Funding Wisconsin’s future innovators

After five years, the Badger Fund of Funds is ready to make waves in Wisconsin startup investment.

From the pages of In Business magazine.

Given our belief in rankings — and the most recent Ewing Marion Kauffman Foundation startup index from 2017 is as credible a source as any — Wisconsin is a black hole for startups.

Ranking dead last in the nation in startup activity for three straight years is a black eye for the Badger State, but it’s not as if good ideas aren’t being born in Wisconsin every day. Those ideas just need a little more nurturing before they can take root and become growing companies.

State officials know this, which is why the Badger Fund of Funds was created five years ago as a limited partnership to invest in Wisconsin-based venture capital funds that will in turn invest in Wisconsin-based new ventures. New businesses account for nearly all net new job creation, so fostering homegrown entrepreneurs stands to benefit everyone in Wisconsin.

Five years is a good, round length of time at which to examine the progress of the Badger Fund of Funds, although as it turns out, much of the Badger Fund’s work remains ahead of it. That’s because, while the state committed $25 million to the fund when it was created, fund managers were tasked to raise additional capital from the private sector themselves prior to any early-stage investment actually taking place. That’s a lengthy, arduous process that has only recently begun to yield fruit, notes Ken Johnson, managing director of Kegonsa Capital Partners, the Madison-based venture capital management firm that along with Sun Mountain Capital, a New Mexico-based investment firm, was pegged by the state to run manage the Badger Fund of Funds as Sun Mountain Kegonsa.

“The fly in the tale is the time it takes to raise additional capital,” Johnson explains. “As a Wisconsin taxpayer, state monies should prime the pump, not be the only water in the bucket. The Badger Fund team has worked hard to significantly increase the private sector match to the state’s priming.”

In Johnson’s Wisconsin fund-raising experience, it takes a month to raise $1 million from the private sector, and while raising money the fund manager is not paid. Each Badger Fund manager — there are seven — can spend 12 to 18 months raising matching private-sector capital. “Take it from someone who has done fundraising a number of times — it’s a very tough and ugly job,” says Johnson.

A fund is born

In the early 1990s, Johnson was a licensing associate with the Wisconsin Alumni Research Foundation (WARF) with the responsibility of initiating a WARF program to license startups or spinouts from the UW–Madison. That experience provided Johnson’s early education about startups from the product or technology side of the business.

Unexpectedly, an investment bank of a WARF licensee, Paramount Capital, offered Johnson an opportunity to move to the investment side of the startup business, something Johnson recalls was a great opportunity but required him to live every other week in Manhattan. “Fun for a while, but travel wears one out,” states Johnson.

In the late 1990s, Johnson started ConLinCo, a company based on late partner and UW–Madison Professor Mark Cook’s patents that the duo licensed from WARF. The company sold in less than two years and that was enough to get Johnson hooked on starting companies.

“By 2005, I started seven companies — three failed, one went on forever, but two companies in addition to ConLinCo had nice exits,” notes Johnson. Tetrionics was acquired for $57 million by Sigma Aldrich and is still based in Dane County, while Natural was acquired for $80 million.

Johnson used this successful startup track record to start Kegonsa Capital Partners as the general partner of the Kegonsa Seed Fund, which closed in January 2005 with 37 investors and $10.7 million to invest. According to Johnson, the Kegonsa focus was to be the first $500,000 investment in pre-revenue companies — essentially the same company profile as his personal startups.

The Kegonsa Seed Fund has since had exits of $50 million, $35 million, $20 million, and $140 million. In 2008, Kegonsa Capital Partners added a second fund, the Coinvest Fund, to make follow-on investments.

Around 2010, Johnson became convinced that what the Wisconsin startup ecosystem needed was many venture capital funds investing in a couple hundred thousand dollars to million-dollar increments — much like the Seed and Coinvest funds. The only trouble was, Johnson didn’t how to start, invest, or manage multifunds.

“At the time, Lorrie Keating Heinemann was the head of Wisconsin’s Department of Financial Institutions,” Johnson explains. “Lorrie had evaluated initiating a fund-of-funds program for the state but couldn’t get state funding. However, she did a good job of teaching me how a fund-of-funds program works and who were the players.”

Serendipitously, Kegonsa Capital Partners’ web guru knew Brian Birk, managing partner and founder of Sun Mountain Capital. Unlike Kegonsa, Sun focused on managing fund-of-fund programs. Birk went college at Carlton, got his first job at GE in Waukesha, and spent 10 years with BCG in Chicago, so he had a Midwest background, notes Johnson.

“I flew to the Sun office in Santa Fe and met the Sun team and a number of the Sun portfolio fund managers,” says Johnson. “Brian was intrigued with the Kegonsa ‘Money for Minnows’ investment strategy and came up to Wisconsin to do his due diligence. The result was that Sun Mountain and Kegonsa formed a partnership, Sun Mountain Kegonsa, to manage the Wisconsin fund-of-funds program.”

One Wisconsin advantage on the state level is both parties have been supportive of building the Wisconsin startup ecosystem, says Johnson. The Act 255 tax credits for seed and early-stage investors — that would be Badger Fund investors — was initiated by a Republican Assembly and signed into law by Democratic Governor Jim Doyle.

Act 41 provided the $25 million dollars of tax money to be invested in the Badger Fund and was passed by the Assembly 89–2 and the Senate 30–3.

Badger Fund breakdown

The Badger Fund of Funds has 27 limited partners, one of which is the state of Wisconsin with its initial $25 million commitment. Sun Mountain Kegonsa (SMK) as the general partner committed $500,000. There are 25 additional limited partners in the Badger Fund, including Johnson himself a second time, as he invested both as a member of SMK and as a limited partner.

“It took about two years from the state’s commitment and the SMK commitment to raise the additional private-sector funding,” notes Johnson. The state required at least a $5 million match from the private sector, but SMK has so far gone above and beyond with closer to $10 million in matching funds from the private sector.

SMK had until June of this year to make financial commitments to Badger Fund portfolio VC funds. So far, the Badger Fund has made seven commitments, five of which have been made public: the Idea Fund in La Crosse; Winnebago Fund in Neenah; Rock River Fund, with offices in Madison and Beloit; Bold Coast Fund in the Milwaukee area; and the Winnow Fund, based in Madison and with a focus on innovative products coming out of the UW System.

Of the two remaining commitments, one is in Dane County and one is in the south Milwaukee/Kenosha area. According to Johnson, the Idea, Winnebago, and Rock River funds have publicly disclosed their capital commitments — the Idea Fund raised $13 million, Winnebago Fund $11 million, and the Rock River Fund over $23 million.

Specifically, the Idea Fund and Winnebago Fund started investing in July 2017 and have made 11 investment offers; seven of those offers have been closed with checks written and four are in the due diligence stage. As of this writing, five Badger Fund portfolio companies have made their investment public — Curate and Agrograph are Madison-based companies, American Provenance in Blue Mounds, Third Element in Green Bay, and Sift MD in Milwaukee.



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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