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When Ross Leinweber recently withdrew his efforts to raise capital for a Milwaukee-centric venture fund, he was deeply critical of the city, citing a lack of local investor support as the leading cause for his fund’s failure.
Ken Johnson, a partner with Badger Fund of Funds, of which Leinweber’s Bold Coast Capital fund was a part of, was even sharper in his criticism of Milwaukee’s investor community.
“Milwaukee has got to get it through their skull that we have done everything to help Milwaukee out and they have done absolutely positively nothing,” Johnson said.
Milwaukee’s venture capital and startup ecosystem has been challenged, ranking lower in terms of deal flow and capital raised than other cities around the country and within the state. Yet, despite the loss of Bold Coast Capital this spring, the Badger Fund of Funds — Wisconsin’s 7-year-old state-backed venture capital program — continues to grow, while Milwaukee leaders maintain optimism about its startup scene.
In 2013, the state of Wisconsin awarded $25 million to Santa Fe, New Mexico-based Sun Mountain Capital and Stoughton-based Kegonsa Capital Partners LLC to establish the Badger Fund of Funds, which raised another $10 million from the private sector and agreed to create six to eight venture capital firms across the state. At the time, the Wisconsin Technology Council recognized Wisconsin’s venture capital ecosystem as lagging, so it proposed a fund of funds to deliver financial returns for investors consistent with the national average while supporting Wisconsin-grown companies.
The fund of funds program was established through Act 41, which was designed to facilitate investments in venture capital funds that in turn must invest in Wisconsin businesses. BFOF invests only in companies designated as Qualified New Business Ventures, which makes investors eligible for tax credits.
The fund managers they have selected have established the Idea Fund of La Crosse; Winnebago Seed Fund LP in Neenah; Rock River Capital Partners Fund I in Madison; The Winnow Fund for college entrepreneurs in Madison; Forward Capital, which targets spinout companies in manufacturing in Milwaukee; Bold Coast Capital Fund I L.P., which would have targeted Milwaukee-based companies; and a growth fund that has not yet been disclosed. Each fund manager is either raising or has raised its own venture capital fund to invest exclusively in Wisconsin companies, and BFOF matches 40% of that total.
In late April, Leinweber notified Bold Coast Capital’s 15 independent investors that he would no longer be raising an early-stage venture fund and released them of their commitments. He had spent approximately two-and-a-half years raising funds and reached $6 million, with the goal of closing his fund at $10 million. The fund would have targeted early-stage companies that were looking for that first $500,000 of investment.
In a Bold Coast Capital newsletter, Leinweber attributed a lack of local investors as the primary reason for the failure of the fund, adding that COVID-19 was a contributing factor, setting back fundraising efforts by 12 to 18 months, he said.
“While COVID-19 created a unique ending to the pursuit, my inability to raise the necessary independent funds was directly related to the lack of local financial support, specifically by the institutional capital of Milwaukee,” Leinweber said in the letter. “Thirty-five percent of the money I raised was from out-of-state investors. I did not receive a single commitment from an academic institution, a corporate entity, or an ‘old money’ Milwaukee investor or family office.”
Milwaukee has been described by several in the venture capital community as conservative and risk averse. Others have pointed to the relative newness and unfamiliarity with venture capital compared to other parts of the country as a reason for why Milwaukee’s investors may not be as quick to get involved.
Leinweber, for example, contends that Milwaukee is a larger city with a small village culture, adding that because relationships are developed over decades and therefore tight-knit, projects and fundraising are controlled by a select few.
“During my experience, I found the community of Milwaukee and its investor base’s risk disposition a primary challenge to raising funds,” Leinweber said. “It is a very conservative community and generally unfamiliar with modern-day venture capital.”
However, Leinweber admitted that his strategy also proved to be a hurdle, selecting to remain independent rather than partnering with a prominent individual in the business community or a local organization for his fund. By choosing the independent route, he felt Bold Coast Capital could achieve higher returns while generating the most investment options, he said.
“However, one has to get to the fundraising finish line first, and in a city like Milwaukee, where relationships are built over decades, you might need to brush aside independence to find the money,” Leinweber said.
Despite losing one if its funds, the BFOF portfolio is still growing, increasing its investment multiplier from 2.5x in March of 2019 to 3.9x in 2020. This means that for every $1 the Badger Fund invests in its fund managers, their funds are attracting nearly $4 from private investors.
The BFOF has a total of 20 active portfolio companies, up from 13 in March of 2020. So far, Idea Fund of La Crosse has raised $13 million, Winnebago Seed Fund has raised $11 million and Rock River Capital Partners has raised nearly $23.5 million for a total of $47,475,000, according to a BFOF portfolio summary. Of those funds, approximately $13 million has been invested in Wisconsin-based startups as of March 31.
There is a total of 112 jobs across all BFOF portfolio companies, up from 77 in 2018. All positions combine for a total quarterly payroll of $2.4 million and an average employee salary of about $85,000, according to BFOF’s quarterly report for the quarter ending on March 31.
“I don’t think anyone would have suspected that all the funds that were initially set out to be organized would have been successful,” said Tom Still, president of the Wisconsin Technology Council. “Because that would fly in the face generally of venture capital investments around the country.”
As for Milwaukee, Still says the failure of one fund cannot be pinned on the community at large, especially since the greater Milwaukee area has a variety of successful angel funds including Dark Knight Capital, Silicon Pastures, Alchemy Angels and Golden Angels, to name a few.
“I would love to see the Badger Fund of Funds embedded in Milwaukee, but I don’t think it’s the only chance to do so,” Still said.
Kathy Henrich, chief executive officer of the Milwaukee Tech Hub Coalition, said there are signs of strong and positive momentum in the Milwaukee startup scene that point to a bright future.
For Henrich, those signs include an uptick in investment rounds for southeastern Wisconsin in 2019 as reported by the WTC, the number of other funds that have been announced or remain in development, and the involvement of public companies, including support of the coalition’s focus on developing startups.
“We encourage Milwaukee regional investors to consider venture capital as a potential asset class for their investments,” Henrich said. “In fact, there may not be a better time as valuations are lower in these economic circumstances which provides the opportunity for larger, long-term returns.”
While other BFOF funds can and have invested in Milwaukee-based companies, the BFOF does not have plans to build another fund with a Milwaukee focus, Johnson said.
Forward Capital, managed by Dan Voell, is the only BFOF fund that remains in Milwaukee, but it does not yet have any investors from Milwaukee County. However, Voell remains optimistic about his fund and pointed to the origin stories of Milwaukee’s most longstanding companies as a reason for why investors might consider investing in the local venture capital ecosystem.
“In the first decade of the 1900s, Dr. Stanton Allen invested in Lynde Bradley (1903), Ole Evinrude let some teenage motorcycle heads (Harley and Davidson) build in his shop and Harold Stratton invested in Stephen Briggs (1908),” Voell said. “What would our city look like if institutions and individual investors were more interested in private equity funds, real estate and value stocks back then? What could our city look like if we spend the next 10 years seeking out and investing in the best and brightest in Milwaukee?”