New venture capital program to feature 'Money for Minnows' strategy

The state of Wisconsin’s new venture capital program holds the promise of boosting private equity deployment and creating a new class of young venture investors, but don’t expect to see the first investments made until the second half of 2014.

An initial step, the Department of Administration’s selection of a new entity, Sun Mountain Kegonsa, to manage the $30 million program, was announced in January. But several more steps lie ahead, including the selection of partner funds, before the money begins to flow. 

“If you stand back and look at the Wisconsin landscape and say, ‘We need more emerging companies,’ then we probably want to place more bets at the table because not every company is going to succeed.” — Tom Still, president, Wisconsin Technology Council

Sun Mountain Kegonsa is comprised of Sun Mountain Capital, a venture capital firm based in Santa Fe, New Mexico that manages seven regional funds with about $500 million in assets, and Madison’s Kegonsa Capital Partners, the Wisconsin-based half of the SMK partnership. The firms are led, respectively, by Brian Birk, managing partner of Sun Capital and a former finance manager at GE Healthcare’s Waukesha office, and Ken Johnson, managing director of Kegonsa Capital Partners.

They will administer a $30 million “fund of funds” comprised of a $25 million commitment established by the state under the enabling legislation, Act 41, plus $5 million to be raised by Sun Mountain Kegonsa and $300,000 to be raised by Birk and Johnson, as required under the law.

The two investors have outlined an early-stage-focused investment strategy they call “Money for Minnows,” but young companies on the hunt for capital will have to show some patience. Before investors cast their lines for minnows, the Department of Administration must negotiate a contract with Sun Mountain Kegonsa that is consistent with the provisions of Act 41. (As of this writing, negotiations had yet to be finalized.)

The contract would then be reviewed by the state’s Legislative Audit Bureau to ensure that it conforms to the law, and then it must be approved by the Legislature’s Joint Finance Committee. Once those approvals are obtained, Sun Mountain Kegonsa must identify a handful of funds across Wisconsin that would provide seed capital to early-stage companies in a variety of industry sectors. 

Birk would like the funds to start making investments this summer, but having never been through Wisconsin’s legislative review process, he’s not sure what it entails. “For companies looking for investment capital, this is not something to think about next week, or in two weeks, because there are a couple of steps that have to take place before the fund will be in a position to make investments into the underlying portfolio of venture capital funds,” he said. “Then, in turn, those funds have got to do their due diligence on the companies themselves.”

Casting for capital

Birk and Johnson believe the Money for Minnows strategy will spread venture capital across industries and locations, as called for in the enabling legislation. 

In a typical investment portfolio, venture capitalists hope to get a return on investment at the exit stage, either when a company goes public through an initial public offering, merges with another company, or is acquired by another company. Venture investors anticipate that 40% of their venture-backed businesses will fail, 40% will produce moderate returns, and 20% will yield high returns. It’s that 20% of high-return investments that enable venture capital firms to recoup their investments and manage risk.

Under Money for Minnows, instead of large chunks of capital being invested in a select number of companies, with the hope of large returns on investment, the money would be deployed in a larger number of small emerging companies that have a realistic chance to become significant players in their respective industries.

According to Birk, Money for Minnows is not really a departure from the typical portfolio strategy but rather a departure from the investment stage at which most venture capitalists would like to invest. The key difference is that the Wisconsin fund-of-fund managers would invest in very early-stage companies, would help entrepreneurs put together companies, and might even put together the companies themselves. 

For example, the venture fund managers could acquire intellectual property from the Wisconsin Alumni Research Foundation, the licensing arm of UW-Madison, and then hire a management team and develop a beta product. Conventional venture capitalists usually do not get involved at such an early stage. They let the entrepreneur take the aforementioned steps, opting to invest at a later stage in a company that’s more mature.

The common denominator between a traditional “VC” and the fund-of-fund managers will be investment diversity. “A venture capital fund usually has a portfolio with a diversified set of investments, and we would look at these venture fund managers as having the exact same approach,” Birk noted. “They would also have a diversified set of investments.”

In order to get larger venture funds more interested in Wisconsin companies and generate quality deal flow, which refers to the rate at which investors receive legitimate business proposals, the state needs to have more minnows with the potential to grow into bigger fish. Venture firms typically invest a minimum of $5 million to $10 million in each portfolio company, so investment targets actually need to have that much capital. 

“There are a lot of companies that never need that amount,” Birk noted, “but in order to get these top-tier national funds, you’ve got to have the quality deal flow and you’ve got to get more companies to a size where they can put in $10 million in a single round. That’s why, to grow our crop of Wisconsin companies, we need money for minnows and then we’ve got to get them to that size and that quality.”

Tom Still, president of the Wisconsin Technology Council, a nonpartisan science and technology advisor to the Wisconsin governor and Legislature, said the partner funds that Sun Mountain Kegonsa decides to work with are each likely to have $3 million to $5 million to invest. By necessity, that means they are more likely to invest in smaller companies with more modest capital requirements — at least on the front end. 

“If you stand back and look at the Wisconsin landscape and say, ‘We need more emerging companies,’ then we probably want to place more bets at the table because not every company is going to succeed,” Still noted. “In fact, you know there is a significant portion that will not succeed, even with good management, good investors, and everything else. So the more bets that are placed, the more likely it is that the ball is going to fall in the right spot on the roulette table.”

The young and the vest-less

Another fund-of-fund program goal is to populate the state with a new generation of young venture capitalists who could improve Wisconsin’s ability to deploy venture capital, a category in which the state perennially lags behind its Midwestern neighbors. 

The ultimate goal is to create a sustainable venture capital community in Wisconsin, which is where youth is served. Sun Mountain Kegonsa is looking to partner with venture capitalists who will raise up to four funds, all with a 10-year life, before they hang up their money belts. 



That rules out investors age 60 and older, but it also means finding younger investors who are experienced in forming and managing businesses, who are successful entrepreneurs with the skills to help their portfolio companies, and who have an appreciation for early-stage technologies.

“We believe venture capital is a full-time job,” Birk stated. “It’s not a part-time job that you do after you’ve retired from your career. To be successful, it requires very, very significant long hours, and it requires a commitment to working 24/7.

“To be a venture capitalist, you really do need to concentrate 100% of your time and energy on your portfolio and on helping to build those companies because, believe me, they need help.”

Still noted the strategy also calls for investing in emerging fund managers, not just emerging companies. “They are the kind of folks who will be making decisions for years to come,” he stated. “That can be really important to the state. It’s vital that we have indigenous fund managers in Wisconsin. 

“Yes, we want to attract out-of-state capital, and I think more of that is happening, but at the same time we want to make sure we have more fund managers here who can syndicate not only among themselves, but syndicate with out-of-state investors. These home-grown fund managers are likely to be early-warning systems in terms of finding the right kinds of companies that not only they will be interested in, but others outside Wisconsin will be interested in.”

Investment Diversity

Embracing diversity isn’t just for the American workforce, it’s for venture investments, too — at least in Wisconsin.

Under Act 41, the law that created Wisconsin’s fund-of-funds venture capital program, the fund manager selected by the state is directed to deploy capital in agriculture, information technology, engineered products, advanced manufacturing, medical devices, and medical imaging. All of these industries represent core strengths of the Wisconsin economy.

In addition, all program money must be invested in businesses that are headquartered in Wisconsin and employ at least 50% of their full-time workers, including any subsidiary or other affiliated entity, in the state. 

Moreover, at least half of the money must be invested in one or more businesses that employ fewer than 150 full-time workers, including subsidiaries or other affiliated entities, at the time of capital deployment.

That sounds like an imposing gauntlet of tests, but given the state’s university system, its diversified set of companies, and the resulting management pool, Brian Birk believes the firm chosen to manage the funds, Sun Mountain Kegonsa, can diversify investments to the necessary extent. 

While Birk’s firm, Sun Mountain Capital, brings experience with fund-of-funds investments in New Mexico and Utah, he noted that Ken Johnson, the chief executive of his partner firm, Kegonsa Capital Partners, has extensive experience investing in Wisconsin. 

Kegonsa Capital Partners is the general manager of the Kegonsa Seed Fund and managing member of the Kegonsa Coinvest Fund, a growth-stage investment fund. 

One of Kegonsa’s more notable investments,, was sold to Microsoft for $50 million, and the partners have been active in several industry sectors, with investments in the likes of Brazen Careerist, Idle Free Systems, and Networked Insights. 

Birk believes this knowledge of Wisconsin will lend itself to diverse investments. “If we were to ship a Sun Mountain Capital person to Wisconsin, it would take months or years for them to be as deeply ingrained as Ken Johnson is,” Birk says. “We look at it as a combination of complementary skills.”

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