.4 percent of Wisconsin families were “unbanked,” a recent survey found, compared with seven percent nationally. Only six states had a lower percentage of unbanked households than Wisconsin. It’s another sign of the state’s conservative approach to personal finances, a JS story suggested.

When you grow up in such a culture you may take the same approach to the business you start, which might explain why startups are far more likely to survive in Wisconsin. Another study by the Ewing Marion Kauffman Foundation rated the 25 largest states in the survival rate for small companies, and Wisconsin’s survival rate of 50.77% after five years was better than all but three states.

To her credit, Gallagher reported on this study and quoted Jason Wiens, policy director at the foundation, who said: “When you think about the act of creating something new, there’s risk involved, there’s vision, there’s a sense of pushing boundaries — maybe that’s not happening to the extent you’d like it to happen in Wisconsin. But on the other hand, once businesses get started, you’re doing pretty well.”

The result is a higher density of small businesses in Wisconsin than in most states the foundation looked at. It may be that this state is simply better at picking winners. Or that it only picks less risky, less innovative startups to finance. Probably the truth is somewhere in between, but this nuance gets lost as Still and Gallagher beat their drum demanding more startups.

We’ve repeatedly been told that the state does well in innovative research and simply needs to attract more capital. The proof: UW-Madison ranks sixth in the world in patents issued. That’s great, but what about the state’s major private sector city? As JS reporter John Schmid found, Milwaukee had just 148 of state’s 1,201 patents issued, helping explain why the state ranked 15th in patents issued in 2009.

tabulation of patents issued by the states over the 27-year period from 1977 to 2004 showed Wisconsin ranked 16th in patents issued. That suggests the state is better than average at innovation, but much of these may be issued to established manufacturers: as Schmid noted, Kimberly Clark generates a lot of them.

In short, it seems doubtful that Wisconsin is a potential high tech powerhouse when it comes to patents issued; more likely it’s in the middle of the pack among the states. Still, there is evidence to suggest UW-Madison could be better at bringing innovations to market: compared to its sixth place ranking globally for patents issued, it ranked 16th “in a global ranking of universities producing the most venture capital-backed entrepreneurs.”

That might be because Madison is a government and university city that has never been focused on growing the private sector. Madison-based journalist Marc Eisen has done several articles arguing for a better connection between Milwaukee and Madison to help address this problem. The result: “You combine an academic powerhouse with a commercial powerhouse and you get job growth,” as Tom Hefty, the retired head of Blue Cross-Blue Shield United of Wisconsin, told Eisen.

Eisen has also argued that the state needs to beef up UW-Milwaukee, to help create more academic innovations that can connect to Milwaukee’s private sector.

Wisconsin’s thrifty, risk-averse culture, which may help new companies survive even as it discourages innovation, can perhaps be solved with state funding programs for new companies that have been passed in the last decade. But that doesn’t do anything about the disjunct between the private sector and academia in Wisconsin.

Look at our neighbor, Minnesota, which has consistently outpaced Wisconsin in new jobs: in that state you have academia, state government and the major private sector city all combined in one metro area, Twin Cities. The result is a state that gets far more venture capital for start-up businesses than us, and also has been far more supportive of university funding. There is a problem with the Wisconsin mind-set that probably hinders the creation of a new economy. But gloom-and-doom stories insisting we’re worse than Mississippi or West Virginia aren’t likely to solve that problem.

Categories: Business, Murphy's Law

11 thoughts on “Murphy’s Law: Maybe We’re Not So Bad At Startups”

  1. Steven says:

    Inrteresting Bruce. Could the not so long ago dismissed Light Rail line link Madison and Milwaukee into an innovation center? It would allow much more commuting options which younger workers in tech find important. You can get a lot ;done on a train ride as many who go to Chicago know. The twin Cities just have a river between them, but rivers require lots of expensive bridges subject to high maintenance needs (and costs). Is Light rail comparable in maintenance costs?

  2. Bruce Murphy says:

    Steven, I do think the rail connection would have helped; I argued a decade ago for Milwaukee Magazine that a fast train connection between the two cities would help break down the barriers between them. Obviously much more than that would be needed but it would help.

  3. Virginia Small says:

    “That might be because Madison is a government and university city that has never been focused on growing the private sector.”

    I can’t recall the exact ref, but doesn’t Madison account for most of the state’s start-ups. I know some emerge from university research but isn’t Madison also a pretty good incubator for new private companies.

    A light rail connector could do much to promote more hybridizing between MKE and Madison, more commuting and more visiting for the day or evening. How about Cousin Cities?

  4. Mike says:

    I’ve always thought this topic was overblown. Our relatively small accounting firm has seen over a dozen clients start a business in the last 18 months or so and those businesses have created better than 100 jobs. The trouble is they aren’t in sectors like tech that tend to get all the media attention. They are in healthcare, professional services and manufacturing.

    I have a lot of respect for the many people who are trying to get more tech stuff to happen here, but they do suck all of the oxygen out of the room and because that area isn’t growing all that much there exists the perception that we can’t do start-ups here. So while tech has created this infrastructure to support new start-ups it’s hard to find support for start-ups that exist in more traditional businesses. If those businesses don’t get attention and coverage it becomes hard for leaders to emerge. As an example, take a look at the 40 Under 40 each year in the Business Journal and what you find is a lot of non-profit execs, employees of large institutions, some developers who are usually asking cities to help fund their business, and anyone associated with tech. What you do not find is very many entrepreneurs.

    One also has to consider that Wisconsin does have a really low unemployment rate and that the businesses that do start here have a much better chance at survival than other states and that might explain why we don’t do as well in certain rankings.

  5. Andy Umbo says:

    Mike, Wisconsin has a low unemployment rate because sooner or later you have to leave the state to get a job, especially if you’re over the age of 55. I would have loved to stay in the state, but no one would hire me with years of media experience, and you could physically see their faces drop when you walked into an interview. Wisconsin is a state you don’t want to be in when someone takes the needle off the record player and you realize your chair is gone. The weird thing is, they’re really overt about the age-ism too, they just don’t seem to care. The businesses have a sociological “best employee” model, and they follow it religiously.

    That said, I had to move to Indiana, and I just don’t get it here. They get new business opening here and expanding here all the time, granted, they’re crap-hole bottom end manufacturing and warehouse things that don’t pay much, but could a minor tax break be all it takes to get companies here? There’s no real mass trans in Indianapolis, so you’re bottom end workers are forced to buy a car; even the college educated here seem ‘dumb’ compared to the people I worked with in Milwaukee and Madison; the general population is culturally retarded compared to Wisconsin (yeah, I know I used that word, but it fits); and the rental companies run wild with no consumer protection laws, they they charge you outrageous sums for ‘call outs’ on your rent like ‘trash removal’, and they raise your lease 75-100 bucks a year until you move out, then they drop it for the next person and start over again.

    I don’t get with all the positive attributes I got used to in Wisconsin, why companies are not just flocking to start businesses there, or moving their midwest offices there, and I’m not being facetious. Living in Indiana is like being in prison, I keep waiting for the reprieve to come along so I can get out of here! I wouldn’t move a lemonade stand here! Poor Wisconsin, are you that bad in promoting your state and following through with a welcoming business environment?

  6. Dave Reid says:

    Just a point of clarification. The proposed rail service From Chicago to Minneapolis via Milwaukee and Madison was not light-rail.

  7. mbradleyc says:

    This is positively uplifting to read! Of course Wisconsin isn’t that bad. There’s always more to be done, but there is strength here.

    Also, Mr. Reid is right. Light rail is something else entirely. How about a hyperloop between the two? Now that would be something!

  8. Matt says:

    No Wisconsin is the worst, by far. I grew up in the state in a poor household and left immediately because of this issue and others. I started three successful businesses before the age of 30, in beautiful Washington State. My friends from youth all did the same, in California. None of us will ever set foot or spend a time in backwards, regressive, high tax, zero freedom Wisconsin. Why when we can make tons of money and have much more personal and economic freedom out west? Sadly, another generation of Wisconsin’s best and brightest will be forced to leave. There honestly is nothing left is Wisconsin except poverty, obesity, alcoholism and hopelessness, SAD. To hell with poverty! Recently I have been thinking of investing in the booming cannabis business here in Seattle. Sorry Wisconsin, you lose, again. Enjoy the dark ages. No personal or economic freedom in Wisconsin. None. Best to vote with your feet and dollars and leave Wisconsin. You won’t be sorry!

  9. Matt says:

    It may seem counterintuitive, but nobody wants to live or do business in conservative Republican states. Fact. Look at the massive wealth congregated in perenial economic powerhouse cities like SF, Boston, Seattle etc. They are all very liberal and all run circles around Milwaukee. People want freedom, economic freedom and personal. I never understood why Wisconsinites don’t get that. Instead Wisconsin has the opposite, economic slavery (low wage crap jobs) and high taxes, tons of regulations and much less personal freedom (ie no right to die laws, no legal cannabis etc) To be successful as an entrepreneur in Wisconsin, you need to leave Wisconsin.

  10. Andy Umbo says:

    Matt, you think Wisconsin is bad? Welcome to Indiana!

    But truly, the “brain drain” in Wisconsin started back in the mid-70’s. The best and the brightest left because there wasn’t full employment for the baby-boomers anyway. Even the biggest doofus I knew back then, who left town and went to the one of the coasts, did marginally better than some pretty smart people who stayed local. When I moved back to Wisconsin for family obligations (and before I had to move again), I always thought that the city was suffering under the product of that “brain drain”, the best people were not in control anymore, and there were a lot of mistakes being made that were resulting in the downward spiral.

    I have to say tho, for my friends in Madison, and nice areas of Milwaukee, that have managed to work in a decent place for decent money, their day-to-day reality is far better than some of the places I’ve had to move to stay employed.

  11. Matt says:

    The last time I visited family in Wisconsin all I saw was unemployment, alcoholism, poverty and hopelessness. Thankfully, I was wise enough to leave 20 years ago. I have never worked for anyone else and never will and I certainly would never start a business or invest a penny in backwards, regressive Wisconsin. Well, unless the state legalized cannabis. My dad was arrested and imprisoned for weed when I was a kid in Wisconsin. It split up my family forever and thus I never knew him. As a successful entrepreneur (in coffee, apparel and the sailing industry in Seattle) I would love nothing else but to return someday and help rebuild northern Wisconsin’s ravaged economy. I own the PPE in Wisconsin and have the capital ready to invest but alas, the state seems to be doubling down on its atrocious and failed policy of Prohibition so I am forced to live and invest elsewhere. Sad. Wisconsin needs to understand that people want freedom more than anything else, economic and personal. Embrace that and the entrepreneurs and money will follow.

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