Capital Midwest Fund is courting investors as it tries to raise between $100 million and $150 million for its third fund, the Wisconsin venture capital firm told Xconomy.
Capital Midwest, based in Mequon, WI, is one of a handful of venture capital funds with offices in the state. It’s currently investing from its second fund, a $40 million pot.
Other Wisconsin VCs include Baird Capital, with offices in Chicago and Milwaukee, which raised $185 million for its fourth fund in November; Madison-based Venture Investors, which raised $80 million for its fifth fund in 2013; American Family Ventures, the $50 million venture arm of Madison-based American Family Insurance; and Madison-based 4490 Ventures, a $30 million information technology fund.
Capital Midwest is aiming to close an initial round of money for its third fund by the middle of the year, general partner Dan Einhorn said. It’s certainly not guaranteed that the firm will reach its nine-figure goal. Baird exceeded its fourth-fund target by $35 million, but Venture Investors reportedly came up $70 million short with its fifth fund.
But if Capital Midwest is successful in its fundraising, it could cement itself as one of the key VCs in a state that often bemoans its lack of venture capital. It will continue to invest throughout the Midwest, but Wisconsin stands to benefit from an infusion of cash for the firm.
“We’re hoping this is a very Wisconsin-focused fund,” Einhorn said. “We’re an ROI-driven fund, and we take the best opportunities. But what’s happening in Wisconsin is very positive right now. There’s a lot of opportunities I’ve seen over the last six months that are very investable companies.”
In Einhorn’s mind, there’s a few things working in Wisconsin’s favor, including the growing number of startup incubators and accelerators, like Gener8tor in Milwaukee and Madison; the flow of talented entrepreneurs from electronic health records giant Epic Systems, near Madison; and the activity of various angel groups and smaller venture funds, like BrightStar Wisconsin Foundation and CSA Partners in Milwaukee.
“We’re very supportive of all these groups because they’re building these companies up to a level that they are ready for venture capital,” Einhorn said.
His fund does deals between $1 million and $10 million—larger than what angel groups are typically able to put in, but smaller than what many coastal VCs are willing to invest in a single company, Einhorn said. “If you need less then $1 million or more than $10 million, I think there’s a market for that. That’s why we play in the space between $1 million and $10 million.”
Capital Midwest invests in a variety of technology businesses, from life sciences to software to Internet-enabled devices. In true Midwest fashion, it typically targets “products that customers need that they’re willing to pay for,” Einhorn said. He’s leery of companies trying to build successful businesses using the “freemium” model that many Web and social media companies employ, which he thinks is “very challenging.”
Capital Midwest raised about $5 million for its first fund, which made 11 investments between 2008 and 2011. None of those companies have generated a return for the fund and two have folded, Einhorn said, but he’s optimistic a few of the remaining portfolio companies will be acquired.
Capital Midwest has invested in 10 companies from its second fund, launched in 2010. It doesn’t plan to invest in additional companies with capital from that pot, but it reserved some of the money for follow-on financing, Einhorn said.
One of the companies from the second fund, Therapeutic Proteins International, was acquired in 2012 for more than double Capital Midwest’s investment, Einhorn said. The rest of the companies in that group remain in business, he said.
One of those companies is OnKol, the Milwaukee-based startup that is attempting to commercialize a box-shaped device that connects to Bluetooth-enabled home and health-monitoring products. The company, trying to take advantage of the “Internet of things” movement, is targeting aging parents and their children.
Capital Midwest invested $2.4 million in OnKol. The startup is currently raising a bridge round of about $1 million and intends to raise a larger round of $5 million to $10 million after it gets some initial sales traction, Einhorn said. OnKol plans to ship out its first batch of devices in the next few weeks.
Einhorn first delved into the startup world 11 years ago, when he joined Einhorn Associates, the merger and acquisition services business started by his father, Stephen, in the 1970s. The son helped lead a new business for the company, brokering venture investment deals for startups. Four years later, Einhorn, his father, and business partner Alvin Vitangcol decided to start their own venture fund and get on the other side of the deal-making table. “We realized there was no capital and awesome opportunities,” Einhorn recalled.
Capital Midwest’s second fund included money from local foundations and dozens of wealthy individuals, and its biggest investor was Einhorn’s brother, David, a New York hedge fund manager known for short-sale bets against Lehman Brothers and Allied Capital, The New York Times reported.
To reach its third venture fund goal, Einhorn and his team will have to convince enough deep-pocketed backers that there are indeed plenty of viable startups in Midwestern states like Wisconsin. That’s an idea that is starting to win more believers from coastal tech hotbeds like Silicon Valley, such as the two former Sequoia Capital partners behind Ohio-based Drive Capital, and Greg Robinson, the former Silicon Valley investor who relocated to Madison last year to run 4490 Ventures.
It’s way too early to call this a sea change in Midwest venture capital. But as more VC funds pop up in America’s heartland, Einhorn thinks the increased competition is a good thing for the startups and his firm, which prefers to syndicate deals with other investors when it can.
“The goal is to build up the entire [Midwest] network,” Einhorn said. “We are all for many, many funds being in this area. The more collaboration you can do with quality investors is extremely helpful.”