Reaching for new highs.

Every year the city of Madison's department of planning and development collaborates with the economic development unit of Madison Gas & Electric Co. to produce the Greater Madison Area High Tech Directory. It is an impressive collection of established and emerging companies.

Since 1987, the directory has traced the area's high-tech phenomenon, covering biotechnology, medical/biomedical research, microelectronics, pharmaceuticals, contract research and development, software and other computer-related firms. This business sector, says MGE's Jim Morhbacher, continues to grow at a 10 percent per year pace. The 1994 directory includes 310 firms of which 27 percent are classified as manufacturing. The balance are service related. The firms employ more than 14,500 people in Greater Madison, which is a little more than 6 percent of the region's total employment. A conservative estimate of annual sales tallies $1.6 billion. Two years ago, the high-tech sector employed 12,500 people and sales were estimated at about $1.3 billion.

There are some very successful high-tech companies in the Madison area. Promega Corp. and Heurikon Corp. are two of the most heralded in the biotechnology and electronics fields, respectively.

Madison, by the way, is one of the leaders nationwide in terms of young biotech firms that have started in the last 10 years.

There is also a long list of highly successful University of Wisconsin-Madison spinoffs, such as Genetics Computer Group Inc. and Lunar Corp. These two firms are among the 57 listed in a recently published book called The Campus, Technology and Wisconsin. The book was produced by the University-Industry Research (UIR) program as part of its mission to foster university-industry relationships, technology transfer and economic development throughout Wisconsin.

If you follow the Madison high-tech community's development as closely as Morhbacher and Peggy Yessa, a City of Madison planning and development specialist, you would not be surprised at how large a role the university plays in fueling Madison's high-tech scene.

BIG-BUDGET RESEARCH

UW-Madison has the highest non-classified research budget of any university in the nation, which amounts to more than $300 million annually. Money sets the whole show in motion, and money keeps it running.

To make the high-tech river run faster and wider, there is an incredible thirst for capital. If there is one limiting factor to unbridled high-tech growth, it might be capital formation for the entrepreneurial companies -- some of which are also high-risk.

One Madison company that's in the midst of a funding search is Small Potatoes Inc., which is trying to raise $1.25 million by July of 1994 from food-processing investors.

SPI was founded in 1988 as a UW-Madison spin-off. The company's technology involves disease-free, test-tube starter potato plants or microtubers. Peter Joyce, the firm's founder, discovered a method of growing microtubers while a graduate student in professor Brent McCown's horticulture lab. The process was patented by the Wisconsin Alumni Research Foundation.

The young biotech firm has been awarded phase I and phase II Small Business Innovation Research grants from the U.S. Department of Agriculture. Gregg Johnson, an SPI executive, says more than half of the $110,000 SBIR funds have been used to support two graduate students at UW-Madison.

More recently, SPI has been seeking a total of $1.45 million in two phases. Johnson says the first phase raised $200,000 in mid-1993; and the second phase, now underway, will raise $1.25 million.

"The phase two funding will be used to expand the North American production facility in Madison and to open a production facility in the European Community -- probably The Netherlands," says Johnson. "The funds also call for us to build an automated microtuber facility using our patented technology." SEED MONEY

"The reason it is important for us to open a production facility in the EC is that one-half of the world's seed potatoes are either produced or bought and sold by the Dutch. It is impossible for us to import seed into the EC because of sanitary tariff barriers. In order for us to gain access to the largest seed potato markets in the world, we need a production facility in the EC."

SPI's revised business plan calls for the developing Madison firm to create a sister company called Small Potatoes World. In addition to Joyce and Johnson, Brent McCown's wife, Deborah, is a member of SPW's executive team. She is also the founder, president and lab director of Knight Hollow Nursery Inc., a nursery supplier of micro-propagated ornamental and specialty crops. The micropropagation technology was also developed in Brent's lab. Today, Knight Hollow provides cloning services to the nursery industry in the United States and in several foreign countries.

One of the interesting developments with SPI, and other Madison high-tech firms, is that it is largely the product of what some people refer to as the "critical mass." Madison is becoming the beneficiary of successful high-tech entrepreneurs lending valuable insight and sometimes financial resources to their start-up brethren.

Another storied example of an established entrepreneur giving support and direction to a start-up is Promega's Bill Linton, who has contributed to Ophidian Pharmaceuticals, Inc. "In that regard, I think we are much further along than 10 years ago, but if we are marching toward 100, I think we are still under 10," says Johnson. There are not nearly enough Lintons and McCowns to go around. Stated another way, there don't seem to be enough investors in Wisconsin.

MAJOR STUMBLING BLOCK 

"The major stumbling block for growth among high-tech companies is capital formation, and the major stumbling block to capital formation is the conservative nature of Wisconsin capital holders," says Johnson. "If I am a multimillionaire and I am willing to take 5 percent of my portfolio and put it into a high-risk company, I don't have to pay Wisconsin income taxes on any of the rewards if I hold the investment for five years, which is a little publicized state law."

Johnson is referring to a state tax code on capital gains on small business stock. According to the code, the amount of net capital gains on small business stock otherwise subject to Wisconsin income tax may be subtracted from the federal tax base if the taxpayer didn't receive the stock as a gift. There are other requirements, too. For example, at least 50 percent of the company's property and at least 50 percent of its payroll must be in Wisconsin. Small Potatoes Inc. has not elected to take a venture-capital route in its funding strategy. But Johnson says that the Wisconsin Venture Fair, which is operated as part of the Wisconsin Innovation Network Foundation, is an important ingredient in helping young companies obtain funding. "I have been to every Wisconsin Venture Fair since they started in 1984," says Johnson. "I have also been invited to help critique some of the presenters. There are usually more money opportunities for people than there are people with money." WISCONSIN VENTURE FAIR

Brennan and Ken Syke are working on getting more exposure for their Wisconsin Venture Fair. Brennan is president of the Greater Madison Chamber of Commerce and Syke is director of the WIN Foundation. At its inception, the Venture Fair was a Dane County event. There was a similar event held at the Milwaukee School of Engineering in the mid 1980s. The two fairs have since merged under the WIN banner and the program is administered through Brennan's GMCC. After the Madison Venture Fair had been up and running for a couple of years, Governor Thompson and others thought it should be expanded throughout Wisconsin. Brennan says that's when the Wisconsin Innovation Network Foundation was created by the Wisconsin Housing and Economic Development Authority and GMCC. The WIN Foundation's mission is to support and encourage entrepreneurs throughout the state, linking them with the management, technical and financial assistance needed to get their enterprises off the launching pad. "The original premise is that we wanted to give entrepreneurs all the ingredients they needed to get started," says Brennan. "It's sort of like a nursery. On their own, seeds will fall in the forest and some will grow on their own. If you develop a nursery and nurture the same seeds, more will be successful. We have tried to develop an arena where successes can happen."

Syke compares the Venture Fair to a coming out party where young companies can rub shoulders with venture capitalists. As part of the process, the young companies may be instructed on how to polish their images or presentations. Entrepreneurs are asked to give 12 to 15 minute presentations on their companies. Just because the entrepreneur may be a great "idea guy," says Brennan, that doesn't mean he or she knows how to develop a business plan or how to woo potential investors.

"We actually have dress rehearsals for them" Brennan says. "We bring people in to give them constructive criticism. We've even gone so far as to find an actor who played a 20-minute role to help the idea guy."

Syke says that WIN, the support network, conducts programs that focus on the challenges that new and growing business face. The organization also educates "potential and participating professional groups servicing those businesses."

HIGH-TECH CONSORTIUM

In addition to the Wisconsin Venture Fair, WIN manages another GMCC brainchild called the High-Tech Consortium. The consortium brings entrepreneurs and experts together monthly to network and to address business-development issues. The Foundation manages another program called WIN Enterprise Forum, which offers advice and assistance to early-stage companies that are at critical junctures in their development. The Forums take place "as needed" in different locations around the state. Syke says WIN has developed a library of entrepreneurs, investors, business professionals and technical resources. Syke's organization is also assisting other groups that provide resources to entrepreneurs, such as the Wisconsin Venture Network and the Wisconsin SBIR Committee. Brennan, who has been president of GMCC for 20 years, says the interest in "developing companies" is intensifying. He points at the courtship of Sematech as a sort of watershed period. When Sematech came to Madison in 1987 to look at sites for its new computer-chip research and development facility, a lot of people were impressed with what they found -- that is, people from Madison as well as the out-of-staters.

Even though Sematech located its $100 million facility in Austin, Texas, Madison was among the three finalists; and the Capital City never lost the momentum to work with members of the high-tech community -- the established as well as the emerging.

LOOKING FOR FUNDS

But are the idea guys having more success attracting capital to the Capital City? SPI's Johnson says interest ebbs and flows, depending on the economy and mood of the venture-capital network.

Brennan and Syke, meanwhile, believe they have something that works and something that ought to be expanded. A couple of years ago a survey was conducted of 65 companies from across Wisconsin that participated in the first six Wisconsin Venture Fairs. The findings: 48 companies (74 percent) were still in business -- 41 in Wisconsin and seven in other states. The seven that left Wisconsin did so because they were unable to secure funding here. At the time they participated in the Venture Fair, the 41 companies had a combined 790 employees and annual sales of $55.3 million. When the survey was completed, the 41 companies employed 1,450 and had annual sales of about $155 million. A few of Madison's storied high-tech successes have been treated well by venture capitalists through the Wisconsin Venture Fair. Persoft Inc. made its initial presentation at the 1986 Fair. The company subsequently received $2.5 million from the Chicago-based venture firm Frontenac. Persoft specializes in writing and marketing communications software that links personal computers with larger mainframes. Promega made a presentation at the 1984 Fair and received funding. Sales of Promega's enzymes that cut and slice DNA molecules have increased thousands of percentage points in 10 years. CEO Linton has also expanded into more than two dozen countries.

Jan Eddy also gave a presentation at the 1984 Fair on behalf of her start-up called Office Solutions. When Eddy's company opened for business in 1983, she had three employees. Within five years, the staff grew to 62 and sales had risen 2000 percent. Office Solutions, a company that designs and markets office-automation software for personal computers, has since been sold by Eddy. In a 1988 GMCC newsletter, Eddy said: "The Venture Fair allows entrepreneurs to be exposed to a roomful of venture capitalists at the same time as opposed to only one at a time. The Fair raises the venture capitalists' awareness level of the participating firms."

Participating in the process may also help explain Eddy's ability to continue searching for new challenges. After selling Office Solutions, she became owner and president of Madison's Wingra Technologies, Inc. This company develops, markets and distributes networking and electronic mail integration software. The company has more than 2,200 installations in 40 countries. Wingra Technologies was known as Joiner Software before changing its name in August of 1992. Fighting to stay ahead of the high-tech curve, Brennan and Syke are planning to boost the visibility and budget of their "entrepreneurial" programs.

TECHNOLOGY MOMENTUM BUILDS

They know the Madison area, in particular, and the state in general, has a substantial number of businesses centered around technology-based ventures. The momentum is increasing exponentially. WIN and the Wisconsin Venture Fair, as the main clearinghouses of activity, are poised to offer resources and direction needed to launch new businesses. The Wisconsin Venture Fair is one of 22 sponsors of an annual event called the Great Midwest Venture Capital Conference. "One of the things we have to work on is becoming a bigger magnet for venture capitalists," says Brennan. "We are considering hosting the next Midwest Venture Capital Conference."

Syke points to other possible changes in the works. "Maybe we have to increase the number of times we prep companies to be ready to approach venture capitalists," he says, "just in case there is a change in the venture-capital atmosphere or if there is more equity out there.

"Right now we prep people on an annual basis. Maybe we need to do it four times a year. Get them ready not only for the Venture Fair but also get them ready to go out on their own to approach venture capitalists or other investors." Brennan says the program's outreach efforts are being explored. He would like to recruit more companies in the Fox River Valley or Eau Claire or Wausau. He also looks forward to working even more closely with the Milwaukee business community and with UW-Madison, which are probably the two most critical sources of capital in the state.

The future looks bright for high-tech development in Madison. Every corner of the city has evidence of growth. At the university, WARF will continue its role as patent manager...to negotiate licensing agreements and to defend patent rights against encroachment. WARF's ability to relieve university inventors of the countless complex details involved in developing and managing new technologies is legendary. More than 3,000 discoveries have been handled by WARF since 1925.

And when it's time to consider bricks and mortar, the city's University Research Park offers unique opportunities and incentives. For example, the MGE Innovation Center at the research park is the perfect start-up company incubator. The location helps developing companies establish relationships with other emerging companies and provides natural ties to the university. MGE provides an annual grant to maintain the facility. Fourteen companies have occupied the Innovation Center. Forty new jobs have been created and more than 100 new products have been developed.

This article originally appeared in Corporate Report Wisconsin, a monthly publication focusing on business, politics and economic development in Wisconsin. It is reprinted here with permission. Pete Millard is the Editor of Corporate Report Wisconsin.