Florence, Italy in the early 15th century was a textile manufacturing city of around 50,000 to 60,000 people. It was about one-fourth the size of Venice, Milan, Paris and London. A large portion of its economy and workforce depended upon the making and trading of wool. It was not considered at the time to be of any particular significance culturally or artistically.
Yet over the next century, it would become the epicenter of the European Renaissance and stage the rise of the most prominent artists and intellectuals of the era.
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Joe Kirgues of gener8tor speaks with Matt Cordio of Startup Milwaukee.[/caption]
One reason: they found a generous and reliable financial backer in the Medici family. The Medicis were a band of Italian merchants who had risen to political prominence in Florence during the 13th and 14th centuries.
“This family rises from being a bunch of wool-makers to becoming the pope’s bankers, and then goes on to finance, in a period of 100 years, Michelangelo, Leonardo da Vinci, Donatello, Machiavelli, Galileo – these unbelievable names that set off the Renaissance,” said Joe Kirgues, co-founder of the nationally-ranked Milwaukee-based startup accelerator gener8tor. “Is it that all of those amazing people just happened to be born in that same city at the same time, or is there something about what they did as it relates to their money and their financing that allowed all these people who would’ve been anonymous in any other city to become, historically, some of the names we associate with being the best artists ever?”
“What macro things do you do to produce a city where good things happen?”
These are questions that have been weighing on Kirgues’ mind, he said, although the context in which he’s asking them is quite different.
Rather than artists, he and a handful of other entrepreneurs have been trying for the past several years to create a bustling ecosystem of technology startups in Milwaukee. But it’s been a difficult code to crack.
A similar narrative to that of Florence during the Renaissance began to play out in the San Francisco Bay area in the second half of the 20th century. Stanford University’s decision to begin leasing out land in the 1950s for use as an office park for high-tech companies, such as The Hewlett-Packard Co., laid the groundwork for a flood of innovations and tech startups that followed in the 1970s and 1980s.
Similarly, Bill Gates and Paul Allen’s 1979 decision to move Microsoft Corp. from Albuquerque, New Mexico, to the Seattle area transformed the economy of the Pacific Northwest. Once known primarily as a lumber, shipping and airplane manufacturing hub, the presence of Microsoft began attracting talented tech workers and, as a result, venture capital investors to Seattle. Now, it has a thriving startup scene and is home to other giant corporations, such as Amazon and Starbucks.
“In every case, it’s hard to look at it and not think the money had something to do with it,” Kirgues said.
Enter Milwaukee: Lake Michigan, the U.S. Bank Center, the Milwaukee Art Museum, the Allen-Bradley clock, City Hall. Neighborhoods of century-old Cream City brick buildings, some renovated and others still vacant, line its rivers.
Beer made it famous and manufacturing made it prosper.
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Krista Bergan and Marisa Raymonds of Chicago-based OfficeLuv work in a private office space at Ward4.[/caption]
It’s a city of roughly 600,000 people in a metropolitan area of around 1.57 million, according to the latest U.S. Census Bureau estimate. It’s home to seven Fortune 500 companies, the Milwaukee Brewers, the Milwaukee Bucks and what is billed as the world’s largest music festival.
Over the past five years, a slew of construction projects have driven a downtown resurgence.
However, that resurgence has not been accompanied by significant job or population growth.
As the nation moves toward a knowledge-based economy driven by technology and the number of manufacturing jobs nationwide continues to erode, Kirgues and others in the city’s small community of local entrepreneurs and investors are confronting a stark reality: Milwaukee does not have the mechanisms in place to build and sustain a healthy startup scene. And that puts it at a competitive disadvantage.
Gener8tor is ranked among the top 16 startup accelerators in the country, according to the Seed Accelerator Rankings Project. Formed in Milwaukee in 2012 by Kirgues, Dan Armbrust, Troy Vosseller, Daniel Bader, Joel Abraham and Jon Eckhardt, it now also has offices in Madison and Minneapolis. Twice a year, the organization selects a group of five startups from a pool of more than 600 applicants from around the country to participate in its core 12-week accelerator program and invests up to $140,000 in each of them. It’s had some success.
The 49 companies that have completed the program have together raised more than $100 million in follow-on financing. A little more than half – about 53 percent – have raised more than $1 million in financing or have been acquired.
But so far, much of that success has come from recruiting entrepreneurs and startups from elsewhere. And aside from a few standouts – such as Bright Cellars and Lumanu, two startups formed by Massachusetts Institute of Technology graduates that moved to Milwaukee from Boston – most of the successful companies that come through the program move on to different locations.
Milwaukee has seen a relatively small amount of organic startup growth. There are two basic narratives behind healthy startup ecosystems in the Midwest, Kirgues said.
No. 1: A city lucks out and a recruited or organic tech startup emerges and becomes very successful (think Microsoft in Seattle). That startup grows rapidly and serves as a “lighthouse” organization, a beacon that attracts top-tier talent who eventually form a cluster of startups around it.
No. 2: A city’s top companies and business leaders come together to form an investment vehicle for startups that attracts out-of-state investment.
“Neither of those two working recipes for Midwestern startup ecosystems are functioning here (in Milwaukee) at the moment,” he said. “Nor do we have the research capability of Madison or Ann Arbor (Michigan).”
Matt Cordio, founder of nonprofit Startup Milwaukee and tech corporate recruiting firm Skills Pipeline, has a similar view.
He’s been trying to build a more cohesive, active startup community in Milwaukee for years, and recently organized the city’s first Startup Week, a week-long series of networking and educational events intended to foster connections among investors and entrepreneurs.
Cordio is frustrated with what he sees as the local business community’s over-emphasis on real estate investment and under-emphasis on startup investment.
“The biggest challenge in Milwaukee, I think, is there seems to be some risk-averseness towards the future and toward technology and startup investing,” Cordio said. “I hope that can change, because I think that if we don’t embrace technology as the future, how are we going to compete with the rest of the country? The last century was defined by manufacturing; this century is going to be defined by technology.”
There are many complex social, cultural and economic conditions at play when it comes to building a thriving industry cluster, and they are hard to nail down or replicate.
There are, however, strategies being employed to solve the startup puzzle that have been working in other cities around the Midwest with similar economies, histories and geographic features to Milwaukee.
“One of the most common misconceptions is that this is zero-sum,” Kirgues said. “We can all get wealthy.”
In 2006 and 2007, Michigan was bleeding manufacturing jobs at a historic rate. The state had experienced its longest job-loss streak since the Great Depression – six straight years.
Business Leaders for Michigan, a group of top executives from 80 of the largest companies and universities in the state, including General Motors Co., Ford Motor Co., the University of Michigan and Michigan State University, began discussing job growth through entrepreneurism.
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Stephen Schaller of RotoPremierLeague.com uses a standing workstation at Ward4.[/caption]
“The conclusion we reached was that Michigan was a region with great technology development, and a really talented workforce, but we were an underserved area in the area of startups and venture capital,” said Chris Rizik, chief executive officer and fund manager of the Renaissance Venture Capital Fund. “So we ended up being an exporter of technology and tech jobs when, really, we had the ingredients here to be a pretty robust startup community.”
They decided to put together a regionally-focused venture fund of private dollars called the Renaissance Venture Capital Fund. Rizik, who by that time had about a decade of experience in venture capital under his belt, would lead it.
But their goal wasn’t to invest in local startups. They wanted to have a larger impact.
“The idea was to create a fund of funds; a fund to invest in great venture funds around the country, with the idea that you could leverage a limited amount of money into a larger impact,” Rizik said.
He and the members of BLM thought they could do more good for the state’s economy if they attracted investment money from the outside – venture capital firms and angel investors from out of state who have historically had their eyes fixed on places such as Silicon Valley and the Pacific Northwest.
These investors seemed to be ignoring Midwestern states when searching for tech startups in which to buy a stake. Rizik felt Renaissance could change that by using a sure-fire method to turn the eyes of fund managers: give them money.
“There are a number of state-funded fund-to-funds,” Rizik said. “Just about every Midwest state has one. But in our view, there were some flaws in the way those were structured.”
Most government-formed fund-to-funds were created with too heavy a focus on local economic development, he said. They weren’t structured in a way that was appealing to top-tier investors from out of state. They were clunky. The funds also were built defensively, he said.
The Renaissance Venture Capital Fund was structured with no financial strings attached. The venture capital firms that received contributions didn’t have to invest it in Michigan, they just had to invest it wisely. But, they’d have to come to Michigan to get it. And while they were there, Renaissance Fund and other Michigan business leaders would introduce them to good local investment opportunities they felt were being overlooked.
If the VCs chose to invest in the Michigan startups, great. If they didn’t, the fund and its contributors would still likely profit from the firms’ other investments.
Renaissance raised $45 million for its first fund in 2008, and invested it all in outside venture capital funds.
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Stephen Schaller of RotoPremierLeague.com uses a standing workstation at Ward4.[/caption]
Rizik estimated that for every dollar the Renaissance Fund invested in that first round, it attracted $23 of investment to Michigan from out of state. He estimated it’s attracted more than $800 million.
According to a report by PricewaterhouseCoopers and CB Insights tracking venture capital-backed investment deals over the past two decades, there were a total of 157 VC deals in Michigan totaling $1.3 billion between 2000 and 2007. From 2008 through 2016, after the Renaissance Fund became active, there were 336 deals for a total of $1.7 billion. A closer look at those numbers reveals a telling detail.
Right as the Renaissance Fund was launched, the Great Recession hit and investment dropped across the country. From 2008 to 2011, Michigan saw 114 deals for $615 million. From 2012 to 2016, however, activity skyrocketed. In that four-year timeframe, Michigan saw 222 deals for a total of $1.2 billion, nearly matching the total amount raised from 2000 to 2007.
If Rizik’s estimate of $800 million is accurate, the Renaissance Fund’s first $45 million pot was responsible for bringing in about 47 percent of the state’s total VC-backed investment deals since its inception.
The first fund was so successful, the group went back and raised $80 million for a second fund in 2012. It’s too early to tell exactly how much investment the second fund has brought in to Michigan just yet, he said.
But the eye-popping success of the Renaissance Fund’s first round caught the attention of a major Midwestern corporation in a city similar in size and economic makeup to Milwaukee.
A representative from Procter & Gamble Co., a multinational consumer goods company based out of Cincinnati that posts billions in annual sales, reached out to Rizik in 2012, right as the Renaissance Fund was raising its second round.
The Cincinnati business world had just been shaken up by a big move: Chiquita Brands International Inc. had decided to move its banana division to Charlotte, North Carolina, where it was promised $22 million in state and local incentives.
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A lounge area at the Union Hall building, Cincinnati’s startup hub.[/caption]
A group called the Cincinnati Business Committee, similar to the Business Leaders for Michigan, had been meeting to discuss the city’s future.
The CBC is an association of executives from the city’s 30 largest corporations, including Procter & Gamble, Kroger Co. and Western & Southern Financial Group. The Cincinnati area hits above its weight class in terms of large corporate headquarters. It’s home to 10 Fortune 500 companies. Weissmann referred to them as “Big Cos.”
Group members debated the value of betting on future job growth through Big Co. relocation to the Cincinnati area, accomplished by offering the types of incentives that drew Chiquita to Charlotte.
They viewed competing over existing Big Cos as a losing situation because it was so unstable – if a company is going to go wherever it can get the best tax breaks and deals, then Cincinnati would be constantly scrambling against other Midwestern cities for a larger share of what already exists, rather than organically creating its own wealth.
And they were right. In 2015, Chiquita, just three years after its move to Charlotte, picked up again and moved its banana division, along with 300 jobs, to Fort Lauderdale, Florida.
Instead, the CBC in 2012 decided to hedge its bet on new company creation and called on Rizik to help it set up a fund that would eventually become the Cintrifuse Syndicate Fund.
When Chiquita left “that woke everybody up,” said Cintrifuse spokesperson Eric Weissmann.
The CBC commissioned a report from McKinsey & Co. to identify what it needed to begin fostering innovation and a bustling startup community.
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Cintrifuse spokesperson Eric Weissmann.[/caption]
“They said, for a city your size, you should have a lot more venture capital coming in,” Weissmann said. “For some reason, VCs don’t find you attractive. Fix that.”
Though Cincinnati’s venture fund is run essentially the same way as the Renaissance Fund, it differs from its Michigan counterpart in two big ways: it’s focused specifically on Cincinnati as opposed to the entire state, and it’s wrapped under the control of Cintrifuse, the larger nonprofit organization that operates a co-working space and an array of other startup support services.
Cintrifuse is based out of a building in Cincinnati’s Over-The-Rhine neighborhood called Union Hall, along with two other major players in the Cincinnati tech scene: a top-10 nationally-ranked accelerator called The Brandery and CincyTech, a leading Midwest seed-stage investor.
In addition, Cincinnati also has an incubator called HCDC and a top-ranked private seed-stage venture capital firm called Queen City Angels.
“What you’re seeing now is really this revitalization of the city and the city core,” Weissmann said.
Cintrifuse launched its first fund in 2012 and raised $57 million from 16 investors. Like the Renaissance Fund, Cintrifuse money comes with no strings attached. However, it does ask that the VCs come to Cincinnati at least once a year.
In Ohio, there were 282 VC-backed deals for a total of $2.75 billion from 2000 to 2007, according to the report by PricewaterhouseCoopers and CB insights. During the Great Recession, from 2008 to 2011, investment dipped, and the state saw 162 deals for $584.4 million. But from 2012 to 2016, it skyrocketed to 355 deals for $1.6 billion. Ohio, with its bounty of large cities compared to most Midwestern states, probably doesn’t have Cintrifuse to thank for all of that investment, but the clear uptick of VC-backed investment in Ohio since its formation is notable.
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Cintrifuse chief executive officer Wendy Lea.[/caption]
“I see the Midwest uniquely able to pull this off,” said Cintrifuse CEO Wendy Lea. “I think they’re tired of being called the flyover country.”
Lea moved to Cincinnati from San Francisco about two years ago. She had been leading a startup based in San Francisco that had secured Procter & Gamble as a client.
“While here, I got to meet some of the leaders of the ecosystem,” Lea said. “She eventually got involved as a mentor at The Brandery and grew more familiar with the local startup scene. By the time Cintrifuse was forming and seeking a CEO, she had already started transitioning out of her leadership role at her previous company. And Cintrifuse was looking for someone with an outside perspective.
“I’m addicted to the potential of people and businesses, and now regions,” Lea said. “I think the Midwest is ripe for the picking. You’ve got lots of points of light, but to truly rise above the rest, there needs to be a band and bond of all the entrepreneurial entities so we’re not just vying for our own attention. We need to be truly collaborating in a way that will bring more energy and interest to the Midwest as a whole.”
While both the Renaissance Fund and Cintrifuse have enjoyed success in recent years using the fund-of-funds model, another city, located on the Mississippi River, has been employing a different approach.
In many ways, St. Louis’ economy and history are mirror images of Milwaukee’s. The Missouri city has a strong manufacturing history, a potent German immigrant influence and a storied beer industry tradition.
But right now, it has something Milwaukee doesn’t have: an incentive program to import startups and entrepreneurs.
In 2012, a program called Arch Grants, named for the famous St. Louis Gateway Arch, was formed. Each year, it distributes $50,000 equity-free grants to 20 startups that agree to set up shop in St. Louis for one year.
“There are definitely early indications that there’s good stuff happening,” said Arch Grants executive director Ginger Imster. “We’re getting companies that are receiving national attention from other accelerators. You just hope that one or two really talented folks can attract others, and that has a cumulative effect on building density and reputation.”
Arch Grants, like Cintrifuse, is a nonprofit organization. But rather than investing in VCs to attract out-of-state investment, it’s investing directly in startups and entrepreneurs. The idea is to get a cauldron of ideas, entrepreneurs and companies brewing in St. Louis that will eventually draw outside investors, and as a result, more talent.
Arch Grants doesn’t have the same quantity of cash as the Renaissance Fund or Cintrifuse. It relies on fundraising.
Imster said Arch Grants raised about $2.2 million last year through private contributions. Roughly half of that money, between $1 million and $1.2 million, was distributed to startups in the form of $50,000 grants. The rest of the money went toward staff salaries, programing and organizing large-scale events to give their companies more exposure.
Missouri, from 2000 to 2007, saw 136 VC-backed deals for a total of $1.96 billion, according to the PricewaterhouseCoopers and CB Insights report. Following the same trend as other states in the Midwest, investment activity dropped from 2008 to 2011 and the state took in only 69 deals, for $571.7 million. Since 2012, however, investment in the state has rebounded in a big way: 167 deals for $1.1 billion.
“It’s attracting talent to the city,” Milwaukee’s Matt Cordio said of the Arch Grants program. “St. Louis is not a place that you think a high-growth entrepreneurship is flourishing, technology is flourishing, but Arch Grants has really helped rebrand the city as moving into the 21st century innovation economy and being competitive.
“I think a similar program in Milwaukee would do the same thing.”
According to the same report tracking VC-backed deals, investment in Wisconsin has been lacking. The state had only 103 VC-backed deals from 2000 to 2007, for $888.3 million. During the Great Recession, from 2008 to 2011, Wisconsin notched a mere 66 deals, for $267.8 million. Although activity has picked up significantly since 2012 – 139 deals for $680.5 million – the state is pulling in about half the venture capital activity of Missouri, despite having a roughly equal population.
Wisconsin has about 5.75 million residents, while Missouri has a little more than 6 million.
And more of those deals have been happening in Madison, or even Beloit, than in Milwaukee.
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Joe Scanlin of Scanalytics utilizes a creative bench workspace in Ward4.[/caption]
“The most frustrating thing I hear from the Chicago venture community is they debate whether to drive through Beloit or Milwaukee on the way to Madison,” Kirgues said. “And to be truthful, more venture money is in Beloit. (They have) Comply365, Acculynx and FatWallet. I can’t name three venture-backed (startups) here. I think Comply took in $10 million alone. That’s more than any startup here. I can’t name one.
“Beloit beat us. They didn’t just beat us, they beat us hard.”
There have been some positive developments in Milwaukee in the past two years. Aside from Cordio’s inaugural Startup Week in November, Milwaukee County Executive Chris Abele decided to bet on local startups on his own.
Abele built a startup hub, Ward4, at the Pritzlaff building in Walker’s Point that opened in 2015. He modeled it after Chicago startup hub 1871. In addition to gener8tor, Ward4 is home to Startup Milwaukee, the Abele-backed venture CSA Partners and a number of gener8tor grads, including Bright Cellars and Scanalytics.
In addition, Northwestern Mutual Life Insurance Co. announced last month it’s planning to form a venture fund called Northwestern Mutual Future Ventures that will make $50 million in investments in finance-focused tech startups over the next few years.
The company said it decided to increase its focus on early-stage companies after its acquisition of New York City-based personal finance software company LearnVest in 2015.
Milwaukee also opened its Global Water Center in Walker’s Point in the summer of 2013, a seven-floor building with 25 tenants that includes a mix of international corporations, academic institutions, startup businesses and support organizations.
Forming a cohesive startup community and attracting significant venture capital investment, however, is still a work in progress.
Cordio and Kirgues both feel Milwaukee needs to attract investment and create more mechanisms to encourage home-grown entrepreneurism.
“We just haven’t been able to bring that ecosystem-like formula like they have with Cintrifuse or Arch Grants to Milwaukee, and we haven’t been able to bring a lighthouse in here,” Kirgues said.
He said he’s hoping one of his gener8tor companies, like Bright Cellars or the homegrown southeastern Wisconsin startup Scanalytics, can turn the kind of success that inspires entrepreneurial growth.
But until then, he feels the city’s business community needs to draw up a more cohesive and aggressive strategy.
“The public should feel comfortable judging the business community by its commitment and willingness to reinvest in its best and brightest,” he said. “There should be a more robust discussion on whether that is best done through private equity, or real estate, or venture capital, or bank financing.”