Startup investing was the name of the game at Milwaukee Startup Week on Friday.
In a morning Open Deal Screening Meeting, Golden Angels Investors heard pitches from two Wisconsin startups and shared their investing strategy with the audience.
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Kenneth Iwinski of Wisconsin Rapids-based enhanced enteral nutrition company Synesis LLC and Sherry Zhang of Brookfield-based genomic nutrition firm GenoPalate Inc. presented their firms, their value proposition and their funding requests, and then members of Golden Angels talked about what they liked or didn’t like about each as an investment opportunity.
Synesis makes an enteral nutrition product – the daily nutrition delivered to people with swallowing disorders.
“80 percent of the products on the market is what we refer to as standard formulations,” Iwinski said.
The challenge with the standard formulations on the market is their makeup can lead to the degradation of the gut barrier function, he said. This can lead to diarrhea, cramping and infection, and affects about 35 percent of patients using the products.
“It’s not a well-understood problem,” he said. “It’s generally recognized as a common problem.”
Synesis has created a formulation, called Phytality,that includes tannins that help prevent the gut barrier degradation.
The company is targeting the $1.5 billion home enteral market, which is expected to grow at 6 percent per year through 2022, Iwinski said. It is seeking $750,000 in initial capital from the Golden Angels to produce and develop its formula.
Synesis projects it will grow to $17 million in revenue by year five post-funding. Ultimately, its goal is to be acquired by a larger player in the home enteral nutrition market, such as Abbott Nutrition or Nestle Health Science.
“We think we’re on to something here and if we can show efficacy in terms of getting it to market…we certainly think (large companies) will be interested in this,” Iwinski said.
The attendees asked Synesis about its patent protections, efficacy risk and margins, and Golden Angels director Tim Keane led a discussion of the growth potential and pros and cons of investing in the company.
GenoPalate, which is currently participating in gener8tor, offers personalized nutrition recommendations to individuals via genomic sequencing.
Zhang has a doctorate in molecular biology and is an assistant professor at the Medical College of Wisconsin.
Customers can buy the GenoPalate testing kit for $299 online, and the company ships the materials to provide a saliva sample and demographic and lifestyle survey. GenoPalate’s four employees then analyze the genetic profile of the individual and profile 38 biomarkers to provide actionable data, such as lactose intolerance.
Zhang described the success GenoPalate has had this year, with 186 test kits sold and $35,563 in revenue year-to-date. Her addressable market is large, about $64.8 billion, since there are about 108 million U.S. dieters.
“I have launched three startups using high-tech information technology before GenoPalate,” she said.
The company is seeking $400,000 in funding, of which $118,000 has been raised so far. Earlier this week, it raised $20,000 of the total via the Healthcare Innovation Pitch competition.
The attendees asked Zhang about the price point, competitors and regulations related to her product, and the potential investors reacted positively to the concept.
Keane described the Golden Angels’ process for evaluating this type of deal. The best answer for a startup is “Yes,” but the second best answer is a quick “No,” he said.
“Dragging somebody along for a long period of time doesn’t seem to be a good idea for anybody,” Keane said. “I think in both these cases there’s great potential and I think the question is trying to apply some experience to the company’s idea to see around the corner just based on what you know.
“Really what we’re looking for is the model of the business, not so much the plan.”
Startup investing 101
A lunch event at Husch Blackwell's office downtown also addressed startup investing, with a panel of experienced investors sharing their tips and strategies with would-be investors and startups seeking insight.
Milwaukee Startup Week organizers Matt Cordio and Ed Javier created the event to try to spur more angel investment in the market “because we need a lot of them,” Cordio said.
The panelists were: Ross Leinweber, who is preparing to launch the Milwaukee market’s Badger Fund of Funds; Bill Goodman, a member of Golden Angels and BizStarts; Pehr Anderson of Harqen and Silicon Pastures; and Eric Lenzen, a partner at Husch Blackwell.
Asked what they wish they had known going into venture investing, they responded:
“Some of the failures that we’ve seen in our practice…great idea, great person, but not the right person to lead a company,” Lenzen said. “It’s more than just a good concept.”
“When I look at venture investing, it’s a little bit like putting together a puzzle,” and every puzzle is different, so it’s important not to take a formulaic approach, Leinweber said.
“When I first started investing in startups on the East Coast, I learned that I was a bump on somebody else’s log,” Anderson said. “Early stage investing in the Midwest is more sustainable and more pragmatic.”
“I wish I had had a better comprehension of just how vague some of these opportunities are,” Goodman said.
The panelists recommended those interested in investing in startups achieve accredited investor status because of the legal benefits for the company and the tax benefits for the investor. They also advised networking in a particular industry to find the right deals to meet an investor’s goals.
“Just be curious. Look around. Figure out what people are doing, where quality deal flow is,” Leinweber said.
“As important as defining what you are looking for is defining what you for sure don’t want,” Lenzen said.
“It’s all about sharing,” Goodman said. “We’ll get entrepreneurs who present to us and honest to God I have no idea what they’re talking about, but then the person next to me who’s in the industry is bubbling in their chair and saying, ‘This is the greatest idea.’”
Getting started with venture investing can be intimidating, so the panelists advised using the first couple of small investments as learning experiences, not expecting a return, and scale up the size of investments later.
“I’ve learned a ton. I’ve made mistakes. The losers are your best lessons,” Leinweber said.