Built to sell

Stories of successful exits


When he was hired on as chief executive officer of ZyStor Therapeutics Inc., Loren Peterson had a directive to help the company gain the funding needed to bring its pharmaceutical product to market.

He did that, raising $8.5 million from venture capital firms, mainly in the Milwaukee area, and then moved the company from St. Louis to Milwaukee in 2005. In 2010, ZyStor was acquired by BioMarin Pharmaceutical Inc. for $22 million upfront, with another $93 million promised if certain milestones were met in the ensuing years. It stands among the largest exits by Wisconsin entrepreneurs in recent years.

Kelly Fitzsimmons holds virtual reality glasses developed by her current startup, Custom Reality Services.
Kelly Fitzsimmons holds virtual reality glasses developed by her current startup, Custom Reality Services.

ZyStor developed replacement therapies for lysosomal storage disorders. One of the main challenges of growing it was raising capital to fund its clinical trials. And once it had taken on investor funds, ZyStor ultimately was headed toward a sale to provide them with a return.

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“The assumption was all along and I think for most of these early stage (companies), at least in the drug development industry, you’re never going to raise enough capital to become a revenue producing company, so the endgame is always to sell to a larger pharmaceutical company,” Peterson said.

“Health care startups are more likely to pursue that approach because the sales and distribution of their product is different,” said Tom Still, president of the Wisconsin Technology Council. “Companies in the health care space, it’s more likely that they are starting with an acquisition in mind.”

That’s partly because of the enormous cost of testing and launching a health care product, and also because the health care industry can be slow to adopt new ideas, Still said.

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“A lot of times, (established) health care companies are looking outside for their best ideas, anyway,” he said. “(Health care startups) ultimately want to start out by identifying strategic partners. It’s not a casting bread upon the water approach – it’s more targeting those firms that stand to benefit the most from your idea.”

In sectors like software, however, the barrier to entry is lower for new companies, so the founders may not launch their companies with an acquisition in mind.

“Sometimes, those companies think they’re going to be the next Google or the next Amazon,” Still said. “That market is so dynamic, who’s to say they’re not?”

Meeting a need

The WTC cautions entrepreneurs to be open-minded when it comes to scaling and consider a variety of options, rather than starting out with a sale in mind, he said.

“Just like every company is not primed for angel and venture (investment), likewise not every company is able to meet its full potential on its own,” Still said.

Some entrepreneurs start a lifestyle business, without consideration of how or whether they will exit someday.

eyedropper-molecule-shutterstock_212688175When Kelly Fitzsimmons launched Sun Tzu Security in 1996, the Internet was in its infancy and she saw an unmet need.

At a time when few people were focusing on information security, she established one of teh first pure play information security consulting firms to protect sensitive information such as company trade secrets on the Internet.

“I realized pretty quickly that this was needed and all organizations would need something like this at some point,” Fitzsimmons said.

She was right. The company grew to about 30 employees and in 2003, it merged with Chicago-based Neohapsis to further its growth. That year, the merged company expanded more than 40 percent year-over-year.

“In 2003, it was really clear that we needed to be bigger and Neohapsis had the best reputation, bar none, in the security field,” Fitzsimmons said.

The firms joined forces under the Neohapsis name, and in 2006 the company was acquired by California security consulting firm KSR Inc. (which later sold it to technology giant Cisco). Fitzsimmons exited Neohapsis when it was acquired in 2006 with a sizable enough payout to eliminate the debt from a failed spinoff and start a new company, Milwaukee-based HarQen, which offers on-demand phone and video interviewing tools.

“As a professional services firm, there was really no expectation of exit,” Fitzsimmons said. “This was really a lifestyle business. Because of our brand, we were approached.”

“It also allowed me to not take a salary for three years, in addition to the cash I put in,” she said. “I couldn’t have done HarQen if I hadn’t had that exit.”

Reinvesting the proceeds

Some of the most successful Milwaukee entrepreneurs have been able to use the proceeds and knowledge from the sale of their first company to start one or more additional companies.

Among the most prominent exits have been New Berlin-based costume e-retailer BuySeasons Inc., which Jalem Getz and investors sold to Liberty Media Corp. in 2006; and Waukesha-based biotech firm Prodesse Inc., which Tom Shannon and investors sold for $60 million to Gen-Probe Inc. in 2009.

For companies that have taken on investor cash to aid their growth, it’s imperative to provide a payout, said Jeff Rusinow, founder of Milwaukee-based Silicon Pastures Angel Investment Network. Rusinow has had six successful exits, including BuySeasons and Prodesse.

scientist-test-tube-shutterstock_253901404“As an angel investor, you have to make sure that management is eager and focused on increasing shareholder value and setting up an exit to allow their investors to liquidate their investment within about four to six years,” Rusinow said. “That, to me, is kind of a good framework.”

Rusinow also was a lead investor in Waukesha-based ModernMed, a concierge medicine provider.

“(Dialysis provider) DaVita Inc., they are so big that apparently back around 2010, 2011 they were whiteboarding and figuring out, ‘OK, what are we going to do in the future; how are we going to continue growing the company?’”

DaVita evaluated setting up primary care clinics with a high level of customer service, which is exactly what Modern Med offered – more primary care physician access for a premium price. DaVita requested an informational meeting with ModernMed, and Rusinow seized on the opportunity.

“After they met with our team, I was chairman of the board and I approached them and said, ‘Hey, would you be interested in making a strategic investment or acquiring us?’” Rusinow said.

ModernMed was sold to DaVita for more than $20 million in 2012.

As a lead investor in BuySeasons, Rusinow earned back 10 times his investment when the company was purchased for north of $55 million.

“Recognizing that the deal has a disruptive technology, can establish a new market, you kind of have to look at these deals through that prism of them becoming a big player,” he said. “The success of that is we went from zero to $40 million in revenue in six years and became the largest seller of costumes online in the world.”

BuySeasons co-founder Getz has since launched another successful startup, subscription e-retailer Wantable, which is growing at an even faster clip.

Prodesse CEO Tom Shannon, who became involved when his investment group Shamrock Partners became Prodesse’s lead investor, has since established Milwaukee-based venture philanthropy organization BrightStar Wisconsin Foundation Inc. He now donates his time and expertise to investing in and growing other Wisconsin startups.

Bill Haack also stands as an example of an entrepreneur who made a successful exit and reinvested it in the Milwaukee economy, forming a second company and creating more jobs after his first venture.

He gradually took on full ownership of his father’s insurance brokerage, Frank F. Haack & Associates, and grew it to $28.5 million in revenue by 2003.

“I joined that when there were six people,” Haack said. “We did grow it from six people to 120 people. What we did was focused on growing the business organically rather than through acquisition and in order to do that, we invested a lot in our capabilities so that we could win business in the marketplace. I assembled what I thought was a really first-rate team. Especially in the insurance business, where so much of your success is determined by your people, that was a really key component.”

In 2004, he sold Frank F. Haack to Glen Allen, Virginia-based Hilb Rogal & Hobbs Co. for an undisclosed sum.

“We looked for (a buyer) who would be supportive of our culture and our commitment to our customers,” Haack said.

Haack exited Frank F. Haack in part because he was focused on growing Zywave Inc., the spinoff company he had formed to meet a need he saw in the insurance market. It offered software tools used by insurance brokers and financial planners for tasks such as data analysis, compliance and risk management.

“We discovered that what we were doing for ourselves, other brokers wanted us to do for them as well,” Haack said. “Obviously, we knew what our clients wanted because we were one.”

The proceeds from the sale of the first company helped support the second.

“It was a big advantage for Zywave that I was able to fund Zywave without having to go to any outside investors prior to 2008,” Haack said.

By 2008, Wauwatosa-based Zywave had 125 employees. There wasn’t immense pressure to bring in outside funding for the rapidly expanding company, so Haack was able to be strategic about it, he said.

“We were under no obligation to find an outside investor, but if someone was there who could help us continue to accelerate our growth, I would be happy to consider that,” Haack said. “That’s what drove that process.”

computer-security-shutterstock_453152185When San Francisco private equity firm Vista Equity Partners invested, Haack made a partial sale of his ownership in Zywave. But he wanted to stay on because he found the business fun and felt there was more he could do.

“The idea of selling, at least in my case, wasn’t something I had at all, at least in the beginning,” he said. “You’re constantly deluged by people who want to invest. We said no for a long, long time.”

Haack and partner Jim Mueller continued to grow Zywave both organically and strategically, and by 2013 had about 600 employees.

In 2013, Zywave sold its insurance solutions division to Aurora Capital Group, a Los Angeles-based private equity firm, and Vista retained ownership of the financial solutions division under the name Advicent Solutions. At that time, Haack sold more of his ownership stake in Zywave and took on a less involved role as a board member.

Jackie and Derek Steinmetz built their vegan cookie business, Sweet Monkees, from a few recipes to a thriving startup before they sold it.

The Steinmetzs, who were vegetarian at the time, purchased the recipes from a restaurant owner in New York in 2011 for a few thousand dollars.

“At the beginning, most of our sales were a few people that we knew just because they were amazing, which is not something you think of when you think of vegan cookies,” Jackie said. “Really we started just as any grassroots effort with a food business starts. We started taking the cookies to people.”

The Steinmetzs first rented commercial bakery space to bake the cookies themselves, but eventually grew enough to contract with a bakery in Wauwatosa to make and distribute the products.

Through persistence and grocery store demonstrations, Sweet Monkees cookies eventually were being sold in 12 Wisconsin grocery stores and at a number of area farmer’s markets.

“It was still a pretty small business,” Jackie said. “We weren’t looking to be acquired by any other food companies. We were just looking for someone who was able to take the business and grow it beyond what we were able to do.”

The couple sold Sweet Monkees to a Madison resident in 2014.

Keys to success

The key to success in growing a saleable business, Haack said, is solving a problem or meeting an unmet need in an industry in which you have expertise.

“In a lot of businesses, obviously, there’s a focus on competition,” Haack said. “Frankly, since we kind of created our space, we’ve never had really direct competition.”

Hiring the right employees also is important.

“I’ve always been really happy with the team that I’ve had on board and I think it’s been really critical to our success,” he said.

Since that first startup, Sun Tzu, Fitzsimmons has founded five other startups.

Custom Reality Services co-founder Jeff Fitzsimmons demonstrates the Oculus Rift and Touch equipment used to view the company's virtual reality films.
Custom Reality Services co-founder Jeff Fitzsimmons demonstrates the Oculus Rift and Touch equipment used to view the company’s virtual reality films.

“The No. 1 thing that I think most entrepreneurs don’t think about is brand. Brand matters,” she said. “Eighty percent of your exit value can be intangible.”

Neohapsis served as a product testing lab for Network Computing magazine and archived a lot of information about vulnerability that was frequently used for research, both of which extended its reach to a global audience.

“Our name was well-known beyond our clients, it was well-known beyond our location,” she said. “It wasn’t known as a Midwestern company.

“Now when I build companies, I’m thinking brand from the get-go. How do we build brand equity? How do people know we’re exceptional at what we do?”

Since January, Fitzsimmons has been applying her expertise as co-founder and managing director-strategy at Milwaukee-based virtual reality filmmaker Custom Reality Services.

ZyStor Therapeutics didn’t have a straight line path to an acquisition.

“We thought we had a deal done with another company that kind of fell apart at the eleventh hour in 2008,” Peterson said. “So we continued on the company side to continue to do the work we were doing to position the company. The number of potential acquirers in our case was relatively small and BioMarin was among the top three potential acquirers all along.”

Part of moving forward until it was finally acquired two years later meant going back to ZyStor’s investors to get more capital. Networking with potential investors at trade conferences along the way helped the company when it later needed cash, Peterson said.

Jackie Steinmetz was able to use the profits from the Sweet Monkees sale – about two or three times what the Steinmetzs bought it for – to grow her second company, Milwaukee-based Accelity Marketing. She also applied lessons learned.

“It helped me understand the hustle you need to run a business,” she said. “Just getting that baseline of understanding you’re an entrepreneur and working that much and the crazy hours and the weekends.”

Jackie has no plans to sell Accelity, which she founded in 2013, and is focused on growing it. She also has the experience to know how to position a company if she were to sell again.

“You can’t be the business. If you are doing all of the work and you don’t have any processes in place, it’s going to be really hard to sell,” Jackie said.

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