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Wisconsin spends millions to bring new business here. Does it work?

Mike Ivey  —  9/04/2008 6:04 am

The corporate press release made it sound like the business coup of the decade:

"State Initiatives Yield Positive Results: Florida Pharmaceutical Company Moves to Wisconsin."

But upon further review, it turned out that the Florida company has just one employee, no revenues and no product ready for market.

Still, NanoMedex recently received $290,000 from the Department of Commerce under programs designed to grow the technology sector in Wisconsin. The funding is based on possible approval from the U.S. Food and Drug Administration in 2010 of an anesthetic that dissolves in water, making it easier to administer to patients.

"It's a project we're very excited about," said Tony Hozeny, spokesman for the Department of Commerce. "We're talking about a potential $700 million market for this type of drug."

And the seed money keeps flowing. Last week, the state announced $630,000 in funding for MPP Group LLC. Founded in 2007, the company is located at the Milwaukee County Research Park and is one of the few Wisconsin biotechs located outside of Madison. The state has certified the company as a qualified new business eligible for investor tax credits under the Angel Investor and Venture Fund Tax Credit programs.

"This company already has a good track record," said Hozeny, noting the high salaries paid to researchers at pharmaceutical companies.

Yet not every deal pays dividends. Companies may fail to deliver on their promises or simply shut down, leaving investors -- or taxpayers -- out of luck.

For example, Caden Biosciences quietly closed its doors in the Fitchburg office park in May after a much-publicized move from Chicago in 2006.

The firm had booked $5.85 million in financing from Baird Venture Partners of Milwaukee, Madison-based Venture Investors and Chicago-based Illinois Ventures -- along with $500,000 from the State of Wisconsin Investment Board.

CEO Randy Bolger said the company, which had 17 employees at its peak, is still in the process of "winding down" and declined to offer specifics about what happened. The company still holds the rights to its intellectual property.

"We're hoping to resolve everything by the end of the year," Bolger said in an interview last week.

But he's optimistic that displaced workers will find other positions.

"The good news is the biotech sector has gotten big enough in Madison it can absorb some more people," said Bolger, whose resume includes stints at PanVera and Bellbrook Labs.

Yet the demise of Caden Biosciences points to the ongoing problem of tracking public investments in so-called "new economy" companies. While there is often a flurry of attention when a firm lands funding, there is no mechanism in Wisconsin or most other states to follow their progress.

And experts say the very nature of the technology sector makes it even harder to judge success or failure. It can take years to determine whether a start-up will produce a return or not.

"It's not just a problem in Wisconsin, it's a problem across the country," said Greg LeRoy, executive director of Good Jobs First, a Washington-based watchdog group.

Last year, the group released a report highlighting the lack of oversight with government subsidies. While it gave Wisconsin an "A" grade for its tracking of lobbying activity, the state scored a "D" for following money that flows to private business.

"Only about half the states are doing anything with this ... and only a few are doing it well," said LeRoy.

The Commerce Department's 2005-2007 biannual report said its Division of Business Development awarded more than $400 million to 753 recipients. Funds specifically earmarked for the technology sector totaled some $12.9 million in that time period.

To better monitor state subsidies to corporations, a UW-Madison think tank has called for a searchable database to track whether that money actually benefits the Wisconsin economy.

Patterned after a system recently implemented in Illinois, the database would include how much companies pay in state taxes, how much business they do in the state and how much financial help they get.

In 2003, Illinois passed a Corporate Accountability Act, considered one of the most comprehensive corporate disclosure laws in the country. As part of that act, companies receiving state economic development money must also report on their progress in job creation, retention and wage promises.

"This level of transparency is key for policy makers and the public to better evaluate the tax system and see if it is truly working in the economic interests of the state," said Kate Gordon, lead author of the report for the Center on Wisconsin Strategy.

In 2006, the Wisconsin Legislative Audit Bureau also released a report showing the state woefully lacking in tracking the effect of public subsidies. The state has since taken steps to address that issue, including working toward a Web-based system.

But traditional measures may not work when assessing the success or failure of investments in emerging technology companies, analysts say. When a printing plant expands operations, for instance, it's easy to count the number of new jobs. The same can't be said for a start-up biotech or life sciences firm with a five-year timetable for a new drug or medical device.

"State support is fairly recent and biotechs take a long time to develop and show a return," said consultant Steve Clark, a former professor and medical researcher at the UW School of Medicine and Public Health. "You will pick up the failures before you see the successes, so that could skew a preliminary analysis of cost-benefit to a state."

Wisconsin has traditionally used jobs created or retained as one measure of judging the impact of its economic development efforts.

For example, the biannual report from the Department of Commerce for 2005-2007 lists some $464 million in programs -- from grants to minority-owned business to aid for rural development. It says that money helped create 21,342 new jobs while retaining another 55,804 positions. Using those figures, the state spent nearly $22,000 for each new job created.

Applying the same formula to the recent investment in MPP Group of Milwaukee, the state is spending $52,500 for each of the 12 new jobs the company plans to create over the next three years.

But Hozeny said simple math can't measure the success or failure of a public investment in an emerging technology company.

"Technology funding is not job-based, it's tied to hitting other milestones," said Hozeny. "You have to look at the long-term potential. We have to remember that small business is creating most of the new jobs in the country."

With no tracking mechanism in place, however, LeRoy said lawmakers and the public have no way of judging economic development efforts.

"From everything I've seen, commerce departments are in the business of generating positive press for their governor, not following whether these deals work out," he said.

Mike Ivey  —  9/04/2008 6:04 am