David & Goliath

Madison-based American Family Mutual Insurance Co. has been investing in startup companies since 2010, which makes it one of the most experienced corporate venture capital investors in Wisconsin.

It started with a Madison startup called Shoutlet, a social marketing software platform that had been helping American Family’s insurance agents communicate with clients. The property and casualty insurer decided to invest in Shoutlet, which according to SEC filings raised about $5.5 million from at least three investors in 2010. American Family got a return on its investment in 2015, when Shoutlet was acquired by Austin, Texas-based Spredfast.

“They needed to raise venture capital and we sort of did a one-time, ad hoc team back in 2010,” said Dan Reed, managing director at American Family Ventures. “That’s part of how an insurance company makes money, and we’ve been making investments in venture investment funds since 1983. It’s an asset class we’re familiar with as a company, but we hadn’t been making direct investments in startups until 2010.”

In 2013, the company officially formed its venture capital division, American Family Ventures, with a $50 million fund and a planned five-year investment horizon.

Within two years, American Family had seen such promise from the Ventures investments that it upped the fund to a whopping $200 million. The insurer has now made 47 investments (seven of which are in Wisconsin), about seven of which it has exited successfully.

Of course, a couple of those companies it invested in haven’t survived, but that’s a hazard of the game.

American Family is one of several Wisconsin companies that have begun taking equity stakes in entrepreneurial ventures over the past several years to meet their strategic goals, help a fledgling firm, obtain talent and, hopefully, make a return on their investments.

The strategy of startups

Investing in startups is a strategic option for American Family as it has evaluated the changing dynamics in the insurance industry, Reed said.

AFV seeks out insurance, internet of things and analytics startups that offer new sources of data or new approaches to gleaning insight from data. It typically chips in between $500,000 and $5 million for early stage companies raising seed rounds to series B rounds.

AFV looks at about 1,500 startups per year, meets with about 400 of those and then chooses to invest in eight to 10 of them.

“People are trying to innovate around the user experience and to some extent, the products that the insurance world offers,” Reed said. “As a result, the investment numbers have been way up every year since we got started.”

American Family isn’t the only Wisconsin insurance company seeking out startups. Madison-based CUNA Mutual Group launched CMFG Ventures LLC in October 2016, also after an ad hoc investment of more than $10 million in an auto loan startup called SpringboardAuto.com.

CUNA Mutual’s customers are cooperatives, credit unions and their members. Creating CMFG allowed the company to find new solutions for its customers’ needs, said Brian Kaas, managing director at CMFG Ventures.

“Within the financial services industry, we were starting to see a lot of emerging fintech companies that were starting to disrupt the financial services industry,” Kaas said. “Given the connection that our company has with the credit union industry, we really saw a need for us to be a driver of innovation.”

Disruption is a common theme that drives corporate players to the innovative world of startups. Even if a company doesn’t invest in an early stage company, it can see what kind of technology is being developed for the industry before it goes mainstream, he said.

“If you look at both the banking side and the insurance side of financial services, they lag behind really major changes in terms of user experiences,” Kaas said. “In part because a lot of these financial institutions are very large, very old and have outdated systems.”

Corporations taking part in venture capital investing are choosing to look at new technology companies not as a threat, but as part of their solutions, he said.

So far, CUNA Mutual has made 11 investments totaling $65 million. On average, its investments range from $1 million to $5 million.

CMFG seeks out fintech and insuretech companies focused on the banking and credit union industries. It has a national scope, and has reviewed more than 300 startups for potential investment. Many business-to-business focused startups seek its investment because of CUNA Mutual’s relationships with more than 95 percent of credit unions in the United States, Kaas said.

“We don’t have any investments yet in a Wisconsin company, so we’re looking for the right opportunity to make that first investment, but to date we have not found the right fit,” Kaas said.

While it has not made any exits yet, CMFG plans on a five- to seven-year investment horizon for each investment.

“We’re looking at companies that have strong management teams, that have innovation and unique platforms with high barriers to entry, so a lot of the traditional criteria that a venture capital investor would look at, but it has to be strategic first and foremost,” he said.

Those strategic applications include new distribution channels for its insurance products.

Milwaukee companies follow suit

Over the past year, several Milwaukee companies have followed American Family and CUNA Mutual’s lead, dipping their toes in the waters of venture investing.

“Some companies view it as a straight up investment,” said Tom Still, president of the Wisconsin Technology Council. “For others, it’s much more strategic in terms of their long-term corporate goals.”

It helps that corporations are experiencing record profits and have extra cash on their balance sheets to put toward a new investment class, he said.

“Especially in a low interest rate climate, which we might be climbing out of now…I’m sure there was some impetus to look for greater returns,” Still said.

Milwaukee-based Aurora Health Care Inc. waded into the venture capital waters in October, when it formed its $5 million InvestMKE fund.

Among the biggest drivers for Aurora, the largest private employer in the state, was the need to source a pool of technology talent in southeastern Wisconsin.

“The digital revolution that’s happening to health care is pretty substantial. We want to make sure we encourage startups, not only here in Milwaukee, to be at the forefront of the technology revolution as it goes forward,” said Mike Rodgers, director of strategic innovation at Aurora.

Aside from the capital injection, Aurora’s biggest value proposition to a startup company is the ability to test its solution on the front lines of health care.

Its venture capital investment strategy began with a partnership it formed with Brookfield startup EmOpti Inc., Rodgers said. The company created a software platform that reduces patient wait times at emergency rooms and arranges completion of preliminary tests before the patient sees a doctor in person.

Aurora invested in two different EmOpti funding rounds, $500,000 each time.

“They’ve really been a development partner essentially … since we first started the company,” said EmOpti founder and chief executive officer Dr. Edward Barthell. “We were pleased to have a customer using our product that thought it was a good enough product that they not only wanted to use it in their facilities, but also invest in the company.”

“The opportunity was there, it was a great mesh, (Barthell) is a serial entrepreneur, a very talented individual,” Rodgers said. “We started working with them, started using their product, gave them an opportunity to build it out with us.”

EmOpti has grown to nine employees and is working to expand its footprint nationwide. The platform is being used in 10 hospitals and two urgent care centers.

Aurora is seeking local startups like EmOpti that want to co-develop a technology with its team as they bring the prototype to the next level, Rodgers said. It is focused on companies with solutions in digital health transformation, next generation innovation and wellness beyond health. InvestMKE has solicited applications for funding by becoming involved in the startup community.

It plans to invest up to $1 million per deal, and has not yet made any investments from InvestMKE but has some “on the horizon.”

“We’re actually going through a list of somewhere between 20 and 30 companies that have reached out,” Rodgers said. “I have a feeling that’s going to increase over time. I definitely feel like there’s enough ideas out there.”

While Aurora aims to get a return on its investments, Rodgers declined to go into specifics.

“We hope to get a return, but I think there’s primary and secondary,” he said. “One of the biggest things is venturing into what we can do together. Obviously the typical returns, we would hope to get.”

While it has been investing in a handful of startup companies for the past three to four years, it wasn’t until this fall that Aurora launched its formal venture capital program.

Aurora announced InvestMKE at the same time Milwaukee-based Northwestern Mutual Life Insurance Co. announced a $5 million Cream City Venture Capital fund dedicated to investing in local tech startups.

Northwestern Mutual and Aurora plan to co-invest in some startups as they each deploy their funds over the next five years. While they are in different industries, the cross-pollination could benefit them both, particularly when it comes to digital health, Rodgers said.

“It’s two corporate partners that really see a lot of value in the southeast (Wisconsin) and Milwaukee community. We’re in the business of having people live well and live a healthy, good quality of life. They’re also in the business of helping people live well,” he said.

The companies began talking about co-investing when it became clear they both had a number of open positions for IT developers and were seeking technology talent, Rodgers said.

“This isn’t just a capital play. This is how do we move the community forward,” he said.

Last month, Northwestern Mutual announced it had selected Socialeads as the winner of its Reverse Pitch MKE competition, which came with an investment of up to $85,000.

As a result, Socialeads is the first startup in Northwestern Mutual’s Cream City Venture Capital fund portfolio.

Entrepreneur Larry Hitchcock and solutions architect Matthew Salzer created Socialeads to address Northwestern Mutual’s challenges regarding salesperson market potential and referral friction. It uses a Northwestern Mutual financial representative’s social networks, with data science and machine learning, to help them reach the right people in their network at the ideal time. For example, it can analyze social media data to determine when a contact is planning to buy a home, save for college or plan for retirement.

Eventually, the product would use predictive analytics and machine learning to gain accuracy and predict life events. While Hitchcock and Salzer work on it, Socialeads will have office space and mentorship at Northwestern Mutual’s downtown Milwaukee headquarters, but their business will remain independent.

The pair plans to raise a larger seed round of between $750,000 and $1.5 million, including Northwestern Mutual’s investment.

They said the mentorship from Northwestern Mutual will prove invaluable both in raising their profile and in perfecting the prototype over the next four to six months.

Socialeads is on the leading edge of technology companies harnessing social media analytics for one-to-one direct sales, Hitchcock said. It aims to get to market quickly to stay ahead of the pack – and help Northwestern Mutual do the same.

“Everything from financial planning to stocks … are dynamic in a way in the last five to seven years that are taking everybody and rattling the cages of all these big businesses,” Hitchcock said. “There’s a lot of change going on and it’s being driven by the changing demographics; millennials are really getting into the meat of their careers.”

The Cream City Venture Capital fund plans to make $100,000 to $250,000 investments in technology startups in the Milwaukee market.

“Cream City is focused exclusively on southeastern Wisconsin-based startups, regardless of industry,” said Craig Schedler, venture partner at Northwestern Mutual Future Ventures. “We’re not looking at investment opportunities specifically focused on areas of direct relevance to our business, but what we do want to do is invest in companies that are leveraging technology to solve big problems.”

Cream City has indicated a preference for companies with $50,000 in monthly recurring revenue, but that’s not a must-have, Schedler said.

“I wouldn’t say that’s a hard and fast rule, but we are looking for companies that have early signs of traction,” he said. “Traction can take a lot of different forms: it could be revenue, it could be users, something that shows they’ve found a problem, they’ve found a solution to it and they’re starting to get users involved.”

The fund has met with about 25 local startups, but has not yet made an investment outside of the Reverse Pitch competition.

“We’re continuing to evaluate a host of opportunities locally. I’ve been very happy with the quantity and quality of entrepreneurs that we’ve been able to meet with,” Schedler said.

Northwestern Mutual has also worked to assist the startups it evaluates, even if it’s not in monetary form, he said.

Northwestern Mutual also in January 2017 launched its $50 million Future Ventures fund, which has a national scope and is more specific to the company’s strategy in the financial services industry.

While it has a robust internal digital innovation team, Northwestern Mutual wanted to connect with startups to bring in outside ideas, which is why it launched Future Ventures, said Schedler.

Future Ventures is focused on later stage companies raising series A or B rounds. It makes investments of between $500,000 and $3 million. It is specifically focused on four strategic areas related to Northwestern Mutual’s business: changing consumer preferences; re-imagining the customer experience; digital health revolution; and transformational analytics and technologies.

So far, Future Ventures has invested in nine companies, none of which are in the Milwaukee area. Each of them is forming a partnership with Northwestern Mutual but remaining independent.

One of the portfolio companies is San Francisco mobile banking startup Chime, which allows users to avoid fees and automate their finances, including rounding up transactions to save the “change.” Future Ventures invested an undisclosed amount in its $18 million series B round in September.

Northwestern Mutual also pointed to the pace of change in the financial services industry and consumer expectations as a reason for its venture capital outreach.

“Our internal innovation efforts play a key role in that, but you’re not going to have a complete understanding of what’s happening in the broader market, so the way you do that is by engaging with the broader market and startups that are disruptive,” Schedler said. “We felt that for our business, the best way to really understand and address it and be proactive was to have a seat at the table.”

Schedler expects to finish investing the Future Ventures fund over the next three to four years, reserving some capital for follow-on investments.

“I think (venture capital investing) can be a very important vehicle for large companies to really get engaged with what’s happening outside of their four walls and I think it’s been a real enabler of… strategic engagement for Northwestern Mutual already,” Schedler said. “It’s a great way for companies in any industry to look at their business. Any company in the city or state would definitely benefit from having this lens on their industry.”

Looking ahead

American Family, CUNA Mutual, Northwestern Mutual and Aurora all have similar goals in mind when it comes to venture capital, Still said.

“What they’re looking for is, sure they want good returns on investments, but they also want to invest in startups or emerging companies that that’s where their own internal goals are for how to grow the company,” Still said. “It’s tough for a company even the size of Northwestern Mutual to do all its innovation in-house or to be on top of all of the research in fintech.”

Still predicted more Wisconsin corporations will begin to invest in startups in their industries.

“You’re going to see more in health care. Aurora’s a great example. You’ll see more in advanced manufacturing, especially around companies that have automation,” he said.

Even Microsoft Corp. is getting involved in the corporate venture capital game in Wisconsin, with the announcement in October of its plans to create a TitletownTech Venture Capital Fund in cooperation with the Green Bay Packers. The size of the fund was not disclosed, but is part of a larger $10 million joint investment in a business accelerator and a lab space that is currently being constructed in the Titletown District in Green Bay.

“There’s a booming startup community in Wisconsin that could benefit from venture funding, business expertise and digital tools. Microsoft’s investment in TitletownTech will help meet those needs and our ultimate goal is to foster job creation and economic growth in Wisconsin,” said Michelle Schuler, manager of Microsoft TechSpark Wisconsin.

And Foxconn Technology Group announced this month it plans to buy the 611 Building in downtown Milwaukee, where it will have its Wisconsin headquarters and also support local startups via a new Wisconn Valley Innovation Center. In response to questions about its potential investment in Milwaukee-area startups, Foxconn released a statement that said, in part:

“Foxconn is committed to contributing to Wisconsin’s transformation into a global center for startups and high-technology companies looking to leverage the competitive advantages that

Wisconn Valley has to offer. In addition to the significant value that our operations will generate, our Wisconsin campus will also provide a platform for the development of next-generation hardware and solutions as part of the 8K+5G ecosystem.

“The facility will house incubators, accelerator labs, venture capital activities and startup initiatives, and support Foxconn’s goal of cultivating a new class of vertical solution providers for advanced manufacturing processes and technologies, as well as for industries such as education, medical and health care, entertainment and sports, security, and smart community.”

The Tech Council also has floated the idea of a pooled statewide corporate venture fund, similar to the Cintrifuse Syndicate Fund in Cincinnati or the Renaissance Venture Capital Fund in Detroit, both of which were formed by corporations and have produced strong returns with a fund of funds models.

“It’s something we’ve followed and have advocated for, but it takes some companies that want to get involved and be a part of such an effort and that’s clearly totally based on their strategy,” Still said.

Wisconsin startups need more investments at the larger end, between $2 million and $5 million, Still said, and a corporate fund of funds could help generate more sizable influxes of capital. It would also provide a fund manager in place of companies having to manage the investments directly.

“We have a lot of angel networks and funds that are doing a great job, we have VCs that are doing what they can, but they can’t do it alone,” he said. “There are other public and private corporations in Wisconsin that are taking a strong look at this.”

Some in the startup community have suggested, though, that southeastern Wisconsin corporations focused on venture capital investing limited to their specific sectors may not find enough companies that meet their criteria locally.

“It’s great that there’s an influx of capital into the early-stage startup scene,” said Matt Cordio, president of technology recruitment firm Skills Pipeline and co-founder of entrepreneurship organization Startup Milwaukee. “(But) we have to do more to attract entrepreneurs here to Milwaukee, I think, so these funds can fully deploy all the capital they have available. They’re looking for SaaS companies that are basically doing $600,000 a year in revenue.”

Accelerators that have sought those kinds of investments in the past have not found a lot of them in the Milwaukee market, he said.