WI Syndication Group Seeks More Investor Team-ups to Spur Big Exits
Many startup investments involve multiple investors these days, but it’s not always easy to assemble a group of backers necessary to close the deal.
Wisconsin—which has a small local pool of venture capital and aspirations to churn out more high-growth startups—is one of the places experimenting with tactics to nurture relationships and collaboration between investors in the state. Now, some of those efforts are starting to bear fruit.
FactoryFix, a software startup that connects skilled workers and manufacturers with short-term staffing needs, is announcing today it reeled in a $1.5 million investment led by Capital Midwest Fund, a venture capital firm based near Milwaukee. As part of the deal, FactoryFix recently relocated its headquarters from Chicago to Madison, WI, according to Capital Midwest. (FactoryFix participated in Wisconsin-based Gener8tor’s startup accelerator program in Milwaukee last year, and it already had employees located in the Badger State before the Capital Midwest deal closed.)
Capital Midwest general partner Dan Einhorn says the deal was sparked by a conversation at a meeting of the Wisconsin Investment Syndication Committee. The committee is an informal group Einhorn formed more than two years ago to try and coax more meaningful conversations—and more deal-making—between Wisconsin’s growing number of venture capital firms, corporate VC arms, angel investors, and other startup backers in their networks, some of whom are located outside the state.
The FactoryFix investment is the first deal to materialize from the syndication committee’s quarterly meetings, Einhorn says.
Capital Midwest general partner Eli Blee-Goldman says he had previously heard of FactoryFix due to its participation in Gener8tor’s accelerator. However, Einhorn says Capital Midwest didn’t pursue the investment until Ryan Weber, managing partner of Minnesota-based Great North Labs, which had invested in FactoryFix, mentioned the startup during the syndication committee’s June meeting. Einhorn was intrigued, and he followed up with Weber afterward to gather more information about the startup and connect with FactoryFix’s team.
The $1.5 million investment isn’t a large amount of money, but Einhorn hopes it’s the start of a pattern. He thinks getting investors to sit down together and talk about interesting companies on their radar is a better way to encourage co-investing than typical methods, such as hallway conversations at business conferences or calling up venture firms out of the blue. The group doesn’t limit potential investment discussions to Wisconsin-based companies, Einhorn says. But he hopes the meetings will result in more startups being funded in Wisconsin—and eventually getting acquired for big sums or going public with hefty valuations. These events deliver investors a return on their money, which they could in turn use to fund more startups.
“In order for more capital to significantly be invested in [Wisconsin] and grow these funds, we’re going to need to have some nine-figure successes,” Einhorn says. “I think this increases the chances of that happening.”
The committee isn’t the only group working to spur collaboration among investors in a proactive and somewhat organized way. There are lots of angel investment networks located around the country, including in Wisconsin. And there are venture capital trade groups and other organizations whose priorities include convening venture firms and other investors to discuss deals. One example is the Western Association of Venture Capitalists—based in Menlo Park, CA, and founded in the 1960s—which claims to be the world’s oldest nonprofit VC group. Another example is the Mid-America Healthcare Investors Network, a 16-year-old nonprofit that aims to foster the creation of investment syndicates to back early-stage healthcare businesses; the group also encourages members to share expertise and network with one another. (Its 40-plus members include Capital Midwest and two Madison-based firms, Venture Investors and 30Ventures, according to the group’s website.)
Meanwhile, some VC alliances are now being facilitated by technology. Take AngelList, which enables angel investors and venture firms to form investment syndicates.
The Wisconsin syndication committee isn’t the only effort afoot to align the Badger State’s investment community. Last year, Venture Investors and other local firms revived the Wisconsin Venture Capital Association (WVCA), a nonprofit trade group that had been dormant for nine years. The association serves as a policy advocate, but it also works to bring Wisconsin startup investors together for networking and deal collaboration, similar to the syndication committee.
The WVCA and the Wisconsin syndication committee are stepping up their efforts amid hard times for the state’s startup community. For three years running, Wisconsin has sat at the bottom of a national ranking of startup activity by the Ewing Marion Kauffman Foundation. And Badger State startups take in a tiny sliver of the total amount of venture capital invested each year. Last year, Wisconsin accounted for just $116 million of the $84.2 billion invested nationwide, according to an annual report from PitchBook and the National Venture Capital Association.
Despite that grim backdrop, the number of investors located in the state has been growing in recent years. New venture firms have sprouted up, including 4490 Ventures in Madison and CSA Partners in Milwaukee. Local corporations and organizations such as Northwestern Mutual, Johnson Controls, and Advocate Aurora Health have launched venture funds. A state-sponsored program called the Badger Fund of Funds has led to the creation of several small venture funds around the state.
That’s a lot of new faces in Wisconsin’s startup investing community. Einhorn says he saw an opportunity to encourage them to more actively build relationships, understand peers’ strategies, share contacts from their networks, help each other vet deals, and team up on investments. The syndication committee has around 125 members from about 80 firms, mostly based in Wisconsin, according to a roster Einhorn shared with Xconomy.
Members include leaders from many of the state’s leading venture firms, including Venture Investors, the state’s largest and oldest VC firm; angel networks, such as N29 Capital Partners; the Wisconsin Economic Development Corp.; Gener8tor, a Wisconsin-based organization that runs programs that train and invest in startups; and various corporate venture groups. A typical syndication committee meeting draws between 20 and 60 people, according to Einhorn and other members. The meetings are usually held in conjunction with business conferences in cities such as Milwaukee, Madison, and Green Bay, WI, Einhorn says.
John Neis, executive managing director of Venture Investors, says he has attended two of the syndication committee meetings. He calls the initiative a “healthy thing” for Wisconsin, especially considering all the new funds popping up. Spontaneous networking opportunities are rarer in the state than in denser innovation hubs on the coasts, he adds.
“This is not Sand Hill Road,” Neis says, referring to the famed Silicon Valley road filled with VC firms. “We don’t go out to lunch and bump into our venture capital colleagues.”
The syndication committee meetings have helped N29 Capital Partners, a three-year-old angel investment group based in northern Wisconsin, get to know investors in other parts of the state, says co-founder Nicole Justa. The meetings haven’t led to any deals for N29 yet, but understanding the interests of other funds—particularly larger ones that might invest in N29’s portfolio companies at later stages—could pay dividends down the road.
“We don’t have a lot of VCs, if any, up in our area,” Justa says. “So, I need to travel and network with these people.”
As the syndication committee matures, one of the keys will be “to make sure it’s not creating groupthink” among the state’s investors, Neis says. He thinks one model that works well involves an investor showing up to a meeting with a signed term sheet, and asking for co-investors on the deal.
“It’s a little more difficult talking about deals that nobody’s committed to,” Neis says. “The goal here is collaboration, not collusion.”
Einhorn says the committee doesn’t have any codified rules. But everyone is expected to refrain from discussing deal specifics during the meetings, he says. And there will be unspecified “ramifications” if anyone attempts to “steal” a deal from another member, he adds.
But members aren’t required to discuss deals they have in the hopper. Einhorn says it’s been a challenge to get people to share, and he’s working with members to brainstorm ways to encourage people to open up more.
“I think it’s always going to be a challenge for people to share what their good deal flow is, until they get more comfortable with the actual goals of what this is,” Einhorn says.