The Cheese State Wants More Cheddar

The state of Wisconsin is known for its cheese, beer, the home of the Green Bay Packers and Milwaukee Brewers.

While these are great things, some people are trying to put the Badger State on the map for one more reason: it’s a good place to invest. Legislators, entrepreneurs and VCs alike believe that Wisconsin has a lot more to offer than initially meets the eye. What’s more, VCs should start to take notice if they are interested in finding solid deal flow in a part of the country that is less picked over than other regions.

From the beginning of 2011 through the second half of 2012, only 22 venture investments have been made in the state for a total of $106 million, according to Thomson Reuters data. What’s more, since the beginning of 2007, VCs have put only $429 million into companies located in Wisconsin, paling in comparison to the nearby hotbed of Chicago, which has seen VCs put $2.9 billion to work since the beginning of 2007. Additionally, there are only about 20 VC firms located in Wisconsin.

Venture Investors, one of the few VC firms that focuses its investing efforts on Wisconsin, reports that the state makes up 1.86% of the national population and 2.5% of the national academic spending, but brings in .0001% of venture spending.

The little amount of interest the state has garnered from VCs would maybe lead people to believe that there’s not much innovation going on in the state, but that’s not true.

The University of Wisconsin Madison spends more than $1 billion annually on research and development. For the past 20 years it has been named one of the top five universities, including private ones, in terms of R&D spending nationwide. Additionally, Wisconsin holds 2.11% of the nation’s patent filings.

“UW Madison is a huge research engine and there is a natural pool of startup activity that comes from it, not to mention the large amount of intellectual property it develops,” says Tom Still, president of the Wisconsin Technology Council, an independent nonprofit that counsels Gov. Scott Walker and the Wisconsin legislature on science and technology developments in the state.

Venture Investors is one of the more prominent VCs in the state, and it has been sourcing deals through UW Madison for a while. The firm sources deals from the University of Michigan, as well.

“Given that two of the largest universities are in our backyard, we do a disproportionate number of deals from there,” says John Neis, a managing director with Venture Investors, which raised $118 million in 2006 to focus exclusively on investments in the Midwest.

The Madison-based firm has reportedly raised $70 million for its fifth venture fund.

If Venture Investors succeeds in hitting its $150 million target, it would be the biggest venture capital fund ever raised by a Wisconsin-based company. Its fourth fund raised $115 million and invested in TomoTherapy Inc. and NimbleGen Systems, among others.

“That could be a plus for our rate of return. There are so many deals here that don’t even see the light of day.”

John Neis

Managing Director

Venture Investors

In addition to universities, Wisconsin has always had a strong entrepreneurial spirit. Oshkosh Corp., Harley Davidson, Kohler, Kohl’s and Kimberly-Clarke all hail from Wisconsin. Also, Milwaukee is becoming known as a place for IT development, not just as a beer distributor. With five universities in the area and a long history in manufacturing, companies are starting to flock to the city. There are new companies designing mobile apps, media companies and medical device companies sprouting up.

But trying to fix the disconnect between the amount of new ideas and innovation and the lack of VC funding available to companies in the state, legislators have tried to entice venture investors  to take notice. For the past couple of years there has been a bill on the table that would ultimately inject some capital into venture firms investing in the state. The hope is it will generate buzz and attract more investors to the state. Unfortunately, as a result of partisan politics, the bill has found it impossible to pass.

The state already worked for the past seven years to build the infrastructure that would lead to more venture investing. It developed an angel network through the use of tax credits, which has led to having 25 angel investors in the state. Yet, there’s not enough VC available to invest when the companies are ready for a Series A round of funding. That’s where the venture capital bill would come in to play. However politics as to who would get the state’s business continues to get in the way.

That may be about to change.

“Next year is when something will be deployed,” Still says. “Recasting of some existing tax credits and monetizing those could be the answer. Either way, something will get done in 2013.”

Stephen Eihorn, a principal with the Capital Midwest Fund, which has $40 million under management, is also expecting something to happen with the venture capital bill in 2013.

He says there are three goals:

1)     To create jobs;

2)     Support the entrepreneurs of the state through investments by Wisconsin-based venture funds; and

3)     Provide taxpayers with a fair deal.

“It should not be difficult to produce a bill with these results,” Eihorn says. “And I believe it will happen in 2013 with bipartisan support.”

While any support will help, the reality is that the bill will not bring too much money into the state. The bill is expected to put $100 million to $200 million into VCs investing in the state over a five-year period, which doesn’t equal a lot of capital per firm. However, it’s a start.

Even VCs like Venture Investors, which  have enjoyed a deal making environment with little competition, would like to see more VCs come into the state.

“There’s so much opportunity,” Neis says. “We have never found ourselves in a position where there was a deal that we wanted to be in and there wasn’t room at the table, but there are deals we pass on because we already own a competitor or it’s not in our sweet spot. We can’t do every deal.”

Also, Neis says that having co-investors would make it easier to build a syndicate.

“That could be a plus for our rate of return,” Neis says. “There are so many deals here that don’t even see the light of day.”

Danielle Fugazy is a New York-based contributor. She can be reached at