Exit Strategy: Wisconsin Investors Seek Next Wave of Startup Wins

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investors did. Andy Shrago, who served as the company’s senior vice president of sales and marketing, estimated that Prodesse’s backers (he’s one of them) turned around and invested in at least 30 early-stage companies since the acquisition. Shrago now co-manages the angel investor group Wisconsin Investment Partners in Madison.

Meanwhile, Shannon said his current investments include AquaMost, a Madison-based water treatment technology company; Okanjo, a Milwaukee-based e-commerce platform with a community bent; Somna Therapeutics, a medical device company based in Germantown, WI; and HarQen, a Milwaukee-based digital-voice software firm.

“When Prodesse exited for $72 million, I think of the branches of the tree that come off,” Shannon said. “That really provides new blood for lots of other startups. These exits are really important.”

But right now some Wisconsin investors seem to have reached their investment limit and are waiting for a payday.

Investors, “especially the angels, have been having two, three, four [investing] rounds and are very tapped out and need some exits,” Shannon said. “When you’re at a meeting, they’re all looking at each other with glazed eyes like, ‘We need an exit, we need an exit.’”

That’s an issue Shannon and several other high-profile investors and businesspeople want to help address with BrightStar Wisconsin Foundation, a nonprofit organization formed this year to invest charitable donations in Wisconsin startups. Shannon serves as its volunteer CEO.

Not surprisingly, both Shannon and Shrago expressed optimism that more exits are on tap for Wisconsin in the next three years. They declined to name any of their own portfolio companies that might soon be acquired or go public, but Shannon pointed out that it’s still early: the investments made by Prodesse backers have matured for only four years at most.

“We expect to see a number of exits in years five, six, and seven,” Shannon said. “That’s right on our time horizon. We’re feeling good about where most of those companies are going.”

 Standing in the Way

The region has some barriers to overcome, however. A lack of available capital, particularly venture funds, continues to hold back startups and exit activity in Wisconsin, several sources said.

Shannon said Wisconsin’s critical capital gap is in the mid-range between $2 million—generally the maximum investment from Wisconsin angels—and $5 million—typically on the low end of what VCs will chip in for an early round.

Proposals for a government-backed venture capital fund in Wisconsin shrank from $400 million to $200 million over the past couple years, as reported by the Milwaukee Journal Sentinel, before a much smaller $75 million bill passed this year.

“Wisconsin has been a very frustrating place in terms of availability of capital,” Shrago said. “It tends to be a very conservative environment financially. The politicians have just not been able to agree on anything substantive for a variety of reasons. It’s a very different environment than what you would find on the coasts or in some other areas.”

Changing that conservative mindset, perhaps ingrained in Midwest culture, will require more time and effort than passing a bill.

“In Silicon Valley if you fail, people think that’s great as long as you learn from it,” Shrago said. “In Wisconsin if you fail, they won’t back you again. We would do better if we embraced risk more than we do.”

Another barrier is a lack of large private equity firms located in Wisconsin that would tackle acquisitions of businesses with more than $10 million in earnings before interest, taxes, depreciation and amortization, said Andy Nunemaker, an Xconomist and the CEO of Dynamis, his second Milwaukee-area startup.

Golden Angels Investors and Infinity HealthCare sold their shares in Nunemaker’s first startup, EMSystems, to Los Angeles-based private equity firm Kayne Anderson Capital Advisors in 2007. EMSystems’ management and operations remained in Wisconsin, he said.

Three years later, EMSystems was sold to … Next Page »

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