WisBusiness: Venture Veteran Sees Bright Future For Wisconsin’s Tech Industry

Paul J. Carbone is bullish on the Wisconsin economy.

“I know some people question where things stand from a cycle point of view and the ability of Wisconsin to continue to grow and attract capital and build companies, but we are generally quite positive about what we see,” said Carbone, 45, director of the Private Equity Group for Milwaukee-based Robert W. Baird & Co.

For the past seven years, he also has been managing partner and chairman of the investment committees for both Baird Capital Partners and Baird Venture Partners. Earlier, he was co-director of investment banking, responsible for Baird’s mergers and acquisitions advisory practice.

“Some people get off track when they see quarterly statistics deviate, or if the market gets the jitters, but we think the Wisconsin economy is strong and that there is capital out there to back companies,” he said in a recent interview with WisBusiness editor Brian Clark.

Brian Clark: Will 2007 be a good year for investing in the Wisconsin economy?

Paul Carbone: We saw some very good opportunities last year and we see some very attractive things continuing into 2007. Some people question where things stand from a cycle point of view and the ability of Wisconsin to continue to grow and attract capital and build companies. We are generally bullish about what we see.

We believe you have to look at this business in the long cycle. Some people get off track when quarterly statistics deviate. But this is a long-term business when you build a venture fund or help a portfolio company grow and develop. We are talking in terms in years. It’s not quarters or months.

We see a lot of positive activity both in Wisconsin and in our portfolio overall. The economy is strong and there is capital out there to back companies and there are ways to realize value and find homes for businesses.

Clark: Are the majority of Baird Venture Partners’ investments in Wisconsin or are they all over the country?

Carbone: We do invest nationally, but most of our activity is in the Midwest. And Wisconsin is where we have many of our investments. This state is where we source much of our capital and we think there are tremendous opportunities here. We invest a lot of time in Milwaukee and we have offices in Milwaukee and this one in Madison.

We have portfolio companies in Madison including TomoTherapy and NimbleGen and Caden Biosciences. We recently sold our investment in Berbee when it was purchased by CDW. We led that financing and were very involved in that business. Our Baird Capital Partners Fund has major interest in Marshall Erdman and Associates. We have no other city in the country with more portfolio companies than Madison. There is a lot of opportunity here.

We are also on the board of the Wisconsin Technology Council and support the Wisconsin Angel Network. We try to be supportive of things that go on with the angel community here, too.

Clark: Which of the markets are hotter? Bioscience … or IT or some others?

Carbone: Baird Venture Partners invests in two sectors, which are the health care sector and business services. We have invests in both sectors here in this state. We have investments on the business service side in a company called PinStripe, which is outside of Milwaukee. Sue Marks runs that business. She is a serial entrepreneur with a tremendously experienced executive team.

We see tremendous opportunities for that business. At the same time, we recently moved Caden up from Chicago to Madison and we see some very exciting things going on the health care side. We focus on those two broad categories and we think that covers a lot of turf and presents a lot of opportunities for us.

Clark: How long have you been with Baird?

Carbone: I joined in 1994 and took over running Baird Private Equity in 1999. At that time, we formed Baird Venture Partners. Prior to that, Baird Private Equity – which was founded in the late 1980s – was investing in both mature companies and venture businesses.

In 1999, we decided to separate the teams because they are different disciplines and have different approaches to doing business. So today we have Baird Capital Partners and Baird Venture Partners. (Baird Capital Partners announced recently that it had raised $300 million and closed its fourth buyout fund to new investors. The fund will be invested in U.S. firms with values of $25 million to $125 million.)

Clark: Are you originally from Wisconsin?

Carbone: My family moved here in 1977 from Washington, D.C. when my father (Dr. Paul P. Carbone) took over running the cancer center at the UW Hospital. He passed away several years ago. The center is now named for him.

Clark: Did you consider medicine?

Carbone: There are seven kids in my family and the first ones became doctors. I was the black sheep, always interested in business. I was the first one not to be a doctor. And my dad was very supportive of that. He never really understood business, but he thought it was intriguing.

We moved to Madison when I was in the middle of high school and I went to Memorial for a couple of years before going off to college. I only lived here two years and I live outside of Chicago now. But I’ve spent a lot of time here and I visit my mother here a lot. Sometimes it seems like my car can drive to Madison and Milwaukee on auto-pilot.

Clark: In the governor’s most recent budget, he talked about creating a venture center. Are you supportive of that and do you have any suggestions on how it should be run?

Carbone: I’m supportive of anything that lowers the barrier to information flow and creates efficiencies in the private capital markets. I’m supportive as long as that initiative is cost-effective and doesn’t interfere with the private markets.

Clark: Is there anything that Wisconsin should do to get more venture capital into the state?

Carbone: From a policy point of view, it should do much of what it is doing today. It should create tax policies that incentivize people appropriately, minimize regulatory barriers and facilitate the flow of information to reduce the costs of transactional activity and the costs of becoming aware of opportunities.

To me, that is the realm of government. The private sector is a very powerful force and we should direct the private sector and support it, but not try to displace the private sector.

Clark: Are there any government barriers that you would like to see go away?

Carbone: (Chuckle) Listen, we think there have been a lot of very positive things done in Wisconsin to facilitate our business and we would like to see that continue. Act 255 was a nice boost to the (angel investing) effort. Money will find opportunities. Geopolitical boundaries don’t define opportunities. They will find capital and opportunities will find capital if there is that free flow of information.

But what you do find is the earlier the stage of the company, the more geographically bounded the source of the capital is. Providers of capital want to be closer to the business and need to be involved in early-stage businesses. So you find in the early stages, you don’t have the amorphous kind of capital flowing around that later stage companies can tap into.

I think the government rightly has developed approaches to incentivize the flow of capital in portions of the maturity curve where there are inefficiencies and that is at the earliest stages. We’d like to see that sort of activity continue to appropriately support those kinds of companies.

We tend to invest at the first round of institutional capital. We are not seed investors and we are not necessarily going to take a concept out of the lab. But what we will do is come in once the business is established to provide capital and advice to commercialize businesses and take them to the next step and that is what we’ve tried to do with a number of companies that I’ve mentioned before.

Angel investors play a very important role in helping companies establish themselves. So typically what you find is a concept from an entrepreneur gets established with family money or friends’ money initially. Then when additional capital is required, the seed or angel investors who have a high net worth will come in. Then there are selected seed funds that will develop the companies further. We would get involved the next round when significant capital needs to be accumulated to commercialize the firm.

There is a natural chain of events, with each participant playing his or her role in that chain. I’m very interested in making sure we have early-stage opportunities because that becomes the fodder for my business down the value chain.

Clark: Wisconsin VC investing is minimal compared to the coasts and lags behind Minnesota. Is it just a matter of time until smaller companies become big enough to attract venture capital and are we on the right track?

Carbone: That’s an often-asked question and it’s an important one. But the way I think about it is that is partly a matter of time. But time itself won’t create opportunity. You have to have the key elements and a lot of time will pass before some other states create the opportunities that Wisconsin has the potential to [have]. …

What I have told people historically is that we have all the components. We have the technology, we have the talent and the capital. And we are seeing that. If you step back and look with a wider lens and over a longer time frame, Wisconsin has made phenomenal progress. When we were investing in the ’90s, we saw a fundamentally different picture than we see today.

Clark: How so?

Carbone: There wasn’t as much capital. There weren’t as many experienced serial entrepreneurs interested in founding businesses. The technology was there, but it wasn’t being pulled out to be commercialized as aggressively. But with institutions like WARF and technology coming out of the UW and the Marshfield Clinic and the Medical College of Wisconsin, talent that is being developed here and incentivized to stay here. One example is Gregg Fergus, our own executive in residence here in Madison who is extremely talented. There are many more funds and sources of capital than there were even 10 years ago.

So, we’ve made lots of progress, we’ve got all three elements. What needs to happen now is critical mass in terms of those three elements and activity. Once you’ve got the technology, experienced entrepreneurs and business people together with the capital, you are going to see a self-sustaining activity that will continue to develop and self-propagate over time.

I’m excited about what we have here in Wisconsin. Not many states have what we have. We just need development to occur so that we create a critical mass of activity.

Clark: Has that critical mass been achieved yet?

Carbone: I don’t think that we are there yet, but I believe that we are well along the way. There is a lot of work to be done, but we are well along the way.

Clark: Will we ever be up with the coasts?

Carbone: If you look at the statistics, the vast majority of capital is deployed in venture on the coasts. There are fundamental reasons for that. It will take a while for us to generate the kind of activity that Silicon Valley generates. But that shouldn’t necessarily be our goal. Our goal as a state should be to maximize the potential that we have here and make sure that we continue to develop that activity to support those three key elements of the venture community and maximize the opportunities that those present.

I think the comparisons of the coasts to our state, to Route 128 on the East Coast or the Research Triangle down south in North Carolina or to Silicon Valley is interesting. But I’m not sure it is terribly relevant. I think we have the opportunity here to do some very interesting things. But what we need to do here is focus on maximizing that opportunity set.

Clark: Sometimes Wisconsin is compared to Minnesota and Minnesota is considered a leader in the Midwest. Is there anything that we can learn from that state?

Carbone: Sure. But Minnesota and Minneapolis have very defined parameters of what opportunity they create. They are health care device oriented. That is because some very talented scientists long ago developed some interesting technologies that formed some very sizable companies that trained managers who spun out and set up their own businesses. So you ended up with self-propagation going on in a very specific sector – medical devices.

I think what can be learned is that that is a very exciting opportunity that we can duplicate because we are developing managers, technologies and capital just like they did. I think what Wisconsin can do differently is broaden out the opportunities.

There are plenty of tools – health care tools, medical devices – but there are also opportunities outside those areas such as business services companies and pharma and other technologies that are coming out of the UW that we can develop and create some very interesting industries out of.

Clark: Are you concerned about the state giving enough support to the university?

Carbone: I’m not in the business of politics or academics. I focus on developing capital to back managers, to invest in companies and we see good opportunities in Wisconsin to deploy that capital to benefit our companies and our limited partners. We think that if the trends continue that we have seen historically that this will be a very attractive state to invest in for years to come.

Clark: Any other thoughts about investing in Wisconsin?

Carbone: The only other thought I’d leave you with is that we have some very interesting domestic, local venture players and sometimes we get enchanted by those that operate outside the region. There is plenty of opportunity here in this state and plenty of talented people and players and investors here in Wisconsin.

I think we should support and develop those capabilities and that nirvana is not necessarily found outside the borders of this state. We have all the tools and capabilities here to support what we have here and to maximize those opportunities.