Michigan Might Hold Lessons for Improving Wisconsin’s VC Climate
Wisconsin and Michigan share a border, but there’s a significant gap between the two states in the amount of money investors are putting into startups based there each year.
Following the recent decision to reboot the Wisconsin Venture Capital Association, which happened in part because a Madison, WI-based VC firm has a satellite office in Ann Arbor, MI, now seems like a good time to ask: What lessons can the early-stage business community in Wisconsin take from Michigan to boost the amount of venture capital flowing to Badger State startups?
According to data from the National Venture Capital Association and PitchBook, two groups that monitor investment trends, startups headquartered in Michigan have raised more money than ones based in Wisconsin in each of the past four years:
(amounts in millions of U.S. dollars)
Madison, WI-based Venture Investors is the oldest and largest venture fund in the state. About a decade ago, it decided to expand into Michigan, and brought on Jim Adox to lead the effort. Adox had previously worked in venture capital for about 10 years, and says he has lived in Michigan throughout his career.
In 2005, shortly before Adox joined Venture Investors, Michigan’s state government elected to move forward with a new initiative. It called for the establishment of a “fund-of-funds” program aimed at jumpstarting investment in early-stage companies based in the state.
The idea behind a “fund of funds” is to create a central fund—backed by a combination of taxpayer dollars and outside financing—that provides capital to “recipient funds.” These recipient funds, which themselves typically raise additional money from outside sources, are the ones that actually invest in startups.
“That was a catalyst for me basically changing the sign on my door to Venture Investors,” Adox says of the opportunity to raise and manage one of the recipient funds created at the start of the program. (He remains with Venture Investors, currently serving as managing director.)
The Michigan Economic Development Corp.—a state-affiliated organization tasked with boosting jobs and investment in Michigan—values Venture Investors’ fund in Michigan at more than $117 million. It is one of several nine-figure venture funds that are part of the state’s fund-of-funds program, according to a report the MEDC released about a year ago.
The creation of the program “definitely fueled the growth in the number of [VC] funds in Michigan, which then fuels the growth in the number of investments made,” Adox says. “The [amount of] venture capital under management in Michigan has grown.”
Wisconsin has its own nascent fund-of-funds initiative. In 2013, Wisconsin legislators passed a bill to give $25 million in state funds to the program, which is known as the Badger Fund of Funds. Two recipient fund managers were named last May. One of them, Idea Fund of La Crosse, recently announced it raised $8.1 million, and will soon begin investing in Wisconsin-based startups. A portion of that total likely came from the central “Badger Fund,” which said in August that it had raised $10 million from private investors. (The other recipient fund announced last May was Winnebago Seed Fund, in Neenah, WI.)
Jonathon Horne is managing director of Idea Fund of La Crosse. He says there was a sense of validation after his team successfully raised its target amount.
“One of the big questions on the Badger Fund of Funds strategy was whether first-time managers could raise the capital,” Horne says in an e-mail. “We’re very proud to have demonstrated it can be done.”
Only time will tell whether Wisconsin’s fund-of-funds program achieves equal—or greater—success compared to Michigan’s effort.
One potential cause for optimism is that like Michigan, Wisconsin is home to a public university that ranks in the top six on the National Science Foundation’s list of institutions that spend the most money on research and development.
Adox says that the University of Michigan’s flagship campus in Ann Arbor is “definitely the dominant source” of startups spun out of academic research, but that a number of new companies have also come from other schools, including Michigan State University and Wayne State University.
He also mentions the automotive and mobility industry as one where Michigan-based startups have attracted a large amount of venture dollars in the past few years.
If Michigan hangs its hat on cars and trucks, what might people in Wisconsin see as their “anchor” industry? Maybe medical devices or health IT, which have corporate clusters in the Milwaukee and Madison areas, respectively.
But improving Wisconsin’s climate for startups and investors will likely require time and happen through a series of small steps. One example: since the beginning of 2016, the Wisconsin Economic Development Corp. has been the most active venture investor in what PitchBook calls the Great Lakes region, which also includes Illinois, Indiana, Michigan, Minnesota, and Ohio.