Many of Milwaukee’s largest companies were built a century ago by independent, self-reliant entrepreneurs, many of whom financed their companies themselves. If they needed additional capital, those entrepreneurs often turned to family and friends.
Their ventures gave rise to companies with familiar names such as Pabst, Falk, Briggs & Stratton, Brady Corp., Northwestern Mutual, Marshall & Ilsley, Harley-Davidson and more.
Like those venerable business founders, today’s entrepreneurs need capital to buy equipment, lease space and hire their first employees to launch their companies. However, those expenses are often beyond the scope of most entrepreneurs’ pocketbooks. The availability of capital from credit cards, home equity loans and other high-interest rate loans has been severely tightened in the past year amid the credit crunch, the subprime mortgage collapse and an American banking industry that is gasping with bad debt. Those who secured their capital through multiple investors may invest in a venture capital reporting system to provide their investors with better access to business financial data.
The current economic conditions make it more difficult to secure credit for starting or expanding a business.
More than ever, entrepreneurs today need access to capital. If the Milwaukee area’s economy is to grow, it needs to attract more venture capital.
However, what little venture capital money Wisconsin attracts usually is invested in the Madison area instead of in Milwaukee.
Milwaukee is lagging behind Madison in the number of high-tech startup companies benefiting from the state’s Angel Investor and Venture Fund Tax Credit Program, known as Act 255.
The program was launched in 2005 and provides up to $11.5 million in tax credits for angel investors and venture capital investors to fund high-risk, high-tech startups.
At a Wisconsin Biotechnology and Medical Device Association breakfast earlier this month, West Bend-based Serigraph Inc. chief executive officer John Torinus Jr., co-founder of Successful Entrepreneur Investors LLC, said the state’s program has been a “bonanza” for Madison and the biotech and medical devices sectors, but only of limited help to Milwaukee and other business sectors.
Torinus noted that of the 85 credits issued by the program, 52 were for companies in Madison, while just 16 were from Milwaukee and the rest from other parts of the state. Of those, 36 went to biotech firms and nine went to medical device firms, while none went for advanced manufacturing, a sector eligible under the act.
In 2007, the state had about $90 million in venture capital investment, an increase over $73 million invested in 2006. Minnesota, by comparison, had $434 million in venture capital investments in 2007, an increase over $321 million invested in 2006.
During the second quarter of 2008, four of the five venture capital investments in Wisconsin were made in Madison, according to the most recent PriceWaterhouseCoopers MoneyTree report.
More venture capital has been historically been invested in the state’s second-largest metro area, because it is home to the University of Wisconsin-Madison (one of the best-known research universities in the nation), has an established angel investing community and has had several well-known angel and venture capital exits.
Angel investors are often high net worth individuals who will help start a company, while venture investors typically invest in companies that have established a foothold in their markets. With both funding sources, investors expect a share of the companies, which they hope to cash out later during an initial public offering or acquisition.
“In today’s banking market, banks have a greater focus on proven cash flow and value of underlying collateral, neither of which startups have,” said David Lubar, president of Lubar & Co., a Milwaukee-based private investment firm. “Startups need capital to fund the pre-revenue expenses like product development, infrastructure, machinery and proving that a market exists. Those sorts of expenses need to be funded by equity rather than bank funding.”
While daunting, these sources can have powerful results for young companies, said Sue Marks, chief executive officer of Pinstripe Inc., a Brookfield-based human resources outsourcing firm.
Pinstripe has been in business for about three and one-half years, growing to 150 employees. The company tripled its revenues in 2007 and expects to double them this year, Marks said. The firm also has raised three rounds of venture capital.
“A lot of entrepreneurs are told to stay away from venture capital because equity is the most expensive form of capital there is,” she said. “I’m happy to have had investors in the past, and I’m happy that they made money. Capital comes to you when you can show that you did good work and get returns for your investors.”
Milwaukee mindset
Many in Wisconsin’s venture and angel capital networks blame some of Milwaukee’s relative dearth of investment capital to the collective mindset of southeastern Wisconsin. Historically, many Milwaukee business owners have been hesitant to give up an equity stake in their companies and have been hesitant to seek alternative financing models such as angel or venture investing. With that mindset, they don’t expect any favors, and they don’t ask for any, either.
The presence of many of Milwaukee’s large, successful companies also has kept some of those people who otherwise would start new companies actively employed, said Dan Steininger, president of Milwaukee-based Steininger Associates LLC and a founding member of Successful Entrepreneurial Investors LLC.
“Milwaukee is home to some fabulous companies, some big companies,” he said. “What you find when you have a city of our size is that those companies soak up a lot of people and talent. And what that does is it has a negative influence on entrepreneurship.”
Steininger noted that the late 1800s and the early 1900s inspired generations of entrepreneurs in southeastern Wisconsin.
“In the 1920’s, Milwaukee was the entrepreneur capital of the U.S.,” he said. “These companies were all homegrown and financed internally. And it was all stodgy Germans that started companies like Falk, Schlitz and many others.”
Research factor
UW-Madison boasts approximately $900 million in funded research and has helped launch many new startup companies. Many of those companies have eventually attracted venture capital because they have shown explosive growth potential in areas such as biotechnology, software development and pharmaceuticals.
“If there were more opportunities in Milwaukee along the lines of what the UW has produced, we would have a more vibrant venture capital community here,” Lubar said. “It relates more to the availability of opportunity than any cultural difference … Professional venture capitalists want to invest in startups that have explosive growth potential. There’s a greater tangible action of available venture capital in Madison compared to Milwaukee.”
Madison-based WARF (the Wisconsin Alumni Research Foundation) has helped steer technologies, new drugs and other discoveries into the marketplace, said Lorrie Keating Heineman, secretary of Wisconsin’s Department of Financial Institutions. Madison also is home to the University Research Park, a nonprofit research park that encourages new product development. The park is now home to 115 companies that employ about 3,500 people.
Because of the university, WARF, the research park and the active angel investment community, Madison has a 20-year track record of successful angel and venture capital investment, said Steve Rippl, a venture capital and private equity consultant. Rippl was formerly executive vice president and chief operating officer of Capital Investments Inc., a Milwaukee-area private equity group.
“They’re seeing the fruits of the long evolution in Madison now,” he said. “It just hasn’t blossomed here yet in Milwaukee.”
Carlos Santiago, chancellor of
the University of Wisconsin-Milwaukee, agreed.
“The state of Wisconsin made a conscious decision to invest in one research university,” he said. “They built a huge infrastructure in Madison and got a great outcome.”
Mature marketplace
Milwaukee also has been slow to attract venture capitalists because it is home to many mature manufacturing and service-related businesses, which have instead been popular targets for private equity investors in recent years.
However, those businesses generally do not generate the types of returns that venture capitalists seek, said Peter Shagory, managing director and partner with Baird Venture Partners, the venture capital arm of Milwaukee-based Robert W. Baird & Co. Inc.
“Higher-tech industries that don’t have access to debt are more ripe for venture capital,” Shagory said. “Milwaukee is going through the transformation that other cities have gone through, transforming from manufacturing to higher-technology service industries.”
Milwaukee needs a few success stories to help attract out-of-town venture capitalists, Shagory said.
“When you look at a Seattle or San Diego, you can point to the opportunities that created so much wealth that the angel (investors) got to appreciate the model. That spurs more entrepreneurs and angel investment,” Shagory said. “Success stories beget more angels and entrepreneurs, more people that want to grow successful companies.”
Lubar & Co. ran a venture capital fund based in Milwaukee in the late ‘80s and early ‘90s. Because there was little other venture capital available in the city, it was difficult to fund deals, Lubar said, because venture capitalists typically do not want to be the sole source for a company in second- or third-round financing.
“There wasn’t much other venture capital available, and to fund a startup takes several rounds of funding,” Lubar said. “Typically, venture capital (funded) companies are funded by a club of venture capitalists that share the risk. Lubar & Co. was the only member of the club in some cases.”
Elusive angels
Until the early 2000s, Milwaukee’s angel investment activity was near stagnant, making it more difficult to fund startup companies that would require venture capital down the road.
“It comes back to the lack of angel capital for so many years,” said Tom Still, president of the Wisconsin Technology Council. “Venture capitalists are not the first money in and are often not the second money in. The lack of first-round financing could have played a contributing role (in slower venture investing in Milwaukee).”
Madison has historically had a more vibrant, active angel investing community than Milwaukee, Still said.
“Some of the story here can be traced back to a couple of investment firms that decided it would be well worth their while to look at University (of Wisconsin) innovation and build upon that,” he said. “Venture capital is like Major League Baseball is to all of baseball. You need to have a good farm system.”
Angel investing serves as venture capital’s farm system, Still said.
“When your farm system produces more prospects, the Major Leagues get more talent,” he said.
The Milwaukee area needs to build more venture capital momentum, Marks said.
“I think of Milwaukee, Madison and Chicago as one,” she said. “We have had no (fundraising) cycle here and we are slowly creating a virtuous cycle. The more that gets raised and deployed here, the more will get raised and deployed here (in the future).”
Starting angel and venture investing is a lot like starting a large flywheel, Marks said. In the early stages, the wheel moves very slowly and is very heavy. But once it moves, the wheel becomes easier and easier to speed up.
“We can’t think that it will be easy,” she said. “The first $100 million to $200 million is so hard. But we can’t give up. Once it gets going, it really is a virtuous cycle.”
If Milwaukee wants to attract more venture capital investment, it needs to nurture and encourage even more angel investment, Lubar said.
“It’s a little bit of the chicken and the egg, which comes first?” he said. “(Angel and venture investment) builds on itself and you get greater and greater momentum. We have strong companies here that have technology. And they have experienced managers. If we can marry technology and management with capital and research, that’s a pretty good recipe.”
Early Stage Investments
Venture Capital investing Wisconsin
2008 (2Q – 5 deals)Â Â Â $17.8 million
2007Â Â Â $90 million
2006Â Â Â $73 million
Minnesota
2008 (2Q – 13 deals)Â Â Â $130.25 million
2007Â Â Â $434 million
2006Â Â Â $321 million
United States
2007Â Â Â $30.5 billion
2006Â Â Â $25.5 billion
