WI’s Badger Fund of Funds Unlocks State Money, Eyes First Recipients

Nearly two years ago, Wisconsin passed a law creating a government-backed “fund-of-funds” that would invest in venture capital funds in the state, in the hopes of boosting the meager amounts of local cash available to local startups. Now, after months of gathering additional commitments from private sources, the Badger Fund of Funds is poised to begin doling out money.

The state committed $25 million to the initiative, as long as the managers of the fund-of-funds contributed at least $300,000 of their own money to the pot and secured at least $5 million from other investors. The managers—Sun Mountain Kegonsa, a partnership between Fitchburg, WI-based Kegonsa Capital Partners and Santa Fe, NM-based Sun Mountain Capital—previously said they would pitch in $500,000. And as of last week, they had successfully unlocked the state money by raising more than $5 million from other private sources, according to a letter from the state Department of Administration.

“The department is very pleased with the development of the Badger Fund of Funds I, and looks forward to the upcoming investments,” Department of Administration secretary Mike Huebsch wrote in the letter.

The first batch of venture capital funds expected to receive seed money from the fund-of-funds are located in Madison, Green Bay, Oshkosh, and Vilas County, Huebsch said. His letter didn’t share more details about those VC funds, but one proposed recipient is Madison-based HealthX Ventures, the new healthtech fund started by former Nordic Consulting Partners CEO Mark Bakken. Bakken confirmed today that he is in talks to receive at least $2 million from the fund-of-funds, “possibly more, depending on how much we end up raising from other sources,” he told Xconomy in an e-mail.

Kegonsa managing director Ken Johnson declined to discuss possible recipients of fund-of-funds money, saying that he and Sun Mountain Capital are still out fundraising in the hopes of growing the total pot to $50 million. He expects to close on the fund-of-funds by mid-year. Attention “will turn toward the commitment process sometime towards the final close,” he told Xconomy in an e-mail.

The fund-of-funds intends to pump money into between six and nine venture funds that focus on startups that have yet to generate revenue, Johnson said. It will also back one to three venture funds that invest in early-stage companies that have revenue but aren’t yet profitable. The plan is based on Johnson’s “money for minnows” strategy that involves making a lot of smaller, earlier bets on diverse startups, rather than making bigger investments in fewer companies in order to selectively search for big hits.

The law prohibits the fund-of-funds from committing more than $10 million to a single fund, although Johnson said Sun Mountain Kegonsa’s proposal to the state calls for investing, at most, $4 million in each fund.

The venture funds must subsequently invest, on average, $2 in startups for every $1 received from the fund-of-funds. This minimum 2-to-1 match means that a $30 million fund-of-funds could leverage another $60 million raised by the recipient funds, resulting in a cumulative infusion of $90 million into Wisconsin startups. If Kegonsa and Sun Mountain are able to match the state’s $25 million appropriation dollar-for-dollar, the total amount would rise to $150 million.

One of the criticisms of the initiative is that the state committed a relatively small amount, but supporters have said it’s a good start. Legislators have also been criticized for limiting the investments to companies in agriculture, information technology, engineered products, advanced manufacturing, and medical devices and imaging products. Conspicuously absent from that list is biotech, a core industry in Wisconsin, particularly in the Madison area. Biotech was excluded partly because some conservative legislators feared that state funds would go toward embryonic stem cell research, the Milwaukee Journal Sentinel reported. Others have said that the main reason was the fact that biotech companies require lots of capital and more time to develop products than many sectors—meaning a longer road to an exit for investors.

Chris Prestigiacomo, State of Wisconsin Investment Board portfolio manager, suggested in a letter to the heads of the Legislature’s Joint Committee on Finance that the fund-of-funds program could be improved if it had fewer investment restrictions. His letter, dated Feb. 26, didn’t specify which restrictions should be loosened, and he couldn’t be reached for comment today.

Prestigiacomo noted that Michigan’s investment programs, which include a state-backed fund-of-funds, generally allow VCs to “invest in the best opportunities available with no restrictions.” “While certain investment restrictions are expected with these types of programs, minimizing them where appropriate will lead to broader interest from fund managers and startup companies,” he wrote. “A program with less restriction provides greater fund and portfolio company diversity, a beneficial outcome when investing.”

Prestigiacomo’s letter also calls for dedicating enough administrative support to monitor the program’s investments, “providing flexibility to the private dollar match requirement,” and increasing the size of the state’s investment in the fund-of-funds, once it starts showing progress. That last recommendation is dependent upon state “budget conditions,” Prestigiacomo acknowledged.

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