The four-corporation Milwaukee venture capital fund announced last month, Wisconn Valley Venture Fund, is an uncommon model.
Solo corporate venture funds are becoming increasingly common, including among the companies involved in the Wisconn fund. But a review of other group venture capital models shows there aren’t many like the $100 million Wisconn fund, which was formed by Foxconn Technology Group, Advocate Aurora Health Inc., Johnson Controls International plc and Northwestern Mutual Life Insurance Co.
Regional efforts such as Michigan’s Renaissance Venture Capital, St. Louis’ Arch Grants program and Cincinnati’s Cintrifuse Syndicate Fund have been formed by local stakeholders to drive startup activity in similar Midwestern cities, but on a private basis.
Renaissance is a private fund of funds which invests in existing venture capital funds around the country – with the condition that the investors come to Michigan to get the money and meet a couple of local entrepreneurs while they’re in town.
Cintrifuse was modeled on Renaissance as a fund of funds, but with a more targeted focus just on Cincinnati and with affiliated co-working and startup support services. Its startup accelerator, The Brandery, was taken over by gener8tor earlier this year. The formation of Cintrifuse was driven by an association of executives from the city’s 30 largest corporations.
Arch Grants is a private direct investment program, which offers a $50,000 grant to 20 startups each year to locate in St. Louis.
Ross Blankenship, chief executive officer of Washington, D.C.-based venture capital fund Angel Kings and an expert on startups and venture capital, said the Wisconn Valley Venture Fund’s four-corporation structure is unique.
He said the announcement has some elements of politics and public relations driving it as Foxconn Technology Group, which is set to receive $3 billion in state tax credits for its development in Mount Pleasant, works to build goodwill with Wisconsinites and Gov. Scott Walker seeks reelection.
The size of the Wisconn fund compared to other venture capital funds nationally is small, Blankenship said. For example, Sequoia Capital has several venture capital and growth funds totaling $12 billion, and SoftBank Capital (in which Foxconn has a stake) has a $100 billion corporate venture fund.
“$100 million is quite insignificant from a macro perspective for how big Foxconn is,” Blankenship said. “It’s barely a decimal point for these guys on their balance sheet.”
The Wisconn fund will benefit Wisconsin, since other corporations and venture capital funds are likely to take notice and come in to the market, he said. Markets like New York and San Francisco are already saturated with venture capital, and the valuations in Wisconsin are attractive because they’re much lower.
Ross Baird, innovator-in-residence at the Ewing Marion Kauffman Foundation and president of venture capital firm Village Capital, said corporations with an affinity for a place or industry are playing a role in funding startups nationwide.
“I would say that it’s unusual to see a venture fund pull together in a specific region where the companies don’t have a connection to that region. The typical investment happens within 90 miles of where the person making the decisions is,” Baird said.
But the direct investment model Wisconn plans to use may be less effective than funding entrepreneurship infrastructure and programs, he said.
“We’ve seen a number of efforts where people are trying to change the entrepreneurial culture of a region by directly investing in companies,” Baird said. “And we haven’t seen evidence that direct investment in companies makes a meaningful impact on the entrepreneurial successes or failures.”
He pointed to Wisconsin’s low ranking in the Kauffman Foundation’s measures of entrepreneurship activity by state.
Wisconsin investors and startup leaders who followed the Wisconn fund announcement said it will be difficult to determine the impact of the fund at this stage. There isn’t yet a fund manager at the helm, and there aren’t a lot of specifics on it.
According to the companies involved, the Milwaukee-based Wisconn fund will make investments of between $250,000 and $5 million in companies at various stages of growth. It will invest globally, with no guarantee of investments in Wisconsin companies. And it will be focused on “transformative and interdisciplinary” innovations in the organizations’ sectors: health care, technology, manufacturing and financial services.
“I’ve talked to many of the venture capitalists and (angel investors) around the state and they think the jury’s out,” said Kathleen Gallagher, executive director at the Milwaukee Institute. “There’s not enough information to understand the impact it’s going to have on the state.”
“For me, there’s still some parts I’m not fully clear on. For example, are the four partners going to pool all their dollars and then make direct investments only?” asked Tom Still, president of the Wisconsin Technology Council.
“It pretty much looks like a straight up venture capital fund,” said John Neis, executive managing director at Madison venture capital fund Venture Investors. “You’ve got four partners with really different areas of interest, so I think it will be really interesting to see how they manage that in terms of the scope of what they look at in terms of opportunities.”
The Wisconn fund will add meaningful investment capability in Wisconsin, which will help drive additional syndication on venture capital deals in the state, Neis said. And the four corporations leading the way on the initiative shows their commitment to developing the innovation economy in Wisconsin, which could help attract out-of-state investors.
“I’ve said for a while we need our institutions in this state…to step up and participate in the asset class in a meaningful way,” Neis said. “If we in the state who know the opportunities that are in our backyard, believe in the people who are trying to advance them, if we aren’t stepping up, why should we expect anybody else to?”
“I think obviously we need to know who the fund manager is and what their strategy will be for deploying the capital in the fund,” said Matt Cordio, president of Startup Milwaukee and Skills Pipeline. “It’s a great thing that will hopefully be another potential catalyst as we continue to build momentum and move southeastern Wisconsin forward.”
“In the venture capital world, more is better,” said Tim Keane, director of Brookfield-based Golden Angel Investors LLC. “This new fund, to me, is another sign of the terrific renaissance of entrepreneurship in Milwaukee.”
The corporate model will provide not only additional capital for Milwaukee startups, but also access to the corporations’ customers, he said.
It can be difficult to define a fund until it starts making investments, but that will likely be clarified over time, Keane said.
If the Wisconn fund decides to invest in a startup in another state, with four major corporations backing it, there’s some pull to attract entrepreneurs to locate here, Keane said.
If the fund is seeking a return on investment, it would hamper their efforts to intentionally restrict their geography of investment, Neis said.
U.S. venture capital funds are clustered in New York, Massachusetts, California and Texas, and more than 80 percent of venture capital is deployed in those states, Neis said.
“Let’s face it, any investor loves the idea of actually being able to drive or walk over to a portfolio company for a routine interaction rather than hop on a plane for quarterly board meetings,” he said.
“Especially if you’re doing seed and early stage, everybody would prefer to have the entrepreneur at arm’s length because you can be more helpful if you’re right there,” Keane said.
Keane said over time, this fund will likely drive substantial local opportunity and impact.
“This does not have the gestation period of a housefly,” Keane said. “It takes a long time, but it’s generational and it’ll happen.”