Maybe We’re Not So Bad At Startups
Conflicting studies raise doubts about state’s “worst in nation”rating for new companies.
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.
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.
A 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.
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.