Badger Fund of Funds to Pump $90M-plus Into Wisconsin Startup Scene

The plan for Wisconsin’s new fund-of-funds program is starting to come into focus.

The headline: The Badger Fund of Funds could ultimately result in at least five new funds investing a minimum of $90 million in more than 100 Wisconsin startups over the next several years. That’s the biggest takeaway from a presentation Tuesday by two of the three managers of the fund-of-funds at an event hosted by the Wisconsin Technology Council’s Wisconsin Innovation Network in Madison.

Last year, Wisconsin legislators passed a bill to give $25 million to fund managers who would raise matching private dollars, then dole out the money to seed new funds that would invest in early-stage companies based in the state. The measure was smaller than previous failed efforts to create a state-backed venture capital fund of at least $200 million, but this bill was passed easily by legislators who saw it as a good start toward fostering a sustainable venture capital ecosystem here.

The legislature picked Sun Mountain Kegonsa to manage the fund-of-funds, an alliance of Santa Fe, NM-based Sun Mountain Capital and Fitchburg, WI-based Kegonsa Capital Partners.

Sun Mountain manages more than $500 million, include overseeing the $350 million New Mexico fund-of-funds program, several New Mexico co-investment funds that total more than $100 million, and co-managing an $80 million fund in the country of Mexico. Sun Mountain has also helped Ohio and Utah develop fund-of-funds programs. Its team includes managing partner Brian Birk and partner Lee Rand, who both spoke at Tuesday’s event.

Kegonsa’s early-stage portfolio includes exits by Wisconsin companies Jellyfish in 2007 and Idle Free Systems this month.

The Wisconsin fund-of-funds will put money into funds that will employ the “money for minnows” investment strategy, a phrase coined and championed by Kegonsa managing director Ken Johnson. The idea, which sounds similar to the “spray and pray” method, involves making a lot of smaller, earlier bets—around $500,000—in diverse startups, rather than making bigger investments in fewer companies in order to selectively search for big hits.

Investors can argue over which school of thought is better, but Sun Mountain Kegonsa’s leaders believe money for minnows is the right approach for Wisconsin because there’s a strong angel investment community here, but not enough early-stage venture capital funds that do deals in the $400,000 to $1 million range.

“We think that is the real fundamental gap in Wisconsin,” Birk said during Tuesday’s presentation. “When there are companies that need to raise $5 million, $10 million, or $15 million, we have found that venture capital funds based in California and in Massachusetts, even some in Chicago or other states, they actually are willing to travel. But when you have a $400,000 to $500,000 investment, those guys will not. Just the economics of the way those funds work, they are not willing to hop on a plane.”

The theory is the fund-of-funds will spur a bigger crop of Wisconsin investment funds for entrepreneurs to pitch to in the earlier stages, their startups will grow, and the bigger, later-stage deals led by out-of-state VCs will follow, Birk said.

“This is a much more fertile way to get the ecosystem moving and to really get a lot of companies launched that will then prove themselves in the marketplace,” Birk said. “Just the sheer numbers of that, eventually you’re going to have more winners coming out of the money for minnows strategy.”

And Sun Mountain Capital’s leaders are optimistic that they can help build a more robust venture capital industry in Wisconsin, pointing to their past experiences. In their first fund-of-funds in New Mexico, 15 of the 29 recipient fund managers went on to start another fund, including eight that started successor funds without additional state money, Birk said.

Birk was careful not to overpromise on anything, but here’s … Next Page »

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