Venture capital volume grows, but level

Last updated on May 13th, 2019 at 02:22 pm

is still ‘inadequate,’ observers say

Wisconsin’s entrepreneurial activity — and the investments that help in flourish — offer another variation on the old "good news/bad news" story.
The good news: they are clearly growing. Venture capital investments, a convenient barometer of entrepreneurship in general, hit $295.4 million in the year 2000, according to a survey by the Wisconsin Taxpayers Alliance.
The bad news is that the figure nets out to just $104 for every working Wisconsin resident. "We’re at an all-time high in absolute numbers, but in per-worker terms we’re still much below the national average," laments Sharon Cook, executive director of Competitive Wisconsin, Inc.
Roger Ganser, chairman of the Wisconsin Venture Capital and Angel Investor Association, estimates that Wisconsin’s share of venture capital amounts to about 0.8 percent of the nation’s total. "That’s far from adequate," says Ganser, managing partner of Venture Investors, LLC.
But the state, insiders say, appears poised for a major leap forward — and investors are starting to take notice.
Wisconsin has no shortage of innovative ideas and technologies, venture capitalists say. Many come through institutions such as the University of Wisconsin-Madison and the Medical College of Wisconsin in Wauwatosa. The UW-Madison is the nation’s No. 2 university spender of research dollars — $554 million in 2000, the National Science Foundation reports; only Baltimore’s Johns Hopkins, with a huge niche in classified defense work, spends more.
And institutions have also become increasingly sophisticated in helping their researchers move their discoveries from the laboratory to the marketplace.
A case in point is the Wisconsin Alumni Research Foundation, which manages the licensing of intellectual property produced by UW-Madison research, and which has increased its involvement with startup companies in the last decade, licensing technology invented and developed by its researchers to some two dozen startup firms.
"The vast majority of our licenses are still with ongoing companies," says Andrew Cohn, WARF’s government and public relations manager. Even so, many larger companies were put off by some of the newest work of university researchers, especially in biotechnology. "The only way we could license that technology was in a startup," Cohn adds. "Bigger companies weren’t willing to take a risk that would be involved in moving the technology from the discovery stage to the product stage."
The Medical College of Wisconsin has taken a similar tack in the last two or three years. William Hendee, senior associate dean and vice president, who also serves as executive vice present of the research foundation managing the Medical College’s intellectual property, says the Medical College made a deliberate decision a few years ago to focus more on startups in its licensing agreements and less on the larger companies — usually out of state — with which it had traditionally done business. The college reasoned that encouraging startups would be better for the state by keeping the fruits of research, from job growth to business wealth, at home, Hendee says.
To help promote such entrepreneurship, the Medical College teamed up with other academic institutions and the Metropolitan Milwaukee Association of Commerce to establish TechStar. The consortium works with startup companies, linking them with interim management professionals and building them to a level where they can attract venture capital. Of its first four businesses, one has received funding, one is expected to soon, and the other two continue to show good prospects for doing so, says TechStar’s managing partner, Lane Brostrom.
Brostrom grew up in Madison and moved away 20 years ago. He most recently served as a general partner in a venture capital and business incubation group in Dallas. He says he returned to Wisconsin last year to head TechStar because he saw "a very clear signal from state and local government and business leaders that they want to kick-start the new economy."
TechStar itself was one such sign; so was the Wisconsin Technology Council, created by the state legislature to promote the growth and development of high-tech businesses.
The money is beginning to follow. "Angel investment groups are starting to crop up all over," says the technology council’s president, Larry Kline. Besides two in Madison and one in Milwaukee formed about a year ago, a new one has begun in the Green Bay area, and others are either in formation or under consideration in La Crosse, Platteville, Marshfield, and Eau Claire.
Why the sudden upsurge? "It takes focus," says Kline. "In the past, nobody was really focused on this." Now, however, as each new deal comes on line, more follow, in a snowball effect.
Venture capitalists also credit the state for becoming more deeply engaged. The State of Wisconsin Investment Board, which manages the pension fund investments of public employees, has been involved in funding startups since the mid-1980s, three years ago set aside $50 million to invest in new companies in biotechnology, health care, and related fields. "There were a lot of good projects that we felt would be a good investment for us," says SWIB public information officer Vicki Hearing. So that the state doesn’t get directly involved in the politically perilous decision of what companies to invest in, the investment board hired two venture capital firms to manage the project.
Still another state initiative is the Certified Capital Company Program (CAPCO), which has awarded $50 million in state tax credits to encourage investments in small companies with fewer than 100 employees and less than $2 million in annual income. The state Department of Commerce certified three firms — Advantage Capital Wisconsin Partners and Banc One Stonehenge Capital Fund Wisconsin, both of Milwaukee, and Wilshire Investors, LLC, of Mequon — to manage the investments, which are made by private investors.
Venture capital is crossing a new threshold in Wisconsin, says John Byrnes, of Mason Wells, a Milwaukee venture capital firm affiliated with Marshall & Ilsley Bank. "People with money in the state are starting to use that money to invest in other businesses rather than simply giving it to charitable or cultural things," says Byrnes. SWIB’s new venture, which Byrnes’ firm helps manage, "has given the whole industry a shot in the arm."
"We have a much better climate for venture capital than we’ve had in the 20 years I’ve been here," says Byrnes. "We need more and more capable, more experienced, entrepreneurs, but they’re starting to come forward." The state is especially showing strength in biomedical sciences and in mass-data storage technologies.
Byrnes says in the past the state’s entrepreneurs, while being hip-deep in innovative new technology, lacked the savvy to put together a solid business, but that’s changing. Local entrepreneurs are getting more sophisticated, and venture capitalists are also reaching out of state to recruit better management talent. "We’re seeing higher quality managers in the deals we’re doing today."
The next step, Byrnes says, is for Wisconsin entrepreneurs to raise their sights. "In the past the mentality of a lot of businesses in this state has been to target niche market opportunities, to exploit and dominate niches." Sounds good in theory, but "when you dominate a niche, you end up with a small company." He counsels people to think much bigger. "If you’re going to build successful, growth-oriented companies, you have to address big problems that have big market potential. You don’t end up winning by aiming for second or third place."
Still, some hurdles remain.
When it comes to luring investors from out of state, Wisconsin still puts off some as too far off the beaten track. Cohn at WARF recalls one East Coast team of investors who almost canceled their trip when they learned they’d have to change planes in Chicago.
William Hendee at the Medical College sees three challenges ahead: pushing academic institutions to be more entrepreneurially focused, building an entrepreneurial community spirit, and breaking down regional barriers within the state that tend to separate groups that actually share expertise in various technologies and could benefit from working much more closely together. Hendee says progress has begun on all three fronts, but much remains to be done.
Ganser and others also say that a number of cultural hurdles still work against the rapid growth of venture investing here. Wisconsin, he notes, continues to have a traditional, conservative, frugal impulse that discourages the risk-taking necessary to entrepreneurialism. "In some communities, taking a risk and failing is very much encouraged, because it’s a learning experience," he says. "You do that here and you don’t dare show your face."
Another concern, Ganser says, is that major institutional investors such as insurance companies continue to tread cautiously in the whole venture arena. "There are so few institutional investors in Wisconsin who invest in the venture capital asset class that we [venture capitalists] all end up talking to the same people. We’re just not reaching that market."
An exception is American Family Insurance. The Madison-based home and auto insurer currently has about $200 million in private equity investments, most of it venture capital, says David Sebald, director of alternative investments for the insurer. "A little over three percent of our surplus is in venture capital," Sebald says. "We got involved in it with the idea that private equity would support our strategic investment goals. Private equity partnerships have historically been able to supply superior long-term returns."
Still another sign of the state’s conservative cast, however, in southeastern Wisconsin especially, is that big technology companies like Rockwell Automation and GE Medical Systems don’t seem to produce more spinoff ventures.
Ganser isn’t sure why that is, but wonders if there is less of an adventurous spirit. When he assisted a fledgling medical device firm a while back seeking to hire someone to manage clinical trials of its products, Ganser made sure to note in the help-wanted ad that the employer would offer stock options. "We didn’t get one applicant out of the Milwaukee metropolitan area," he says. "It was pretty frightening."

May 24, 2002 Small Business Times, Milwaukee

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