Seed Money: Madison has become Fertile Ground for Venture Capitalists

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Ask venture capitalists why they do what they do, and you’ll hear some different takes.

For Ken Johnson, who founded seven different companies before launching Kegonsa Capital Partners in 2004, venture capital — the business of making high-risk investments in startups poised for long-term growth — scratches an entrepreneurial itch. A company where you can work with multiple business plans at once, he said, is like the ultimate startup.

“The trouble with regular entrepreneurism is you can only be the entrepreneur of a company at one time,” he said.

Dan Reed, managing director at AmFam Ventures, said venture capital is the perfect outlet for geeking out about business strategy.

“It’s like you’re overdosing on it. It can be sort of overwhelming. There’s always something new to look at,” he said.

For Mark Bakken, managing director at HealthX Ventures, it’s about giving back. He made millions as the founder of the massive health care IT consulting firm Nordic before leaving in 2014. Now, he can help the young founders of companies in the health care technology industry replicate that success. For many of the startups he works with, he’s become a close mentor. (Disclosure: The Cap Times Co. is an investor in HealthX Ventures.)

“Some of the startups call me Uncle Mark,” Bakken said. “I kind of show them how to navigate this world.”

For others, it doesn‘t hurt that there’s a potential seven-figure income, plenty of travel, and the ability to be your own boss.

Regardless of their motivations, Johnson, Bakken and Reed have become part of a sea change in the way startups are getting financed in the state, and in the Madison area in particular. Venture capital activity in the region used to be underwhelming, startup community leaders say. These days, it’s on an upswing.

The state is now home to an unprecedented amount of venture capital dollars. In 2008, Wisconsin venture capitalists had about $287 million under management, according to the National Venture Capital Association. By 2018, that figure had grown to over $1 billion.

Locally, over the past ten years, Madison-based venture capitalists have launched 10 major funds, from health care technology-oriented firms like HealthX Ventures to massive corporate institutions like AmFam Ventures and the CUNA Mutual’s firm CMFG Ventures. Some of those firms have already seen enough success from their initial venture capital fund, and are diving into a second.

The recent uptick in activity has been enough to take the state’s venture capital association off of life support: The Wisconsin Venture Capital Association recently announced it would resume operations after years of inactivity.

“A really important success story in Wisconsin has been the rise of Madison as a venture hub,” said Joe Kirgues, one of the co-founders of gener8tor, a Wisconsin accelerator and venture capital firm. “The community should be proud of all the success it’s enjoyed.”

Ken Johnson is the managing director of Kegonsa Capital Partners, which is partnering with a New Mexico-based firm to oversee the Badger Fund of Funds.

Ask investors, entrepreneurs, and other leaders of Madison’s startup scene about what a typical venture capitalist is like, and they’ll list off some common traits. Venture capitalists tend to be wealthy. They often have a high tolerance for risk. Most either come from the world of finance, or were once entrepreneurs themselves.

“They all own at least one Patagonia vest,” Reed joked.

Venture capitalists are also largely white and male. Different surveys have found that women constitute between 6 and 20 percent of the industry, with a similarly low percentage for people of color.

“Many great ideas have been out there have not been recognized because of the white male educated lens that venture capitalists bring to the table,” said Scott Resnick, the entrepreneur-in-residence at the startup center StartingBlock, and a coach for many young companies on finding financing.

Regardless of demography or personality type, venture capitalists all share a similar job description: They are responsible for taking money belonging to others and using it to make high-risk bets on startups.

Venture capital is one of many forms of startup financing entrepreneurs can choose from. Some simply rely on their own coffers to finance their business — known in the industry as “bootstrapping.” Others may apply for foundational grants, checks from friends and families, or investments from affluent individuals interested in trying their hand at investment.

Johnson himself decided to become a venture capitalist after becoming frustrated with the process of raising money from angels.

“I had to go out and raise the money each time (I founded a company),” he said. “You were talking about nine months of pounding pavement. And then you've got 10 to 15 people, all with different ideas about running a company. It was hard...I thought, ‘Hey, wouldn’t it be much more effective if I just had the money, and become a one-stop shop?’”

A typical venture capital fund involves three different parties: The wealthy individuals and institutions who contribute cash, the venture capitalists who manage the pot of money, and the startups that get the cash in exchange for a slice of company ownership, also known as equity.

The goal for everyone involved is for the startup makes a big “exit” — in other words, get acquired or go public. That way, investors can cash in on their stake in the company, and — if the terms of the deal were right — rake in a return of three times, five times, or even 10 times the initial investment.

Risk and failure come with the territory. Research from the Harvard Business School and the National Venture Capital Association has found that between 25 to 40 percent of venture-backed companies end up failing, yielding no return whatsoever for investors. Taking into account both the wins and losses, the average early-stage venture capital fund in the U.S. gets a return of about 20 percent across all portfolio companies.

Risk management is something that Jon Eckhardt — the director of the Weinert Center for Entrepreneurship at the Wisconsin School of Business — said often gets overlooked by the general public.

“When they read about a company that worked out really well, what they’re missing is all the effort and money and energy that went into companies that didn’t work out,” he said.

Risk is especially a factor when a venture capital fund decides to speculate on early-stage or seed companies with unproven ideas.

“The earlier stage a company is, the more uncertainty there’s going to be,” said Reed, of AmFam Ventures. “At the earliest stage, (venture capital is) very much an art … You just don’t know whether customers will buy a device at, say, $199, or if the device itself will even exist.”

Venture capitalists do three things: They raise the money, choose companies to invest in, and then help the companies in their portfolio, either as a mentor or as a member of its board.

Fundraising, said Andy Walker, a partner of Rock River Capital, is a grind.

“It’s the worst process … No one gets into this business to fund-raise,” Walker said.

One particularly point of stress is that a venture capitalist doesn’t get any income during the fundraising process: The management fees they charge investors only kick in after they close a fund.

Greg Robinson, managing director with 4490 Ventures, said that it can be particularly tough to fundraise in the Midwest, where venture capitals are still a novelty

“There’s been a lot more interest in it over the last five years,” he said. “But it’s still new to people. We’re just not as far along the learning curve.”

The work of investing can also be a grind in and of itself. It involves casting a wide net — meeting companies at networking events, making cold calls, keeping an eye on pitching competition rosters and online databases — and keeping tabs on hundreds to thousands of companies in the pipeline.

Winnowing that field down and figuring out whether a company is worth an investment is part science, part art, according to venture capitalists. Almost all venture capital firms go through systematic processes to help them figure out whether a company is a good fit: They conduct market analysis, determine whether the company fits within their firm’s focus, assess whether a product is technically feasible, and model potential returns on their investment.

Venture capitalists also look at the personalities behind a startup team. Bakken said he has potential portfolio companies take personality tests. The team at Rock River Capital say they look at how much of a salary a CEO gives themselves, to assess whether they’re committed to their business, or more in it for the “lifestyle.”

To varying degrees, venture capitalists rely on their gut. Robinson said that given the huge stream of potential deals he has to sift through, he’s developed a knack for making quick, intuitive decisions about whether a company is worth his time.

Bakken said that he’s a believer in first impressions.

“There’s an inner gut reaction when you meet someone promising,” he said. “Like, the passion’s there.”

Others are more wary of their instincts. Christopher Eckstrom, with Rock River Capital, said he worries his personal bias might cloud his judgment.

“I think you get into trouble when you go with the gut too much,” Eckstrom said. “I’m actually more scared when there’s a product I’m in love with.”


Sanaz Cordes is the CEO of DotCom Therapy, which makes a platform for providing online therapy, and a startup consultant who has helped companies through fundraising process. She said that she’s found the best venture capitalists to be those who are aware of their own biases.

“I would say a good VC, you’ll know because they’re not influenced by buzzwords and hype,” she said. “Sometimes VCs will get starstruck by a founder with a massive exit. It doesn’t necessarily mean that they’re going to do well for the new industry they’re entering.”

The third component of venture capital, mentorship, is extra credit in the venture capital world. It’s entirely possible for a venture capitalist to take a hands-off approach. However, as venture capital activity catches fire, firms are increasingly selling their ability to help companies grow.

“Venture capitalists are competing with each other to be more entrepreneur-friendly,” Eckhardt said.

Altogether, venture capital is a tough job. The hours are long, and constant phone calls can tear you away from family dinners and vacations, said Andy Walker, one of the partners with Rock River Capital.

“It’s definitely not a 9-to-5 job,” he said. “You have no idea where it’s going to take you.”

Compounding it all is the level of risk.

“Unless you’re good, at the end of ten years, suddenly you’ve lost time, energy, and your money,” Johnson said. “All this is very hard to do.”

Understory develops on-the-ground weather tracking technology, as shown above on a Madison rooftop. Understory has received much of its financing from local venture capitalists.

Greg Robinson first came to Madison in 2013, after having cut his teeth for nearly a decade at a venture capital firm in San Francisco. He said he had an itch to try out something new, and saw Madison as an untapped market for venture capital.

“The innovation inputs of raw talent, with Fortune 500 companies, engineering education — all the inputs were dramatically greater on the Midwest, relative to other places,” he said.

After six years in town, Robinson said his hunch was mostly right. 4490 Ventures has emerged as one of the heavy hitters of the local venture capital industry, having made early investments in major Madison startups like the food delivery company EatStreet, the apartment-hunting website Abodo, and the weather monitoring company Understory.

Most venture capitalists in town say that thanks to investors like Robinson, the Madison area has made vast strides compared to where it was five to ten years ago.

“The venture landscape in Madison, when we started, it was a lot smaller than what it seems to be now,” said Kirgues, of gener8tor.

Alex Kubicek, the the co-founder of Understory, said that he initially moved his company to Boston in 2013 after failing to connect with venture capitalists in Madison. He said there seemed to be a disconnect – venture capitalists didn’t seem to understand his company, which creates on-the-ground technology for collecting and modeling sophisticated weather data for the insurance industry.

“We started pitching companies in Wisconsin, they kind of recoiled from Understory,” he said. “They dismissed us out of hand… their market understanding of how startups should be, was very different from how the coasts.”

After moving back at the behest of Robinson with 4490 Ventures, Kubicek recently ended a successful fundraising round of $7.5 million last year. He said that it was clear the scene was different — all of the firms he pitched to were new ones, who were more receptive to his ideas.

Cordes said she’s also seen major changes in Madison’s venture capital scene.

“Investors, in general, are shifting their dollars into later stage healthtech startups than a few years ago during the ‘Super-Sized’ Series A phase,” she said.

Resnick said that the local environment has indeed changed considerably. More venture capitalists are operating with increasing sophistication – a result of what Resnick said is an increasingly competitive field of investing.

Mark Bakken, the managing director of HealthX Ventures and founder of Nordic, said that he became a venture capitalist to help a new generation of digital health care companies grow.

Cordes said that the growth of venture capital has positive by-products for the community. She said that she states that DotCom Therapy’s corporate team has moved to Madison and is excited by the growth of sophisticated funds, like HealthX, operating in the area.

Now, the Badger Fund of Funds is poised to spur further growth in the local venture capital industry. The fund of funds is a pool of $25 million established by the Wisconsin Legislature in 2014 to spur more venture capital activity in the state. The fund has provided money to six new funds, including Rock River Capital and the Winnow Fund in Madison, all of which have committed to investing in Wisconsin startups exclusively.

“You look at our seven fund managers, they’re all about 30 years old. (They’re) all first-time fund managers,” Johnson said. “This is about increasing the state’s human capital.”

If all goes well with the initiative, and the funds perform well, Johnson believes Wisconsin might no longer be ranked dead last in the Kauffman Foundation's annual rankings for startup activity.

“The idea is, venture capitalists can get that degree of return that others can’t,” Johnson said. “If we do standard practices of the industry...we can go from 50th to 20th.”

Most startup leaders in Madison acknowledge the growth of venture capital in the area as a positive indicator. Resnick said the volume of deals the community has seen in recent years is a solid “lagging indicator” of the city’s entrepreneurial health, although he’s not sure about the proposition that Wisconsin’s standings in the Kauffman rankings will change thanks to venture capital.

Others also noted that while the venture capital economy has improved over the years, it still has a way to go.

“There’s an energy around it that, I think, that makes me say it’s still in its early days,” said Reed, of AmFam Ventures, adding: “It’s like my five-year-old daughter. She’s so much bigger than she used to be. But you don’t notice the growth on the day-to-day basis. It’s like, she’s four foot tall all of a sudden. How did it happen?”

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