Wisconsin's Need For Start-up Money For Companies

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Wisconsin's Need For Start-up Money For Companies

Premiere Date: 
February 14, 2014

Zac Schultz reports on the state of venture capital for growing companies in Wisconsin.

 

Episode Transcript: 

Scott Walker:

I'm bullish about the future. I’m excited about where we're at.

We talk about Wisconsin being open for business, that's not just because we put a sign up.

Frederica Freyberg:

Governor Scott Walker assures the Wisconsin Economic Development Association this week that the state is indeed open for business. Then, why are start-up entrepreneurs flying to California looking for money? I'm Frederica Freyberg. Tonight on "Here and Now," Zac Schultz reports on the supply and demand for venture capital in Wisconsin. His story goes from Milwaukee to the Silicon Valley. Also tonight, we'll hear excerpts from the State of the Tribes Address. Later, from the backroom to the front burner, a packed house this week to hear about a new way to draw state voting maps. And our "Capitol Insight" segment tonight explores why senate and assembly leadership probably didn't exchange Valentines today.

But first, despite Governor Walker's attempts to lure businesses from other states to Wisconsin, most experts agree the best way to grow jobs is to create them in-state. But some of the best start-up companies are looking to leave. "Here and Now"'s Zac Schultz explains why.  

Zac Schultz:

Every day nearly 100 people fly out of Dane County Regional Airport destined for San Francisco.

Sure, some of them are going on vacation. But a lot of them are like entrepreneur Matt Younkle, heading for Silicon Valley. They're searching for the venture capital needed to keep their start-up business going.

Matt Younkle:

I was just in San Francisco last week.

Zac Schultz:

Younkle is the CEO and cofounder of Murfie, a Madison tech company looking to store your old CDs and put the music on your own personal cloud on the internet.

Matt Younkle:

You have a perfect archive of your music collection. It's future-proof. You can stream it, download it, you can play it on all sorts of devices.

Zac Schultz:

He got the idea in 2010 after moving his boxed-up CDs. 

Matt Younkle:

I looked at those boxes and said, well, that’s a little bit strange. I don't even have a CD player anymore, so what am I doing with all this stuff?

Zac Schultz:

Murfie was born. Four years later, customers have sent them half a million CDs. They get unpacked, cataloged, uploaded to the cloud and then stored in the basement.

Matt Younkle:

So there's Dave Matthew’s “Crash.” Go figure. We have a lot of those. Murfie is about your own music that you own in your own private cloud on the network.

Zac Schultz:

Murfie charges $1 a CD, but as a start-up it needed more money to keep the business growing.

Matt Younkle:

We raised $1.4 million.

Zac Schultz:

Murfie raised another $1.7 million in 2013. But Younkle was in San Francisco recently looking for venture capital, the big bucks.

Matt Younkle:

If you really need sort of that growth capital, then you don't have as many options because there aren't a lot of VCs with offices around the capitol square.

Zac Schultz:

Let's stop there and explain just what venture capital is and why the need for it is driving some of the best small companies out of Wisconsin. It all begins with a great idea or a new way of doing things. To make it happen, you need what’s called seed money, which usually comes from the entrepreneur, sometimes by mortgaging their home or maxing out their credit cards. The seed money grows the idea into a business or at least proves the idea will work. To keep going, the company needs more money, which comes from an angel investor. They're called that because they are a company's savior. An angel can write a big check, anywhere from $100,000 to a million dollars. In exchange, the angel becomes part owner. As the start-up keeps meeting goals and growing, eventually it needs more money than the angels can provide. That next level of money is called venture capital. It comes from firms that invest other people's money in start-ups, hoping for a huge payday a few years down the road. Unfortunately, there's not enough venture capital in Wisconsin, and the start-up often has to look to San Francisco or Boston to get funding.

Zach Brandon:

There are investors who will say, I'll invest in you, but I want you to be near me.

Zac Schultz:

Zach Brandon is with the Greater Madison Chamber of Commerce. Also with the Wisconsin Angel Network, which helps match angels investors with start-ups.

Zach Brandon:

We've grown a lot of companies to the point where they need venture capital.

Zac Schultz:

Tax breaks passed in 2005 helped create more angel investors. And while that helped local start-ups thrive, they now need venture capital.

Zach Brandon:

You have a pooling of these companies that are ready to go to the next level. If they can't find it, they'll go somewhere else.

Zac Schultz:

When companies like Murfie head to the coast to raise money, the expectation is they'll relocate there.

Matt Younkle:

We got asked that every meeting. It wasn't a question of if, like, are you guys going to move to Boston? Sort of like, when are you moving out here? It was just assumed.

Zac Schultz:

It's not an unreasonable expectation. Venture capital firms aren't banks. They don't just lend money and wait for you to pay interest.

John Neis:

It is actually rolling up your sleeves and getting actively involved. We're typically going onto the boards of directors.

Zac Schultz:

John Neis is the managing director at Venture Investors, one of the only venture capital firms in Wisconsin. They only make money when the start-up succeeds.

John Neis:

I like being available. If they want to call me up and say, hey, I want you to meet somebody. Can you come over and join us for a meeting tomorrow. I'd like your input on this.

Zac Schultz:

Wisconsin has a history of seeing start-ups grow big elsewhere. A decade ago, this brick building on Silver Spring Drive just outside Milwaukee was home to a small tech company that had a big idea.

Eric Dresselhuys:

How could you network all the devices across the grid--?

Zac Schultz:

Eric Dresselhuys was the cofounder, and says they were struggling to come up with a name.

Eric Dresselhuys:

They said, you know, when you get to be a big company, they name the street after you. So we adopted the name of the street we were on as the name of the company. That was the day we became Silver Spring Networks.

Zac Schultz:

Silver Spring Networks raised some angel money locally, but when it came time to raise venture capital, it hit a wall.

Eric Dresselhuys:

There wasn't a culture for venture capital, certainly at the scales we needed to drive our business.

Zac Schultz:

Dresselhuys says they needed between $10 million and $20 million. So they headed to California.

Eric Dresselhuys:

We were able to find it on relatively short notice.

Zac Schultz:

Additional venture capital raised last year came even faster.

Eric Dresselhuys:

We were able to raise $150 million in about a month.

Announcer:

Silver Spring Networks, building tomorrow's new energy-efficient grid today.

Zac Schultz:

Today Silver Spring Networks is a leader in smart-grid technology. It does business on five continents and employs 650 people. The only connection to Wisconsin is Eric's degree from the University of Wisconsin, and his love for the Packers.

Eric Dresselhuys:

We don't have an office or presence in Wisconsin today.

Zac Schultz:

If they'd been able to raise enough venture capital in Wisconsin, there's a good chance Silver Spring Networks would still be located on Silver Spring Drive, and not just because of the street sign or the chance for free rent, but because once a company and its employees put down roots, it's awfully hard to get them to move.

Eric Dresselhuys:

And that becomes really the most valuable asset for the company. So moving those people is a difficult proposition.

Announcer:

Meet the Snowshoe Stamp, a secure, intuitive and inexpensive method of authenticating interactions.

Zac Schultz:

So what's the next big thing to leave Wisconsin? It could be a company called Snowshoe.

Claus Moberg:

I would love to still be living in Madison.

Zac Schultz:

Claus Moberg is the CEO.

He won a business plan competition while getting his Ph.D. at UW-Madison. While working on that business plan, he ran into a roadblock.

Claus Moberg:

We ended up inventing our current technology, the Snowshoe Stamp, to solve that problem, and then very quickly realized that we had invented something that had broad application outside of that specific niche.

Zac Schultz:

The Stamp is five points that touch on your mobile phone, creating a unique signature.

Sheradyn Mikul:

Simply by moving the points around, we can create different sort of identifiers.

Zac Schultz:

Imagine this Stamp replacing the old loyalty card at a coffee shop or a gamer buying a toy with the Stamp inside and then using it to activate a new weapon in a game. The Stamps are made with a 3D printer in less than an hour.

Sheradyn Mikul:

It's inexpensive, requires no power, can be easily replaced.

Zac Schultz:

Snowshoe raised $1 million in seed money in Wisconsin, but CEO Moberg says those angel investors couldn't help after that.

Claus Moberg:

The seed investors that funded this company at its earliest stages did not have significant connections into the next time stage of capital.

Zac Schultz:

Snowshoe opened an office in San Francisco to find venture capital, but still has staff in Madison for now.

Claus Moberg:

And I can't tell you where we're going to be two, three, four years from now.

Zac Schultz:

Snowshoe's Madison office is in this coworking space just down the hall from John Neis and Venture Investors, who declined to invest in them.

John Neis:

We see several hundred business plans a year and invest in a handful of them.

Zac Schultz:

One company Venture Investors did select is Nextt.

Mark McGuire:

The way you connect on Nextt isn't by sharing things you've already done. It's to connect on things you want to do together in the future.

Zac Schultz:

CEO Mark McGuire and his friend, Emmanuel, realized most social media sites did a poor job of helping set up future events.

Mark McGuire:

He was actually having some problems scheduling pickup soccer games. He's a software engineer, and as a good engineer he’s thinking, there's got to be a better way to socially organize.

Zac Schultz:

Nextt allows you to propose an event to friends, something as small as drinks or as big as a vacation.

Mark McGuire:

It’s all that messy kind of pre-planning of, you know, I have this general idea. Or, hey, let's get together tomorrow night. You don't have a place and good network to work out those messy details in a fun and kind of easy fashion.

Zac Schultz:

The product is free, and they're hoping ad revenue will eventually create a profit. But for now they're relying on angel investments. McGuire just closed on a seed round of funding of $750,000 in December, all of it from Wisconsin.

Mark McGuire:

Looking at Nextt, I feel like, if anything, the local climate here and the investment climate is even better than it has been in previous years.

Matt Younkle:

So we probably ended up with a couple thousand CDs coming in the door today.

Zac Schultz:

But like Matt Younkle at murfie, it's a little easier for Mark McGuire to raise money in Wisconsin. Both men have what’s known as a successful exit in their history, meaning they've had start-up companies become profitable for their investors.

John Neis:

Our goal with our companies is to grow them very rapidly, either get them public or have them acquired by big companies.

Zac Schultz:

Notice the one positive outcome venture capitalists are not looking for, slow, steady growth. In fact, jobs are not a priority at all.

Chris Prestigiacomo:

For us it's investment returns first. And out of that, if there are jobs created or jobs retained, you know, that's a benefit.

Zac Schultz:

Chris Prestigiacomo manages regional venture capitol for the state of Wisconsin investment board, which managed the state pension fund.  He says, even if no long-term jobs are created, seeing a start-up get bought-out has a positive impact in the state.

Chris Prestigiacomo:

As companies exit, dollars are pushed out in the community, that only creates momentum, you know,  where more dollars are put back to work to invest in new companies.

Zac Schultz:

Zac Brandon says, eventually a few of those start-ups will become huge employers.  

Zach Brandon:

If we can keep it long enough, these companies, when they scale, they scale big. And they create lots of jobs

Zac Schultz:

While everyone agrees Wisconsin needs more venture capital, the future is not as bleak as it once was.

Chris Prestigiacomo:

There's some momentum building and I'm optimistic on the future of the state.  

Zac Schultz:

And the hope is that more of those flights will return from the coast with a young CEO having obtained the funding needed to grow their company here in Wisconsin. 


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