Wisconsin's new venture capital program taking shape

From the pages of In Business magazine.

Don’t ask Ken Johnson whether he’s looking for people with financial acumen to manage funds in the new Badger Fund of Funds investment program. He’ll tell you that he’s looking for determined entrepreneurs who aren’t afraid to dream.

Johnson and Brian Birk, his Sun Mountain Kegonsa partner, have identified Green Bay, Madison, Oshkosh, and Vilas County as the geographic areas where the first funds will be established. The funds are not yet up and running, and the identities of the fund managers won’t be confirmed until later this year, but the partners have selected four geographic areas where they believe there is strong support for a venture capital investment fund.

“I’m a little nervous because there is a lot of public perception out there about how funds have got to be near the university. Steve Jobs didn’t get any of his ideas from a university.” — Ken Johnson, managing director, Kegonsa Capital Partners; partner, Sun Mountain Kegonsa

In addition, Johnson has left no doubt about the type of individuals that he and Birk are looking for to manage the funds — a younger generation of successful entrepreneurs who already have the skills and experience to help the portfolio companies the funds will eventually invest in. Johnson, the managing partner for Kegonsa Capital Partners in Madison, says that Birk’s role as managing partner of Sun Mountain Capital has taught him to search for community business leaders.

To manage a state-sponsored venture capital program, the State Department of Administration has selected Sun Mountain Kegonsa, which consists of Santa Fe, N.M.-based Sun Mountain Capital and Kegonsa Capital Partners, the Wisconsin-based half of the partnership. The new entity will create funds across Wisconsin to provide seed capital to early-stage companies in a variety of industry sectors.

At the moment, Sun Mountain Kegonsa is on the hunt for a few good entrepreneurs. “Somebody that’s in the community, highly respected, has been successful, and is used to success,” Johnson said, ticking off the ideal qualities of the fund managers the firm is seeking. “Someone who makes you say that if this person is involved, it’s going to work. In the communities that we’ve talked about — Vilas County, Green Bay, Madison, and Oshkosh — we have a community leader that we’re working with.”

Johnson admits that he’s describing his own experience. In 2005, he was an emerging fund manager who was starting a new fund. He had never done it before, but now he’s been through the process of establishing one fund, Kegonsa Seed Fund I, and closing it out earlier this year with $10.725 million in committed capital. Eleven of the 13 initial investments were “seed” venture capital investments, meaning they were companies that still weren’t reporting revenue, and the management of Kegonsa Capital Partners created 25% of the fund’s portfolio companies.

The most successful exit came in 2007 when Jellyfish.com, a comparison-shopping search engine, was acquired by Microsoft for $50 million, bringing a return of more than 15 times the fund’s original investment. Nearly five years later, another exit brought three times the fund’s initial investment when Qiagen, a European molecular diagnostics company, purchased Intelligent BioSystems.

Meanwhile, a second fund, the Kegonsa Coinvest Fund, made 13 investments totaling $7.6 million in growth-stage companies (defined as ventures that have revenue from product sales but are not yet at the cash flow break-even point) in the five-year period from 2007-2012. Of those 13 investments, 10 were made as part of a syndicate. Five of those 10 investments were led by the fund, which continues to make investments in companies headquartered in Wisconsin.

Of the 15 funds managed by Sun Mountain Capital in New Mexico, eight of them started a second fund that was made possible by the successful track record of the initial fund. That’s essentially the long-term goal of the Badger Fund of Funds, because the second funds typically have more money to commit in larger, $5 million-plus investment rounds required by companies that are poised to accelerate growth.

“If we could start up 10 funds combined from the Badger Fund and from state money, and of those 10 fund managers, five of them started Fund II completely on their own because they had a great track record, I would dance in the street and shout, ‘We have made it,’” Johnson said. “I’m not just talking about the companies, but having a functioning venture capital system here with managers who grew up here, who are not going to move, and who live here.

“Their investors are here, and they were so successful the first time around that they can do the second time around on their own with Fund II and then Funds III and IV. We don’t have that here, and I don’t want to pick on Wisconsin, because very few states have it.”



Creating a sustainable venture capital community of people who will establish multiple funds will not happen overnight. The first funds, each with a 10-year life, will provide more early-stage capital, but if the fund managers make enough of their initial investments pay off, they should be able to establish larger second and third funds that can commit larger amounts of capital down the road.

That’s why the initial focus on early-stage investing is called a “money for minnows” approach. “Our expectation is that these fund managers will go on to raise subsequent funds, and those funds will be larger than their initial funds,” Birk noted. “At some point, if it’s a Fund II or Fund III, could there be funds that actually invest the $5 million round in any kind of company, not just life sciences but in information technology or manufacturing? The answer is yes, but it’s not going to happen tomorrow.”

The reason for them to visit Wisconsin is quality deal flow, which refers to the rate at which investors receive legitimate business proposals. “It is relatively common in other states to see those larger investment rounds, those $10 million or $15 million or $20 million investment rounds led by national firms,” Birk said. “Those firms will travel when they’re writing a $10 million or $15 million check, but they will not travel to write a $500,000 check because economically it just doesn’t make sense to them. That’s why you need a lot of that local capital focused on the early stage.”

Where the entrepreneurs are

The Badger Fund of Funds was established by the Legislature in late 2013 with $25 million in state dollars. In explaining the reasoning behind the geographic areas identified thus far, Johnson noted that Sun Mountain Kegonsa’s proposal called for capital to be deployed where the entrepreneurs are, which is not the same as where the ideas are. “We feel that entrepreneurism is more of a per-capita phenomenon,” he stated. “There are more entrepreneurs in Milwaukee because there are more people in Milwaukee than La Crosse, but on a per-capita basis, it’s probably somewhat similar, and some of the larger populated areas have venture capital now, and some of the lesser-populated areas do not.”

The driving force of such funds, however, is not geography but a driven entrepreneurial community leader who’s done it before, and who wants to help other people do it. Of the community leaders who have been identified in the four geographic locations, Johnson said that all of them have started their own businesses and failed, and all of them have started their own businesses and succeeded. They are entrepreneurs with business backgrounds, not necessarily venture capitalists or people with financial backgrounds.

“My business isn’t finance,” Johnson stated. “My business is starting and growing companies, so I want community leaders who have started and grown companies. Picture Steve Jobs trying to make an iPhone in 1983. Those are the people we’re looking for, and those are the community leaders. They had a dream, and they started a company. Sometimes they failed. Sometimes they succeeded.”

The fund managers will also raise capital for their respective funds and oversee a fund portfolio with a diversified set of investments in early-stage companies. They will help entrepreneurs put together companies or form businesses themselves — companies that serve as the minnows in Sun Mountain Kegonsa’s “money for minnows” approach to building a Wisconsin venture capital ecosystem.

The hope is that once an early-stage ecosystem is established, larger venture funds will gain more interest in making investments here. “When you look at how venture markets work, there is really kind of an ecosystem component of that, and that’s somewhat reflected in the ‘money for minnows’ that we have,” Birk says. “In order to attract some of those bigger fish — i.e., the big venture funds that can write a $5 million check — you need to have baitfish or minnows for them to come and invest. Our belief is that with the right companies and enough promising deals, you’ll find those larger venture capital funds traveling to Wisconsin and investing in Wisconsin.”



Under Act 41, the 2013 law that set up the Badger Fund of Funds, the program was not only seeded with $25 million in state money, a minimum of $5 million was also required to be raised by Sun Mountain Kegonsa and another $300,000 was to be raised by Birk and Johnson. Both partners confirmed that they have raised the minimum amount and noted that fundraising continues, meaning the amount of money available for investment will exceed the $30 million called for in Act 41. Under Act 41, the investment managers can invest money in at least four venture capital funds but cannot invest more than $10 million in a single fund. The more money they raise, the more individual funds they can establish in the overall Badger Fund of Funds portfolio.

“These are private investors who stepped up to invest in the fund alongside of the state,” Birk noted, “and I think that really speaks to the opportunity that people see in Wisconsin.”

The law directs capital to be deployed in a variety of industries, including agriculture, information technology, engineered products, advanced manufacturing, medical devices, and medical imaging (not biotechnology). All program money must be invested in businesses that are headquartered in Wisconsin and employ at least 50% of their full-time workers (including those employed by subsidiaries or other affiliated entities) in the state. At least half of the money must be invested in one or more businesses that employ fewer than 150 full-time workers at the time of capital deployment.

Mountainous model

Birk has seen this approach work in New Mexico, where Sun Mountain Capital manages seven regional funds with about $500 million in assets and where a vibrant startup community has attracted investment from nationwide venture funds. With Birk’s track record at Sun Mountain and Johnson’s knowledge of Wisconsin business and his network of statewide contacts, the partners believe they can identify a younger generation of fund managers who are willing to make venture capital work. This work includes helping to manage their fund’s portfolio companies, which will be a full-time job.

The fund-of-funds concept has been a dream of Johnson’s since the early 1990s. His advocacy dates back to the time he worked at the Wisconsin Alumni Research Foundation, the technology-licensing arm of UW-Madison, and tried to start a venture fund. But the WARF model of technology transfer from the university to the commercial world isn’t what the Badger Fund of Funds is all about. “I’m a little nervous because there is a lot of public perception out there about how funds have got to be near the university,” Johnson said. “Steve Jobs didn’t get any of his ideas from a university.”

If enough of the funds pan out to create the ecosystem Birk and Johnson envision, there should be no need for state taxpayers to provide additional support to the venture capital program. “The state should not be doing more venture capital,” Johnson said. “We have to get it rolling. Once we get it rolling, hopefully we won’t need the state anymore.”

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