What Do Angels Want?

Wisconsin is constantly trying to boost its angel and venture capital deployment, but an established investment program has been a tough act to follow.

Tim Keane, director of the Wisconsin-based Golden Angels Investors, can tell any entrepreneur the answer to the question “What do angels want?”

At least Keane can tell you what he and his colleagues want, for no two angel networks are exactly alike. For Keane, companies are divided into two camps: the ones that arouse his curiosity because they operate in a space that Golden Angels is topically interested in, and the companies he’s not willing to invest in because that’s simply not what they do. That’s not an irrelevant point for entrepreneurs seeking angel capital through the Act 255 tax credit program, which offers qualified investors a 25% tax credit on investments placed with state companies that are certified by the Wisconsin Economic Development Corp.

Keep in mind that Keane’s second example has nothing to do with the merits of the company, which is one of the reasons angel investment involves two-way due diligence. “One of the things entrepreneurs do is end up talking to investors of one stripe or another who just don’t invest in the category they are in,” Keane said. “For us, that’s stuff like retail, pharmaceuticals, service businesses like insurance, and financial modeling. We just don’t look at those at all.”

With respect to the industries that pique his interest – information technology, medical information technology, medical devices, certain niche education markets, suppliers to the oil and gas industry, and water technology – there are still many questions to answer. The queries start with the entrepreneurs themselves: “Who are these people? Do they have prior experience in this type of business? Are they addressing an unmet need? Do they know something about this area? How did they get this idea? How strong is their business concept and how compelling is their technology? How much does the world really need it?

The questions only begin there because there are market considerations and their various risk factors. He cited the example of a new iPhone app that helps keep track of the office supplies in your office. In that case, there is probably little technology risk, Keane said, but there is a lot of market acceptance risk. To put it another way: Will the dog eat the dog food?

If that judgment is favorable, there is another market-related gauntlet: How big is the universe? “If you have 20% of this market, what does that look like, and what is the distribution going to be like with the related risks and costs?” Keane asked.

“We try to understand where they are on that risk scale, and what the biggest risk to success might be,” he explained. 

In this look at angel investing, IB spoke to two local entrepreneurs who have secured funding through Act 255, the state of Wisconsin’s angel and venture investor tax credit program. They describe a seamless process for becoming certified by the state as a Qualified New Business Venture (QNBV).

Zurex Pharma: An Ounce of Prevention

Keane said Act 255 has gotten investors off the bench, and Carmine Durham, president and CEO of Zurex Pharma and its subsidiary, Zurex PharmAgra, is grateful. Durham and his business partners have secured both angel and venture capital. That’s not bad for a company (Zurex Pharma) that is still developing an antimicrobial technology platform designed to prevent surgical site infections and catheter-related bloodstream infections in the hospital and outpatient settings.

The timing could not be better because it coincides with health care reform. Even before passage of the Affordable Care Act, government payers were starting to curtail reimbursement to hospitals for certain adverse (and preventable) medical events, including infections. It’s not a small problem, according to the Centers for Disease Control. The CDC estimates that on an annual basis, 1.7 million infections are acquired in hospitals. These infections not only drive up the cost of care by an estimated $35.7 billion to $45 billion, they cause nearly 100,000 deaths. 

Zurex Pharma had an advantage over other start ups because it was spun out of a larger entity, the Lafayette, Ind.-based Ash Access Technology, which already had invested $30 million in its technology platform. Still, Durham and his partners had to make the case to investors, which resulted in $250,000 in matching angel financing from the state and later a round of Series A financing – a combination of angel and venture capital. They landed $6.2 million from the likes of Baird Venture Partners and the State of Wisconsin Investment Board, with participation from Wisconsin Investment Partners, Peak Ridge Capital, and individual investors. 

The Zurex partners would not have gotten that far if first they had not been certified by the state as a QNBV. To attract angel investment in Wisconsin, “it’s basically a prerequisite to get your company qualified,” Durham said.

According to Durham, the process is relatively seamless, starting with downloading an application from the state website and continuing with some straightforward questions about your commitment to apply the investment in Wisconsin. “They want to make sure you have a real company, what your intentions are, and what your business is about,” he said. “They have to go through a process on their end to make sure a company qualifies under their rules.”

Durham doesn’t recall exactly how much time elapsed from the moment he completed the application to the time Zurex was certified as a QNBV, but he’ll wager that, depending what’s on the WEDC’s plate, the process at most takes between four to eight weeks.

Don’t get the impression that once you’re certified, angel investors come knocking. “They don’t come knocking, you go out knocking,” Durham said, chuckling at the thought. “For anyone looking at this, it’s going to take time to identify and contact the people you might want to talk to.”

The Wisconsin Angel Network is the best resource to identify angel networks. From there, it’s a matter of clearly explaining your technology, what problem it solves, what you plan to do with the money, and how it’s going to get you to the next phase of product and business development. Angel groups have a formal process in which you are put on a schedule to make your initial case, and you might have to come back again. “It takes time to set up meetings with these folks,” Durham noted. “I’ve never had anybody invest after the first meeting. It takes people a while to think about it. They want to hear it again. They go home and think about it. They want to ask more questions.”

Durham began looking to raise angel money in spring 2010. It took two years from that point to when the Series A round was secured in May of 2012 – a two-year process of getting qualified for tax credits, getting some initial angel investment, and ultimately securing a larger Series A round.

A key point about both angel and venture investing: Recipients have to be willing to give up a percentage of ownership in the company in order to secure the money. “It’s a negotiation and a process,” Durham said, noting that factors include the stage of your company and technology and the path to commercialization. As an entrepreneur, he was reluctant to give up 50% or more because of the loss of control, but he also noted that a venture capital group that comes in with a large sum of money is not going to settle for 10%. 

Zurex is using its capital to develop and commercialize a portfolio of antimicrobial products, focusing on surgical site wounds and catheter-related infections. At some point, the investors will want to reap the benefits of their commitment in some form of exit, and Durham is well aware of the options. The company already generates revenue in the animal hygiene market by preventing infections in dairy cows through PharmAgra, but in managing Zurex Pharma, the partners remain focused on driving value in both companies, because if they do, exit opportunities will come. 

“Would everybody love to have a big acquisition? Sure, that’s what a lot of entrepreneurs hope for, but those things will come. You just have to focus on your plan and driving your value and continuing your product development, and then hope those opportunities present themselves.”

Eso-Technologies: Heart-felt Technology

Bonnie Reinke, president and CEO of Eso-Technologies, also touts the value of certification. Her company, which is developing an esophageal probe as an alternative heart monitor, was incorporated in 2008 and she immediately hit the angel investment circuit. One of the first questions that came up is “are you certified by Act 255?”

“I just Googled it, got in the system via their website, and made a couple good personal contacts at the former Department of Commerce [now the WEDC], who helped me understand the program and fill out the paperwork,” she said.

Like Durham, Reinke found the process to be straightforward. There were a few pages of questions pertaining to whether the money raised would be used in Wisconsin, especially to create jobs. “Obviously, those are all good reasons the state would provide a tax credit,” she stated.

After filling out the application, Eso-Technologies got a letter from the Doyle administration indicating the company qualified for the credits. That enabled Reinke to immediately go back to the investment community and let them know that an investment in the company now qualified for a tax credit. The company’s patented technology caught the eye of angel investors – Phenomenelle Angels and DaneVest Capital – which have committed $1 million for continued development of the less invasive heart monitor, and the company is looking for more.

Since the heart is right next to the esophagus, it’s not difficult to explain how the probe, which is affixed with monitoring sensors, works in the context of a surgical procedure. The probe, a modification of the esophageal stethoscope, is connected to a monitor so the data can be recorded and tracked and stored, but it can be deployed by medical personnel such as a nurse or a medical technician, whereas pulmonary catheters require a board-certified physician.


Part of Reinke’s pitch is that there would be cost savings in terms of total patient management because the complications catheters can cause, notably infections, can send a patient into the ICU. The esophageal probe will be used mostly in surgical patients at the beginning. It would not totally replace the catheter because it isn’t tolerated in fully awake patients, but Eso-Technologies is planning to miniaturize it so that it becomes the size of a gastric tube, which a conscious patient can tolerate.

“One of the great things about the whole project is everybody gets it because it’s so easy to understand,” Reinke said. “You would like to use a much less invasive device on a patient than something that has to be surgically inserted and threaded through the bloodstream and right into their heart.”

As proof, Reinke recently met with a group of Chinese investors looking at Wisconsin companies. She didn’t even have to speak the language. “I just held up the pulmonary catheter device we hope to replace and said, ‘Would you like this inserted or our minimally invasive esophageal probe?’ It’s a very simple picture to create.”

Even after securing angel funding, one element of the angel investment picture was not clear to Reinke – the reporting process. She didn’t realize until the end of the year that she was going to have to produce checks and bank deposit slips showing that she received the check and had deposited it in her account. That would have been a nice thing to know at the beginning, she said, because “it became kind of a hassle” that first year.

Eso-Technologies’ exit strategy is to develop its products and demonstrate clinical proof-of-concept in the medical device industry and to create strong intellectual property that gets the attention of a larger medical device company. The company has completed two clinical trials and will pursue 510(k) market clearance from the Food and Drug Administration (to show the device is safe and effective).

“So that would be the exit – an acquisition, a partnership,” Reinke said. “We don’t see every developmental organization go all the way to full marketing.”

If the company’s story unfolds that way, it will be due in no small part to the Act 255 tax credit program. Reinke certainly sings its praises. “It costs nothing to get into it, if you qualify. It costs just your time and time spent reporting. I think it’s one of the best entrepreneurial programs to come out of the state.”

Tough Act to Follow

While Act 255, enacted in 2003, receives high praise, state government has failed to come up with a second act in the form of a state-run, investment capital fund of funds. State Sen. Alberta Darling, R-River Hills, likes the prospects for success in the forthcoming session of the Legislature, not as a separate bill but as part of the next state budget. 

Under Darling’s concept of a fund of funds, up to $200 million in general purpose revenue would be invested over a four- to six-year period. It would be managed by a fund manager appointed by the governor and accountable to make investments in Wisconsin businesses. The state would be an equal investment partner and realize returns on investment, but elected officials would be kept at arm’s length because “you don’t want them choosing winners and losers,” Darling said.

Darling said the program would fund companies across the investment continuum, from angel to start up to early stage to venture capital. The money would have to be invested in Wisconsin businesses, including those in core industries.

According to Darling, the concept has bipartisan support in the Legislature, and lawmakers hope Gov. Walker will incorporate it into his 2013-15 budget proposal. “We’re behind neighboring states on this,” she said. “We’re an outlier.” 

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