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 three $200 million-plus deals. Propeller was the only exit from the past five years to exceed $200 million, we found. One key caveat: most of the purchase prices we’ve tracked over the past decade weren’t disclosed, so there may have been more big deals that occurred.

“I think that’s a big issue for Wisconsin companies,” says Bram Daelemans, director of investor networks at the Madison-based Wisconsin Technology Council, a nonprofit that runs programs to connect investors and entrepreneurs, and lobbies state lawmakers on science, technology, and workforce issues. “We don’t brag enough about our exits when they do happen.”

The data matter because Wisconsin leaders have ramped up public and private sector resources for entrepreneurs in recent years. These efforts include the launch of more venture capital firms, some seeded with money from a new state-backed fund of funds program; startup accelerators and incubators; and entrepreneurial networking groups. Exits are a common—and highly visible—measuring stick for such initiatives. They’re the desired outcome for venture capital-backed startups, they can raise the profile of a local startup scene, and the wealth they create can deepen the pool of local entrepreneurs and investors.

Although Wisconsin’s exit activity doesn’t hold a candle to places like Silicon Valley and Boston, its trajectory is worth following. As coastal innovation hubs struggle with talent wars and skyrocketing real estate prices, there’s growing talk that America’s heartland could generate the country’s next wave of thriving innovation hubs.

The exit data and other reports indicate that by many metrics of startup success, Wisconsin is playing catch-up. Locals are probably tired of hearing about it, but it’s hard to ignore three consecutive years sitting at the bottom of the Ewing Marion Kauffman Foundation’s national ranking of startup activity.

Nevertheless, there are signs of progress. Venture capital investments in Wisconsin companies, like the rest of the country, are generally trending upward: total annual deal value surpassed $200 million for the first time in 2014 and remained above that mark in each of the following three years, according to Wisconsin Technology Council data. The state kept that streak going in 2018, per the latest data from PitchBook and the National Venture Capital Association. By comparison, annual VC investments in the state dwelled below $100 million from 2003 through 2009, then rose above $100 million for the next four years, according to Tech Council research. The number of startup investment deals has also, for the most part, been on the rise in recent years, Tech Council data show.

As for recent exit trends, business leaders Xconomy spoke with found reasons to feel encouraged. But there’s still plenty of room for improvement, they say.

“Both Milwaukee and Madison could stand to step up their game,” says Kathleen Gallagher, executive director of the nonprofit Milwaukee Institute, which aims to help advance the region’s high-tech business community. “We need more and bigger exits, preferably with some IPOs sprinkled in. The question, of course, is how best to drive connectivity between and support our most promising entrepreneurs.”

There was only one initial public offering by a Wisconsin high-tech company between 2014 and 2018: Brookfield-based Connecture, which develops Web-based software to run online health insurance marketplaces, raised $53 million in its 2014 IPO. In the years after, Connecture struggled financially, and in April it was taken private again by private equity firm Francisco Partners.

Gallagher, a former Milwaukee Journal Sentinel reporter who covered startups and venture capital in the state, thinks it’s notable that 13 of the 33 exits over the past five years came from the Milwaukee area, compared with 19 from the Madison area. (The lone deal from outside those two areas was the sale of Green Bay-based IOD to HealthPort in 2015). That’s a better performance by Milwaukee than some might have expected, given the perception that Madison has a much more robust startup scene.

“What’s most surprising here is that Milwaukee deals represent nearly 40 percent of the total over the last five years,” Gallagher says. “That’s not the narrative we’re used to hearing.”

Wisconsin has developed a “much more vibrant ecosystem overall than has ever existed in the past,” argues Tom Still, president of the Wisconsin Technology Council.

“I think back to when the Tech Council Investors Network was founded as the Wisconsin Angel Network, which was ’05,” Still says. “There were literally, like, a half dozen funds or networks that we could pinpoint. Today, there are about three dozen.”

Still says he’s not disappointed by the state’s recent exit activity.

“I think this has always been a matter of delayed reaction,” Still says. “Stuff that happened in the early 2000s to 2010 or so didn’t immediately pay off. It was more of an incremental process. And I expect that’s been the same through the last five years.”

Troy Vosseller also calls for patience. He’s a co-founder of Wisconsin-based Gener8tor, which runs a network of startup accelerator programs in the Midwest and beyond, some of which make equity investments in young companies. Founded in 2012, Gener8tor is part of Wisconsin’s recent wave of venture investors and startup support organizations. Vosseller says three of the local startups acquired during the past five years participated in a Gener8tor program: Modern Movement, Shift Savings, and Lactic Solutions.

“The good news is that we as a community have made some good investments” in resources for startups, Vosseller says, citing the VC firm 4490 Ventures in Madison and newer corporate venture groups such as Northwestern Mutual’s Cream City Venture Capital. “But I think we still need more time for that to bear fruit.”

The questions are how long it will take for more success stories to materialize, and what Wisconsin will reap from them. And if the stats don’t improve as much as Wisconsin’s business leaders and politicians hope, what levers would be left for them to pull? These are complex questions that deserve healthy debate, and we won’t try to answer them here. But it’s a safe bet many in the state’s early-stage business community will be watching how the discussion plays out in the coming months. Democrat Tony Evers, who recently took over as governor after eight years of Republican Scott Walker at the helm, has put discussion of entrepreneurship and innovation initiatives on his agenda in the first month on the job. But it’s unclear what policies he or the Republican-controlled legislature might propose—and whether they’d agree on them.

Politics aside, the startup environment in Wisconsin is “maturing a little bit,” the Tech Council’s Daelemans claims. “We just have to make sure that we keep feeding the funnel.”

Below are Wisconsin’s 33 exits from the past five years. To clarify, we didn’t include deals in which we knew it wasn’t the first time the company changed hands. Those criteria ruled out the reported $500 million sale of OnCourse Learning to Bertelsmann last year, for example; OnCourse had been acquired at least two other times. And we didn’t include deals that didn’t involve a sale of the majority of assets, so PerBlue’s deal with GREE International Entertainment in 2016 didn’t make the list.

If we missed any, please e-mail jengel@xconomy.com. [Editor’s note: This report was updated to include the purchase price of MdotLabs and the acquisition of Vonlay.]

Wisconsin Exits 2014-2018

CompanyAcquirerDeal ValueYearHeadquartersSector
NovaShieldBullGuardUndisclosed2014MadisonCybersecurity
Cedarburg Hauser PharmaceuticalsAlbany Molecular Research Inc. (AMRI)$41M2014GraftonLife Sciences
VonlayHuron Consulting Group$34.5M2014MadisonDigital Health
Idle Free SystemsPhillips & Temro IndustriesUndisclosed2014MadisonCleantech
MdotLabsComScore$4.5M2014MadisonCybersecurity
HopsterInmarUndisclosed2014MiddletonSoftware
ConnectureIPO$53M2014BrookfieldDigital Health
VidmakerYouTubeUndisclosed2014MadisonSoftware
TermSyncEskerUndisclosed2015FitchburgFintech
IODHealthPortUndisclosed2015Green BayDigital Health
TeraMedicaFujifilm Medical Systems U.S.A.Undisclosed2015WauwatosaDigital Health
ShoutletSpredfastUndisclosed2015MadisonSoftware
Modern MovementNautilusUndisclosed2015MadisonFitness Devices
XolveUndisclosedUndisclosed2016MiddletonMaterials Science
NeuWave MedicalEthicon (Johnson & Johnson subsidiary)Undisclosed2016MadisonMedical Devices
AlfalightGooch & Housego$1.3M2016MadisonLaser Technology
StratatechMallinckrodt Pharmaceuticals$76M; up to $197M2016MadisonLife Sciences
VirentTesoroUndisclosed2016MadisonCleantech
PatientCareDirectPath$8.5M2017MilwaukeeHealthcare
Aquarius TechnologiesManagementUndisclosed2017Port WashingtonWastewater Treatment
Agro BioSciencesChurch & Dwight$75M; up to $100M2017WauwatosaAgricultural Science
Lactic SolutionsLallemand Biofuels & Distilled SpiritsUndisclosed2017MadisonSynthetic Biology, Energy
GenAlpha TechnologiesShore Points Capital, Greyrock Capital GroupUndisclosed2017BrookfieldSoftware
HarQenStuart Olsten (investor & board member)Undisclosed2017BrookfieldSoftware
LucigenLGCUndisclosed2018MiddletonLife Sciences
Cayen SystemsTransACT CommunicationsUndisclosed2018MilwaukeeEdtech
Behold.AIEntrepreneur Simon RasalinghamUndisclosed2018MadisonDigital Health
FishidyFlir SystemsUndisclosed2018MadisonSoftware
Shift SavingsSafetyNet (CUNA Mutual Group subsidiary)Undisclosed2018DelafieldFintech
Adorable8th LightUndisclosed2018MadisonSoftware
True ProcessBaxterUndisclosed2018GlendaleDigital Health
MCT DigitalGerber Technology$3.5M+2018New BerlinIndustrial Tech
Dynamis SoftwareApplied SystemsUndisclosed2018West AllisSoftware
Propeller HealthResMed$225M2018MadisonDigital Health

Sources: PitchBook, Wisconsin Technology Council, press releases, news articles, interviews

[Top photo by Flickr user Pictures of Money used via a Creative Commons license.]