Funding Wisconsin’s future innovators
After five years, the Badger Fund of Funds is ready to make waves in Wisconsin startup investment.
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To implement their vision, the Badger Fund management team committed to finding individuals with a Wisconsin history — family, education, college, and friends — willing to leave their current employment to learn the skills and craft of being a venture capital fund manager, says Johnson. The Badger Fund provided these individuals with training both in Wisconsin and in New Mexico, but the real test for each of these new fund managers was to raise 60 cents of matching investment capital from private investors for every 40-cent investment by the Badger Fund, all the while going without compensation while they were raising capital.
“The Badger Fund management team is quite pleased that four new fund managers have completed their fundraising, closed three funds, and are now investing,” says Johnson. Those fund managers are Jon Horne, manager of the Idea Fund, David Trottier, manager of the Winnebago Fund, and Chris Eckstrom and Andy Walker, co-managers of the Rock River Fund.
Currently, Richelle Martin and Ross Leinweber have received commitments from the Badger Fund, left their employment, and are raising capital for the Winnow Fund and Bold Coast Fund, respectively. The Badger Fund has made two additional commitments that have yet to be disclosed, as the fund managers are preparing fundraising documentation.
“The Badger Fund management team expects in the next year there will be seven Badger portfolio funds investing in Wisconsin startups,” says Johnson. “Our dream is to issue a check a week from a Badger portfolio fund into a Wisconsin startup.”
Home sweet home
Like many states, Wisconsin startup funding is dominated by friends and family or relationship investing and angel investors — investors more excited about the product and entrepreneur than a return, Johnson explains. Both of these investor classes are investing their own money, whereas over 90 percent of all venture capital is from institutions investing in funds managed by career professionals.
The investment focus of the Badger Fund team is being the first investor in exclusively Wisconsin-based companies, and having sufficient capital to invest in two or three rounds of financing for each portfolio company.
“[In order to] keep those Wisconsin entrepreneurs and innovators in their ‘home environment’ — Wisconsin — we need to be the first investor,” says Johnson. “It could be an innovator with a great product idea who needs help creating his or her company, or a pre-revenue startup with the ‘plan’ still on the napkin. The coastal or regional firms won’t come to Wisconsin to make a $500,000 investment in these new companies, but for the Badger team a couple hundred thousand dollar to maybe a $1 million investment is our sweet spot.”
However, Johnson admits to worrying that the Wisconsin-based early-stage companies the Badger Fund invests in will eventually be lured elsewhere.
Nationally, out of every 10 investments made at the couple hundred thousand dollars to $1 million level, about 50 percent of the time investors lose all of their investment.
The Badger Fund’s investment strategy is based on the Kegonsa Capital Partners “Money for Minnows” idea. The strategy is being the first investor in new companies and having the capability to fund each portfolio company until a hoped-for exit in three to four years, with the expectation that investors will obtain the national average investor return from the two to maybe five “winners.” These two to five winners have to cover the losses and provide the return from the losing investments.
Typically, only one in 10 investments will provide investor return in three rounds of financing, Johnson explains. The four remaining successful startups will require more investment capital. “Most likely that additional capital will come from regional or maybe national firms that like to have their portfolio companies be in their ‘home environment.’ It would be unfortunate if Wisconsin does the high-risk investment and culls out the losers, and then the winners move out of state to the home environment of the regional or national investors.
“These winners will be requiring investments in the $5–$20 million-a-round range or will be acquired by out-of-state firms for $25–$50 million,” Johnson continues. “The Badger Fund management team will have a good idea of which Badger companies look like winners, but our toolbox is low for what we can do when $5–$20 million is needed to keep the winner startups in Wisconsin.”
Bright Badger outlook
According to Tom Still, president of the Wisconsin Technology Council, and a staunch supporter of the Badger Fund of Funds efforts to invest in Wisconsin early-stage companies, the Badger Fund will play an increasingly important role in the overall Wisconsin venture capital landscape for several reasons.
“First, its funds will look for deals in places that other VCs and angel capitalists may overlook — it has geographic diversity,” notes Still. “Second, the Badger Funds of Funds will often provide the ‘first money in’ for young companies. Third, it will simply make a lot of investments over time because of the nature of its strategy, which is to make mostly smaller investments.”
While the law creating the Badger Fund of Funds was passed five years ago, it necessarily took time to raise the matching dollars and to begin the deployment of those dollars, says Still. Now that that’s largely happened, the state’s promising startup investment scene has a strong ally in the Badger Fund.
“Regardless of the Badger Fund of Funds, many more innovators are staying in Wisconsin and the Upper Midwest,” says Still. “Why? The costs of doing business here are much lower, the ecosystem is becoming highly developed, and there are more investors than ever before. When the Tech Council launched the Wisconsin Angel Network in 2004, there were about six investor funds or networks in Wisconsin. Today, the Tech Council Investor Networks works with about three dozen groups, the Badger Fund of Funds included. Increasingly, the reasons to move to either coast don’t make as much sense as they might have five, 10, or 15 years ago. The Badger Fund of Funds is an important addition to that landscape and will only help what is an exciting scene.
Investors go to where the deals are, and Wisconsin is in excellent shape to expand the number of deals to be examined, adds Still. “For example, half of the Wisconsin deals to be ‘pitched’ at our Wisconsin Early Stage Symposium are not from Madison. That’s the first time in our memory that has happened. The potential for the state as a whole is increasing.”
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