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.
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 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 start up 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.
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.
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.”