After 33 Exits in 5 Years, WI Seeks “More and Bigger” Startup Deals

Xconomy Wisconsin — 

[Updated 1/22/19, 3:10 pm CT. See below.] When Propeller Health’s founders initially tried to raise funding for their new healthcare technology venture, many of the investors they spoke with were hesitant to take the risk.

It was the early part of this decade, and Propeller was navigating the FDA’s regulatory process for medical devices. The company believed it had a chance to become one of the first to earn market clearance from the agency for a software product, says Propeller co-founder and CEO David Van Sickle. Propeller’s idea for a so-called “digital therapeutic” involved equipping prescription inhalers with sensors and an Internet connection. That way, patients with asthma or chronic obstructive pulmonary disease could more easily track and analyze their inhaler use on an accompanying mobile app and other software.

Startups whose products have a hardware component often face higher costs and unique challenges, and at the time, investors weren’t sure how the FDA would approach the review of Propeller’s product, Van Sickle says.

“It was a very early time for digital health,” he recalls in a phone interview last week. “There was a lot more perceived risk around what we were trying to do. … It took work to find investors who were willing to bet on that approach and [our] team to get that done.”

Van Sickle says Madison, WI-based Propeller was able to score outside seed money from Wisconsin angel investor Jeff Rusinow; Mitch Kapor, the Bay Area-based startup investor who founded tech firm Lotus; and retail pharmacy chain Walgreens. Their early money helped Propeller develop and test its technology. In 2012, it gained FDA clearance to begin selling its first product.

Over the next six years, Propeller brought more respiratory disease products to market, grew to 90 full-time employees, upped its total venture capital haul to nearly $70 million (the vast majority of it from backers located outside Wisconsin), and became Wisconsin’s most valuable VC-backed company, according to an October report from Seattle-based PitchBook.

In December, the efforts of Propeller’s team—and the confidence of its investors—were rewarded. The company inked a $225 million agreement to be acquired by San Diego-based medical device giant ResMed (NYSE: RMD).

The deal was a notch in the belt for both the digital health sector as well as for Wisconsin’s innovation community. It was the largest reported exit for a Badger State startup since 2011, according to an Xconomy analysis based on data from PitchBook, the National Venture Capital Association, the Wisconsin Technology Council, news articles, and interviews with investors and local business leaders.

Propeller’s sale is one of at least 33 significant exits by Wisconsin companies over the past five years, according to our analysis. We tracked mergers, acquisitions, and initial public stock offerings involving both venture-backed companies and firms that didn’t raise outside capital, spanning high-tech sectors such as software, pharmaceuticals, medical devices, and clean energy. (See full list below.)

Propeller’s experience counters the narrative that entrepreneurs can’t build a venture-backed tech company in Wisconsin and have a successful exit. Van Sickle says he considers having the company’s headquarters in Madison to be an asset, citing the talent coming from the University of Wisconsin-Madison and the area’s healthcare sector, and the “cultural fit” of the local workforce. (Propeller also has a San Francisco office that lets it draw from the Bay Area’s larger talent pool.)

Van Sickle says Propeller tried to raise funding from Wisconsin-based venture capital firms, but it didn’t happen “for whatever historical reasons”; he wouldn’t go into more detail. Although “it would’ve been great” to have more financial backing from Wisconsin investors, Van Sickle isn’t dwelling on it. But he does hope that Propeller’s acquisition might spur more risk-taking by local startup investors, at least in the healthcare sector.

“I hope that it will encourage local investors to take seriously and to take chances on entrepreneurs and businesses that are focused on healthcare because I think Madison has a unique community and something really significant to offer,” Van Sickle says.

Other significant Wisconsin exits in the past five years include the sale of Madison-based human skin tissue maker Stratatech to U.K.-based Mallinckrodt Pharmaceuticals (NYSE: MNK) for $76 million in cash, a deal that could grow to $197 million; and the $75 million purchase of Agro BioSciences, a Milwaukee-area developer of probiotics for agricultural products, by Church & Dwight (NYSE: CHD), the parent company of Arm & Hammer Animal Nutrition. The Agro BioSciences deal value could increase to $100 million if the company meets certain performance benchmarks. That deal is also notable because the company, founded in 2013, didn’t raise venture capital, says co-founder Tom Rehberger. It was funded primarily with proceeds from the 2008 sale of his last business, Pewaukee, WI-based Agtech Products, for $42 million to Danisco, now part of DuPont.

The 33 Wisconsin exits from 2014 through 2018 are almost double the number of exits Xconomy found in a similar analysis conducted at the end of 2013. (That report actually looked at data from the previous six years, which included two big deals in 2008: the $580 million sale of Third Wave Technologies and the $125 million sale of Mirus Bio. Excluding those two exits leaves 17 major deals from 2009 through 2013. For the purposes of this article, we’re comparing five-year periods, so 2008 is left out.)

Despite an increase in the number of exits from 2014 through 2018, their reported value was lower than during the previous five years, which saw at least … Next Page »

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