Venture philanthropy: BrightStar lifts off in Wisconsin

BrightStar Wisconsin Foundation Inc. has deployed its first three investments

With a fresh nonprofit designation in hand, BrightStar Wisconsin Foundation Inc. has deployed its first three investments in startup companies that will create jobs in Wisconsin.cover_031714_web

The organization, which has a unique model by which donations are deployed into equity stakes in early stage, rapid growth companies, has invested a total of $266,000 in its first three selections.

A critical designation

Tom Shannon is a determined visionary. The BrightStar Wisconsin Foundation Inc. president and chief executive officer managed in November to secure the early stage investment fund’s nonprofit status—something typically afforded to organizations that address a social issue—by framing the need for more Wisconsin jobs as a social issue.

BrightStar’s “venture philanthropy” model: solicit donations and deploy them into early stage startup companies that will create jobs in Wisconsin. Invest the returns back into the nonprofit and into new startups.

“This is a very unique thing, because BrightStar was able to get tax exempt status, so that people can make a tax deductible contribution to an organization, which intends to invest in businesses and startup businesses,” said Rich Meeusen, chairman, president and chief executive officer of Brown Deer-based Badger Meter Inc.

Shannon approached Meeusen in his role as co-chair of the economic development committee at the Greater Milwaukee Committee when he was considering forming the venture philanthropy fund.

“Frankly, I was very skeptical that they would get it,” Meeusen said. “I just didn’t think that the IRS or the government was ready to make that move, but they have and it’s great.”

The Wisconsin Economic Development Corp. also showed early interest in the idea.

“They made the argument, successfully, to the IRS that creating jobs, alleviating some of the burdens of government, also qualifies as exempt,” said Reed Hall, CEO and secretary of the WEDC.

BrightStar has the advantage of not having investors who want their money back, plus a return. For that reason, it has the freedom to take more risk with new ideas and new startups, Meeusen said.

The GMC is now helping introduce BrightStar to potential investors and lending some credibility to the nonprofit’s mission, he said.

“Tom Shannon is someone that I’ve had the opportunity to work with in the past … and he is positive, he makes things happen, he is successful and I believe strongly in his mission to create more jobs here. And he has the talented team behind him to make it happen,” said Lorrie Keating Heinemann, vice president of BrightStar. “We are changing the face of philanthropy, not only in Wisconsin, but in the entire United States.”

Heinemann would know—she founded the Wisconsin Angel Network 10 years ago and has served as banking and securities commissioner for the state.

Soliciting donations

BrightStar was started in July with $6 million in founder seed funding, and has since received a $1 million donation from Milwaukee-based Nicholas Co. founder Ab Nicholas.

Shannon and Heinemann are busy selling wealthy individuals, corporations, foundations and estates on the concept of venture philanthropy.

“We don’t make any more money off of this thing being successful,” said Todd Sobotka, BrightStar’s portfolio manager and investment committee chair. “The evergreen aspect of this gets put back right into the state of Wisconsin.”

BrightStar is in the vetting stage with a number of individuals and some foundations from Wisconsin and beyond that plan to invest in BrightStar. The nonprofit requests a minimum $100,000 donation. It’s all part of the goal to raise at least $60 million in the next three years.

“To really get where we need to be, we need hundreds of people to donate at that level,” Shannon said. “Our hope is that our average contribution, when you’re looking at corporations and foundations, edges up toward a half million.”

There are some individuals, organizations and estates that aren’t interested in entering the early stage capital space, but do plan to make donations, Shannon said.

“There’s plenty of people that have money to get out of their estate, and what better place to put it than a pot that generally helps the whole state of Wisconsin?” Shannon said. “It floats all boats.”

In a traditional venture fund, equity returns go back to the investor as a return of investment principal. BrightStar is a more uncommon evergreen fund.

Tim Keane is an experienced angel funder who heads Brookfield-based Golden Angels Investors. Wisconsin could use both additional early stage capital and more people who have experience deploying that capital, he said. BrightStar is a welcome addition to the arena, he said.

“There are clearly evergreen funds in the world, lots of them,” Keane said. “An evergreen fund is typically a permanent source of capital. When an investment is sold, then the fund gets its money back, but it invests it again.”

In most evergreen funds, a wealthy individual makes a decision each time the money comes back on whether to take it out. But BrightStar doesn’t have that option, because its funds are donated.

“I have never seen one where you get donations to start it, but I think it’s a great idea,” Keane said.

Deploying capital

BrightStar isn’t a lead investor on its deals, so it doesn’t have to do the heavy lifting on due diligence surrounding a potential investment.

“The other angel groups and the angel funds are already doing that so we can just piggyback with them,” Shannon said. “We would rarely invest first and only by ourselves. We’re there to top off and add to the early stage funding. That’s where there’s a shortage in the state.”

About 60 firms have applied for funding from BrightStar. Sobotka evaluates the strength of the application and reviews the due diligence of other investors. He then makes a recommendation to the investment committee, made up of experienced investment professionals, which puts it up for a vote.

The early stage funding is what often gets a company into the venture capital stage, where larger sums are invested.

“We are initially watering the grass so it sprouts up, and that’s what early stage is all about,” Shannon said. “The real early stage stuff is where you really have to nurture them, so they have the opportunity to get to the place where they can commercialize.”

The nonprofit makes its investment decisions based on a company’s job creation potential first and foremost. Even if a startup offers an incredible return, “if it’s not going to create jobs in Wisconsin, we’re going to pass. It’s our mission,” Sobotka said.

The investment committee looks at the long-term sustainability of those jobs based on the company’s scalability, market potential, market size, competition, regulatory pathway, intellectual property protection, management team, barriers to entry and other factors, he said. Usually, startups that meet these goals are in the fields of innovation and technology.

BrightStar will track a number of metrics at the companies it invests in, and Shannon hopes to create a Jobs Power Index to highlight the gains that have been made in employment.

Eventually, the plan is to fund companies in the proof of concept stage up to $250,000, in the commercialization stage up to $500,000 and in the revenue phase up to $750,000, Sobotka said.

“We want high wage paying jobs,” Heinemann said. “If you can create a high tech job in the state of Wisconsin, there (are) a lot of residual jobs that come out of that. This is going to be a long-term and sustainable solution to providing early stage capital in Wisconsin.”


Here are the companies BrightStar has invested in so far:

425 Inc.

BrightStar has invested $66,000 in 425 Inc., a Mount Pleasant company that makes the Guardian Angel—an LED light personal safety device that makes it easier to see emergency personnel in the dark or low lighting situations.

425 lined up an individual investor that performed due diligence and led the investment. BrightStar invested to put the offering over the top, Shannon said. The total is about $200,000.

The company demonstrated customer validation when it co-developed the Guardian Angel with the Milwaukee Police Department, which became its first customer, said Todd Sobotka, BrightStar’s portfolio manager and investment committee chair. It also has a strong team that’s experienced in the emergency responder space, is rapidly scalable and there’s a need for it in the marketplace.

“Their big thing is we create jobs here in Wisconsin, so their money is really going to help us find some employees, pay them, and start making a positive contribution to the community,” said Juan Gomez, co-founder of 425 Inc.

Gomez and Kevin Matte co-founded the company with personal savings in 2012. This is 425’s second round of fundraising.

It currently has six employees, but Gomez said the company is getting busier and he needs more help. The company has shipped Guardian Angel orders to more than 200 police, sheriff and fire departments in the U.S. It’s also recently started filling international orders.

In addition to creating jobs, 425 will use the influx of capital to ramp up its marketing efforts at trade shows and seek out a permanent office space.

BrightStar and its angel partner had great ideas for the future of 425, which made them a valuable choice for the company, Gomez said.

“We were lucky that they came along,” he said. “We knew that we were going to be looking for our second round of funding to help push us to the next level. I was looking for smart money, not just any money.”

Engineered Propulsion Systems

New Richmond-based Engineered Propulsion Systems has already seen success and is committed to creating 128 jobs by 2020, through a $600,000 matching forgivable loan from the state.

The diesel aircraft engine developer has a large valuation of almost $20 million, and is in its third capital raise. It already has a $2.95 million contract with the Department of Defense.

EPS’ engine is unique because it eliminates the use of leaded fuel common in aircraft engines.

The company has several investors lined up to get it out of the research and development phase and into production. The company’s likelihood of success is high, said Todd Sobotka, BrightStar’s portfolio manager and investment committee chair.

“They’ve hit every single milestone,” he said. “The angels that have original money in them have basically doubled up each time.”

BrightStar has invested $100,000, as part of a larger effort to raise $11 million to fund its operations. EPS has about 100 investors through its first two rounds and the three tranches it has completed in this third round.

While BrightStar is one of many investors in the funding round, it helped fill a gap, said Paul Mayer, chief financial officer of EPS. He praised the organization’s efficient deployment.

“Most angels, one of their five questions is, ‘what is the exit strategy?’ Todd never said to me, ‘what’s the exit strategy? All he said was, ‘how can I help? And I think that’s a tremendously different view of how to help startup companies,” Mayer said.

Stemina Biomarker Discovery

Madison-based Stemina Biomarker Discovery Inc. evaluates the toxicity of chemicals on embryo development and develops biomarker tests for autism.

It is currently raising $10 million to enroll patient sites for identifying the biomarkers, said Elizabeth Donley, chief executive officer.

Stemina is almost at the venture capital stage, but needs companies like BrightStar to help it run the last lap, Shannon said. The organization is contributing $100,000 to the biotech firm.

“They’re on the verge of breaking out,” said Todd Sobotka, BrightStar’s portfolio manager and investment committee chair. “They just landed an (Environmental Protection Agency) contract that has the potential for substantial money. That was a quick injection, a shot in arm, to help boost them to get them over this hump in the next year.”

Donley expects that Stemina, which currently has 10 employees, will hire another seven to nine employees this year, partially because of the $10.6 million EPA contract to study birth defects. By 2018, employment is expected to be at 75.

BrightStar’s investment has helped with fundraising on a $1.5 million convertible note, Donley said. While Stemina has some revenue being generated, it doesn’t have enough to achieve its goals.

“We don’t have enough revenue to grow,” she said. “We have enough revenue to sustain at the current level. And you can’t really get anywhere at that pace. At some point your company is ready to accelerate, and if you don’t seize the day and go out and raise the money to accelerate your business, you often miss the market opportunity.”

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Molly Dill, former BizTimes Milwaukee managing editor.

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