Crossing the valley of death

Young companies bridge challenging chasm between seed and series A funding

Alana Platt waits in a line at the back of an auditorium at the Monona Terrace convention center in Madison.

When it’s her turn, Platt takes her place in the spotlight, in front of a red curtain, and presents the Whitefish Bay-based company she’s been working on for the past year-and-a-half—a fundraising management tool for school districts called Classmunity.

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There are 50.4 million students in the U.S. and it takes about $11,600 per year to educate each one. Many schools have to fundraise to meet these costs, but fundraising is disjointed and prone to fraud, she says.

“If you can think of a fundraiser, Classmunity can help the school manage it,” Platt says. “We bring modern financial technology to a sector that has been doing things pretty much the same way for decades.”

She presents the company’s growth path and then she gets to the reason she’s making this five-minute pitch:

“We’re looking to raise $500,000 to bring on more full-time staff members to help accelerate the growth of our platform and bring on more customers.”

Walking the tightrope

Classmunity is raising its seed funding round, the first institutional capital the company has sought out since its foundation. It is just moving beyond friends, family and grants into real cash.

Once the company gets its seed round and grows larger, it will face the monumental challenge of raising an even larger sum – usually $2 million to $6 million – from venture capitalists for the series A round. Several Wisconsin entrepreneurship experts call the gap between seed capital and venture capital the “valley of death” because crossing it successfully can be so taxing.

The “valley of death” is a particularly big problem for Wisconsin’s economy.

Milwaukee ranks 39th among the 40 largest metropolitan areas in the country when it comes to startup activity, a set of economic indicators measuring new business creation, while Wisconsin ranks dead last among the 25 largest states, according to the latest Kauffman Index of Startup Activity from the Ewing Marion Kauffman Foundation. Startups are a vital source of new job creation. And the state’s lack of new business formation could translate to a less active venture capital community.

There are only a handful of venture capital investors in the state, and three major names pop up again and again: Mequon-based Capital Midwest Fund, Baird Capital (with offices in Milwaukee and Chicago), and Madison-based Venture Investors.

The East and West Coasts have the lion’s share of venture capital investment in the country. California had $33.9 billion in venture capital investment in 2015, according to the National Venture Capital Association. Wisconsin, on the other hand, only attracted $88.9 million in venture capital investment last year.

However, some cities in the middle of the country, like Chicago and Dallas, have managed to put themselves on the map, according to a study by the University of Toronto’s Martin Prosperity Institute.

“There needs to be more venture capital than currently exists in Wisconsin in order to compete in the knowledge economy,” said Joe Kirgues, managing director of Milwaukee-based startup accelerator gener8tor. “We need more engineers building more products and we lack the infrastructure that facilitates people taking the leap into entrepreneurship. In my opinion, venture capital is a lagging indicator. The leading indicator will be the number of angels in Milwaukee and the broader region.”

“We lack that add-on capital,” said Dan Steininger, president of Milwaukee-based entrepreneurship assistance organization BizStarts Inc. “There’s just not enough for us, no question about it. We don’t even have enough angel capital, let alone add-on capital.”

“We can use more capital, not just on the angel side, but between that angel and that later stage, there is a huge gap,” said Todd Sobotka, investment manager at BrightStar Wisconsin Foundation Inc., a Milwaukee-based venture philanthropy firm. “Wisconsin as a whole needs more capital and that was the focus of BrightStar. It’s not for lack of wealth. We do have a lot of wealth here but it’s just our culture – we just don’t invest in early stage companies.”

“Obviously we have a lot of opportunity for growth, whether it comes to entrepreneurship or investment,” said Bram Daelemans, director of investor networks at the Wisconsin Technology Council. “It’s even something we put in our presentations and refer to as the ‘valley of death,’ but I think it’s getting better. If you look at the Badger Fund of Funds and some other funds that are getting started, I think people are making an effort to bridge that gap.”

Alana Platt presents her Whitefish Bay company, Classmunity, to potential investors at the 2016 Early Stage Symposium.

Alana Platt presents her Whitefish Bay company, Classmunity, to potential investors at the 2016 Early Stage Symposium.

Classmunity was one of five Milwaukee-area companies pitching themselves at the Wisconsin Technology Council’s 2016 Early Stage Symposium. Startups from across the state and nation each got a five-minute window to tell investors about the company, what it does, its addressable market, the investment opportunity, how much it has raised so far and its customers. They practiced and honed their pitches with the WTC to get them ready for an audience of investors from Wisconsin and the wider Midwest.

The other southeastern Wisconsin firms were Menomonee Falls-based NewOz Big Data Analytics, which created a system to decrease logistics costs for corporations; Milwaukee-based Metria, which innovated a single-camera 3D optical motion tracking technology; Waukesha-based Intellivisit, which developed an artificial intelligence that integrates health care with daily life; and West Bend-based Spaulding Medical, which aims to improve cardiac care accessibility.

Making the pitches were entrepreneurs and early employees at these fledgling firms, most of which are working on their series A funding rounds.

Intellivisit, founded in 2014, has tested its virtual health care technology on more than 1,000 patients and has brought two physician groups on board as customers.

The company has grown to eight employees and has raised a total of $2 million from two angel capital rounds. It’s time to raise a series A round, so it can scale and deploy its technology to other provider groups, hire more employees and move faster, said Drew Palin, chief medical officer. Intellivisit is currently crossing the valley of death.

“We need the money. VCs want a good investment,” said Palin, who has helped start four companies. “So you try to work to get to a common ground. It’s risky for them if they go too early and it’s hard for us to grow if we go too late.”

Intellivisit is aiming to raise between $4 million and $6 million, and is just getting started pitching venture capitalists. Its founders have drawn upon their networks and narrowed down a few investment firms to pitch. One or two are in Milwaukee, four or five are in Chicago and a few are on the East and West Coasts.

“Our experience is the Midwest, it’s a little more thoughtful, a little more friendly, a little more Midwest nice,” Palin said. “But you still have to hit the right milestones, have the right market opportunities, present the right team to get anybody’s interest.”

It could be challenging to raise up to $6 million from Wisconsin investors, though, since angel groups aren’t set up to give that amount of money. The state’s entrepreneurship ecosystem has adjusted as more angel groups entered the scene over the past 10 years, Palin said.

“Angels and angel groups have kind of taken the place of venture capital,” he said. “They’re doing the earlier, high-risk investments. And the VCs have moved up the chain to kind of be more like private equity, where they’re doing later investments.”

If some of the companies getting seed capital from the angel networks achieve successful exits, that could attract and drive additional venture capital investments in the state, Palin said.

Risky business

When a new company is formed, the founder usually first raises money from friends and family, crowdfunding or a private investor.

After that initial seed capital, the company moves on to the institutional investors. Among those are angel investors, groups of wealthy individuals who make small investments of about $1 million to $2 million to help new companies develop their products, find customers and move the product to market.

Once the product is selling and the company is generating revenue and has a “story to tell,” it looks for venture capital, said Steininger. This is when it can begin raising a series A round. The space between angel capital and venture capital can feel like a yawning canyon, especially in Wisconsin.

Venture capital is invested in companies with high growth potential and frequently jumpstarts job creation and economic growth.

The Wisconsin Technology Council helped facilitate 380 meetings between investors and startups during a “speed dating” event at the Early Stage Symposium.

“I know this is kind of a small sample and a small snapshot, but 70 companies had at least one meeting,” Daelemans said. “There’s a lot of excitement and there’s a lot of activity in the state and investors are looking for that next investment opportunity. So if it doesn’t happen, is it because we’re not connecting the right investors to the right entrepreneurs or is it because the ideas aren’t that good?”

Paul Royal, founder of Menomonee Falls startup NewOz Big Data Analytics, presenting to potential investors at the Early Stage Symposium.

Paul Royal, founder of Menomonee Falls startup NewOz Big Data Analytics, presenting to potential investors at the Early Stage Symposium.

Part of the reason the valley of death is such a big problem in Wisconsin is the state’s conservative cultural roots, Sobotka said.

“We’d like to see Milwaukee step up more,” he said. “It’s old German culture: we’re risk averse, frugal, don’t necessarily do things that we’re not comfortable with, and stay inside the box.”

“What’s happening in default (without enough venture capital) is we go back to the angel investors and say, ‘Hey, we’ve got a million dollars in; we need to raise another million,’” said John Torinus, a general partner in Milwaukee-based Wisconsin Super Angel Fund. “It’s looking good. Would you double down? That’s a little tough to do because this could be a round for $2 million, $3 million, and it’s pretty hard to get that kind of money out of angels.”

Torinus’ angel fund invests mainly in Wisconsin businesses, since it has the proximity to connect those companies to investors, banks, customers, professional services providers and other resources, he said. There is also plenty of opportunity to get in on the ground floor of Wisconsin businesses.

“It’s sort of a paradox,” he said. “Because there’s so few players here, it’s a good place for the players who are here. We don’t go priding ourselves on how many deals we turn down. We like to do deals and we like to do Wisconsin deals.

“I wouldn’t feel too comfortable starting a company in Indianapolis. We’re touching and feeling and we’re interacting with these guys every week. Local money, in a way, is better than far away money.”

Seeding growth

In September, Milwaukee entrepreneur Bryant Randall wrote a LinkedIn post titled “Why Milwaukee sucks for startups.”

Randall doesn’t pull any punches while telling the story of his unsuccessful attempts to raise seed and angel capital.

He talked to accelerators, he pitched a private bank, he jumped through hoops at government lenders, he presented to angel investors. But no one would givehim a dime for his startup, Northern Elements, which sells modern, bioethanol fuel-burning furniture online.

Randall previously started an audio/video resequencing agency called Reverse Enginears out of his Milwaukee bedroom. He worked with companies like Google, Showtime and Microsoft. But this is the first time he’s had to raise money.

“It’s been really bad,” he said. “I used to work out west a lot with Disney and Pixar, a lot of movies, and I’ve never seen a city so much in its own way as Milwaukee. My honest advice to any young entrepreneur would be: ‘leave.’”

Most disconcerting was that Randall, who is African-American, would email investors and get immediate interest, but once they met him face-to-face, they weren’t as engaged.

“I think it’s the investment community. Our conservative culture, bundled together with our propensity to make everything about race,” Randall said. “They would always call us back, sometimes the same day. But the minute that they saw our face, it always was so many excuses.”

But when Randall emailed West Coast flash sale retailer TouchofModern.com, he quickly got a placement on the company’s site and had sold $10,000 worth of product in five days. No paperwork or protracted process required.

Northern Elements is now working to get crowdfunding through a Kickstarter campaign, which was 10 percent funded after its first week, Randall said.

“It’s just super conservative and all this talk happens and quite frankly, especially with millennials, (Wisconsin investors are) getting left behind,” he said.

“They’re not keeping up with the speed of business. The new business economy is completely antithetical to the slow Wisconsin glad-handing…this old boys’ network. You don’t become successful because of Milwaukee, you become successful in spite of Milwaukee.”

Platt, the co-founder and chief executive officer of Classmunity, has only just started raising seed funds, but has had the opposite experience.

“This is my first startup company, so I don’t really have a lot to compare it to,” she said. “The biggest thing that I’ve been seized with so far is how supportive different groups have been. In Wisconsin, there seems to be a real emphasis on paying it forward and trying to help each other.”

Platt pitched her startup, a fundraising platform for school districts founded in 2015, for the first time at the Early Stage Symposium.

“We had been previously contacted by some investors, so we chatted with them and got a sense for what they’re looking for, but that was kind of our kickoff,” Platt said.

Classmunity has two employees, plus five founders, and has six school districts paying for its service as of May.

So far, Classmunity has operated on a few hundred dollars from each founder and a two-part Ideadvance seed grant totaling $75,000 from the University of Wisconsin-Extension.

Since its Early Stage pitch, Classmunity has received interest from a number of different investors and is setting up meetings to tell them more.

Platt has thought ahead to the series A round and knows Classmunity will have to prove its concept further before it can get to that level.

“Everything that we’re looking to do, it’s all based around customer acquisition and growth because we know that we need that as a company and we know that is going to make us desirable for a series A round,” she said. “We were warned to expect Midwest investors to expect your idea to be further along. Here, people expect you to have revenue, and your cost of customer acquisition is less than what you’re bringing in, and you actually have a product that people are willing to pay for.”

Good ideas attract money

Tim Keane, director of Brookfield-based Golden Angels Investors LLC, says it shouldn’t matter if Wisconsin has enough home-grown venture capital, when the best startup ideas will attract funds from afar.

If out-of-state venture capitalists want to invest in a Wisconsin company, state lines aren’t stopping them, Sobotka said. Money finds good deals, wherever they are.

Wisconsin may have a lower risk appetite than other regions, Keane said. Culturally, Boston or Chicago might have more risk takers. Probably, startups need more customer proof here than in California.

“There’s a lot of money around that’s just more comfortable being in the stock market or being in real estate rather than startups. Startups are risky. We lose 50 percent of the time,” Keane said.

“It kind of depends on who you ask,” Daelemans said. “If you talk to investors, they’ll say they don’t have enough good companies to invest in; if you talk to entrepreneurs, they’ll say there’s not enough money available.”

“Where you stand depends on where you sit,” said Cory Nettles, managing director of Milwaukee-based Generation Growth Capital Inc. “The investment community feels there is enough (venture capital). The entrepreneur who’s told ‘no’ doesn’t.

“It’s always nice to have more capital, but all the capital in the world without the ideas and the entrepreneurs and the ecosystem to support it doesn’t really move the needle.”

Not every investment starts with an entrepreneur and a venture; existing businesses with the infrastructure and reputation to succeed are a less risky investment, and some investors are attracted to that, he said.

Like Nettles, Jerry Jendusa, co-founder of Wauwatosa-based consulting and investing firm Stuck Inc., is one of those more cautious investors. He prefers to acquire or invest in a more established company and then use traditional strategic methods to help it grow.

“In our particular case…we’re believers in the management team and the tools, their current customers, and creating ‘aha’ moments that could help a company grow,” Jendusa said. “It’s just a different thought process. We can be a patient investor, not expecting a big return really quickly.”

Entrepreneurs have a stake in whether they get funded, Kirgues said. They need to convince venture capitalists that they’ll get a good return on their investment. And that happens by creating scalable business models and products that are fundable.

Kirgues said universities could do more to help students create new companies, forming a funnel of entrepreneurship that could attract venture capital.

“I don’t think there’s enough accountability about where the community’s investing resources to facilitate more startup creation and the outcomes those organizations are achieving,” he said. “I think everyone who takes economic development dollars related to startups should be accountable to one metric, which is how many of your startups receive angel and venture financing.”

Other options

“If you don’t get that next stage, things get ugly,” Steininger said, which is why startups should think ahead on funding. “Long before you start your business, you have to think about: What are you going to do after angel?”

There are other pathways to funding that are often overlooked, Steininger said. Beyond the traditional funding rounds, early stage companies can seek capital from crowdfunding, contests and business grants, credit or a loan, an incubator, a corporate investor, an interested distributor, a barter deal or a customer grant.

Tom Still, president of the Wisconsin Technology Council, introduces investors to startups seeking their series A round funding at the Early Stage Symposium.

Tom Still, president of the Wisconsin Technology Council, introduces investors to startups seeking their series A round funding at the Early Stage Symposium.

“That’s the problem. There’s too many entrepreneurs starting companies thinking about making a boatload and exiting. They don’t think about profit. They think about investor capital because that’s where they want to get their money and get out. That’s sad,” Steininger said.

He pointed to Joe Bartolotta, Barry Mandel, Sue Marks, George Mosher and other Milwaukee entrepreneurs who have done it for themselves, bootstrapping their ideas into major names in the Wisconsin business world.

“They created thousands of jobs and you know what they all have in common?” Steinger asked. “They all have in common that they built profitable businesses right from the get-go.”

A cautious state

Torinus has been brainstorming with a group including the Wisconsin Economic Development Corp. and the Milwaukee 7 regional economic development partnership to determine how to build up a better venture capital pool for Milwaukee’s entrepreneurs.

Among the ideas that have been proposed by stakeholders across the state:

  • Offering loan guarantees like those obtainable from the U.S. Small Business Administration or the Wisconsin Housing and Economic Development Authority, which could help a business obtain bank financing.
  • Big companies could invest in smaller counterparts that are coming up with innovative industry solutions, and could eventually be strategic acquisition targets.
  • Foundations could designate that their investment portfolios’ alternative investments go to Wisconsin startups.
  • Raising the limits on early-stage business investment credits, which can be claimed by those who invest angel or venture capital in a young Wisconsin company that meets certain criteria and has the potential for significant economic impact and job growth.

And while there is a need for additional venture capital to help grow Wisconsin’s early stage companies, the state’s startup scene has come a long way from just 15 years ago. At that time, there were no incubators, accelerators or campus entrepreneurship programs, Torinus said.

“Entrepreneurs need two things—they need a support system and they need capital,” he said. “Today, there’s a very nice support system across the state.

“When I hear dearth (of available venture capital), I don’t like that word because we’re so much better than we used to be. That doesn’t mean we couldn’t use more capital. We could use 10 more of my fund.”

Series A seekers

“The ‘valley of death’ seems to be going on forever today,” Steininger said. “Twitter has never had a profitable day in its life. It’s still living on investor cash. It’s a problem in Milwaukee; it’s a problem nationally.”

In Wisconsin, part of the reason for the long-lasting valley of death is the difficulty of obtaining bank capital in the tight regulatory environment, Torinus said. Even if a company has receivables, collateral and equipment, it’s a tough sell.

“Theoretically, you become bankable,” he said. “The truth of the matter is it’s not in the current mission or business space the banks want to be in. It’s especially hard because the regulators at state and federal levels are being especially scrupulous, maybe overly scrupulous, about any deal that has some hair on it, some risk.”

Torinus has vouched for companies his angel fund has invested in as they seek to get to the next level by obtaining bank or venture financing. With revenue, a proven market and some customers, many companies are growing quickly and could use some operating capital to help them expand.

“Every entrepreneur that comes in shows you his hockey stick,” Torinus said. “They’re zero today and they’re going to be $900 million in three years. We only have a few companies that have met their original hockey stick.

“Every one of them’s different but they’re generally at the point where they’re starting to expand. You’d love to get debt capital versus equity capital because it’s less expensive and it’s not dilutive.”

Badger battle

In 2015, 128 Wisconsin companies received some kind of seed or series A funding, according to Daelemans, who tracks Form D filings, investor surveys and announcements. Of the 128, 70 of them are in the greater Madison area, while 36 are in southeast Wisconsin. In 2016, Daelemans has so far tracked 64 companies receiving funding, 44 of which are in Madison and 18 of which are in southeast Wisconsin.

“There’s a large gap between Madison and Milwaukee, maybe not in dollars invested, but in the number of startups,” Daelemans said.

Madison’s startups are spread throughout the metropolitan area, while most of Milwaukee’s startup activity is concentrated in the Historic Third Ward and in Walker’s Point, he said. That could contribute to the less prominent entrepreneurship ecosystem in Milwaukee, he said.

“It seems that the states around us, the states that we’re sort of ‘competing with’ or that we’re measuring ourselves against, it’s hard, in my opinion,” Daelemans said. “If you add Milwaukee and Madison together, we’d still be a small city compared to Chicago or Minneapolis-St. Paul or Detroit. Having that separation (between Milwaukee and Madison) doesn’t really make it easier.”

“Milwaukee desperately needs better community leadership around entrepreneurship activities,” Keane said. “We have too many people trying to do their own thing and not enough proven expertise. It’s like talking to a neurosurgeon about dermatology.”

“Madison has a good chance of being a health care IT hub over the next decade, with Epic being there,” Sobotka said. “There’s just no way around that. Madison does have a little better vibe right now. It ebbs and flows. Is there greater activity right now, so it seems, in the Madison area? Yeah.”

“I don’t think there is any Milwaukee and Madison (competition),” Keane said. “Nobody that I’ve ever met said, ‘We will fund your company if you move down the road to Madison.’”

Alana Platt waits in a line at the back of an auditorium at the Monona Terrace convention center in Madison.

When it’s her turn, Platt takes her place in the spotlight, in front of a red curtain, and presents the Whitefish Bay-based company she’s been working on for the past year-and-a-half—a fundraising management tool for school districts called Classmunity.

cov-121216-valley-of-death-shutterstock_178572440

There are 50.4 million students in the U.S. and it takes about $11,600 per year to educate each one. Many schools have to fundraise to meet these costs, but fundraising is disjointed and prone to fraud, she says.

“If you can think of a fundraiser, Classmunity can help the school manage it,” Platt says. “We bring modern financial technology to a sector that has been doing things pretty much the same way for decades.”

She presents the company’s growth path and then she gets to the reason she’s making this five-minute pitch:

“We’re looking to raise $500,000 to bring on more full-time staff members to help accelerate the growth of our platform and bring on more customers.”

Walking the tightrope

Classmunity is raising its seed funding round, the first institutional capital the company has sought out since its foundation. It is just moving beyond friends, family and grants into real cash.

Once the company gets its seed round and grows larger, it will face the monumental challenge of raising an even larger sum – usually $2 million to $6 million – from venture capitalists for the series A round. Several Wisconsin entrepreneurship experts call the gap between seed capital and venture capital the “valley of death” because crossing it successfully can be so taxing.

The “valley of death” is a particularly big problem for Wisconsin’s economy.

Milwaukee ranks 39th among the 40 largest metropolitan areas in the country when it comes to startup activity, a set of economic indicators measuring new business creation, while Wisconsin ranks dead last among the 25 largest states, according to the latest Kauffman Index of Startup Activity from the Ewing Marion Kauffman Foundation. Startups are a vital source of new job creation. And the state’s lack of new business formation could translate to a less active venture capital community.

There are only a handful of venture capital investors in the state, and three major names pop up again and again: Mequon-based Capital Midwest Fund, Baird Capital (with offices in Milwaukee and Chicago), and Madison-based Venture Investors.

The East and West Coasts have the lion’s share of venture capital investment in the country. California had $33.9 billion in venture capital investment in 2015, according to the National Venture Capital Association. Wisconsin, on the other hand, only attracted $88.9 million in venture capital investment last year.

However, some cities in the middle of the country, like Chicago and Dallas, have managed to put themselves on the map, according to a study by the University of Toronto’s Martin Prosperity Institute.

“There needs to be more venture capital than currently exists in Wisconsin in order to compete in the knowledge economy,” said Joe Kirgues, managing director of Milwaukee-based startup accelerator gener8tor. “We need more engineers building more products and we lack the infrastructure that facilitates people taking the leap into entrepreneurship. In my opinion, venture capital is a lagging indicator. The leading indicator will be the number of angels in Milwaukee and the broader region.”

“We lack that add-on capital,” said Dan Steininger, president of Milwaukee-based entrepreneurship assistance organization BizStarts Inc. “There’s just not enough for us, no question about it. We don’t even have enough angel capital, let alone add-on capital.”

“We can use more capital, not just on the angel side, but between that angel and that later stage, there is a huge gap,” said Todd Sobotka, investment manager at BrightStar Wisconsin Foundation Inc., a Milwaukee-based venture philanthropy firm. “Wisconsin as a whole needs more capital and that was the focus of BrightStar. It’s not for lack of wealth. We do have a lot of wealth here but it’s just our culture – we just don’t invest in early stage companies.”

“Obviously we have a lot of opportunity for growth, whether it comes to entrepreneurship or investment,” said Bram Daelemans, director of investor networks at the Wisconsin Technology Council. “It’s even something we put in our presentations and refer to as the ‘valley of death,’ but I think it’s getting better. If you look at the Badger Fund of Funds and some other funds that are getting started, I think people are making an effort to bridge that gap.”

Alana Platt presents her Whitefish Bay company, Classmunity, to potential investors at the 2016 Early Stage Symposium.

Alana Platt presents her Whitefish Bay company, Classmunity, to potential investors at the 2016 Early Stage Symposium.

Classmunity was one of five Milwaukee-area companies pitching themselves at the Wisconsin Technology Council’s 2016 Early Stage Symposium. Startups from across the state and nation each got a five-minute window to tell investors about the company, what it does, its addressable market, the investment opportunity, how much it has raised so far and its customers. They practiced and honed their pitches with the WTC to get them ready for an audience of investors from Wisconsin and the wider Midwest.

The other southeastern Wisconsin firms were Menomonee Falls-based NewOz Big Data Analytics, which created a system to decrease logistics costs for corporations; Milwaukee-based Metria, which innovated a single-camera 3D optical motion tracking technology; Waukesha-based Intellivisit, which developed an artificial intelligence that integrates health care with daily life; and West Bend-based Spaulding Medical, which aims to improve cardiac care accessibility.

Making the pitches were entrepreneurs and early employees at these fledgling firms, most of which are working on their series A funding rounds.

Intellivisit, founded in 2014, has tested its virtual health care technology on more than 1,000 patients and has brought two physician groups on board as customers.

The company has grown to eight employees and has raised a total of $2 million from two angel capital rounds. It’s time to raise a series A round, so it can scale and deploy its technology to other provider groups, hire more employees and move faster, said Drew Palin, chief medical officer. Intellivisit is currently crossing the valley of death.

“We need the money. VCs want a good investment,” said Palin, who has helped start four companies. “So you try to work to get to a common ground. It’s risky for them if they go too early and it’s hard for us to grow if we go too late.”

Intellivisit is aiming to raise between $4 million and $6 million, and is just getting started pitching venture capitalists. Its founders have drawn upon their networks and narrowed down a few investment firms to pitch. One or two are in Milwaukee, four or five are in Chicago and a few are on the East and West Coasts.

“Our experience is the Midwest, it’s a little more thoughtful, a little more friendly, a little more Midwest nice,” Palin said. “But you still have to hit the right milestones, have the right market opportunities, present the right team to get anybody’s interest.”

It could be challenging to raise up to $6 million from Wisconsin investors, though, since angel groups aren’t set up to give that amount of money. The state’s entrepreneurship ecosystem has adjusted as more angel groups entered the scene over the past 10 years, Palin said.

“Angels and angel groups have kind of taken the place of venture capital,” he said. “They’re doing the earlier, high-risk investments. And the VCs have moved up the chain to kind of be more like private equity, where they’re doing later investments.”

If some of the companies getting seed capital from the angel networks achieve successful exits, that could attract and drive additional venture capital investments in the state, Palin said.

Risky business

When a new company is formed, the founder usually first raises money from friends and family, crowdfunding or a private investor.

After that initial seed capital, the company moves on to the institutional investors. Among those are angel investors, groups of wealthy individuals who make small investments of about $1 million to $2 million to help new companies develop their products, find customers and move the product to market.

Once the product is selling and the company is generating revenue and has a “story to tell,” it looks for venture capital, said Steininger. This is when it can begin raising a series A round. The space between angel capital and venture capital can feel like a yawning canyon, especially in Wisconsin.

Venture capital is invested in companies with high growth potential and frequently jumpstarts job creation and economic growth.

The Wisconsin Technology Council helped facilitate 380 meetings between investors and startups during a “speed dating” event at the Early Stage Symposium.

“I know this is kind of a small sample and a small snapshot, but 70 companies had at least one meeting,” Daelemans said. “There’s a lot of excitement and there’s a lot of activity in the state and investors are looking for that next investment opportunity. So if it doesn’t happen, is it because we’re not connecting the right investors to the right entrepreneurs or is it because the ideas aren’t that good?”

Paul Royal, founder of Menomonee Falls startup NewOz Big Data Analytics, presenting to potential investors at the Early Stage Symposium.

Paul Royal, founder of Menomonee Falls startup NewOz Big Data Analytics, presenting to potential investors at the Early Stage Symposium.

Part of the reason the valley of death is such a big problem in Wisconsin is the state’s conservative cultural roots, Sobotka said.

“We’d like to see Milwaukee step up more,” he said. “It’s old German culture: we’re risk averse, frugal, don’t necessarily do things that we’re not comfortable with, and stay inside the box.”

“What’s happening in default (without enough venture capital) is we go back to the angel investors and say, ‘Hey, we’ve got a million dollars in; we need to raise another million,’” said John Torinus, a general partner in Milwaukee-based Wisconsin Super Angel Fund. “It’s looking good. Would you double down? That’s a little tough to do because this could be a round for $2 million, $3 million, and it’s pretty hard to get that kind of money out of angels.”

Torinus’ angel fund invests mainly in Wisconsin businesses, since it has the proximity to connect those companies to investors, banks, customers, professional services providers and other resources, he said. There is also plenty of opportunity to get in on the ground floor of Wisconsin businesses.

“It’s sort of a paradox,” he said. “Because there’s so few players here, it’s a good place for the players who are here. We don’t go priding ourselves on how many deals we turn down. We like to do deals and we like to do Wisconsin deals.

“I wouldn’t feel too comfortable starting a company in Indianapolis. We’re touching and feeling and we’re interacting with these guys every week. Local money, in a way, is better than far away money.”

Seeding growth

In September, Milwaukee entrepreneur Bryant Randall wrote a LinkedIn post titled “Why Milwaukee sucks for startups.”

Randall doesn’t pull any punches while telling the story of his unsuccessful attempts to raise seed and angel capital.

He talked to accelerators, he pitched a private bank, he jumped through hoops at government lenders, he presented to angel investors. But no one would givehim a dime for his startup, Northern Elements, which sells modern, bioethanol fuel-burning furniture online.

Randall previously started an audio/video resequencing agency called Reverse Enginears out of his Milwaukee bedroom. He worked with companies like Google, Showtime and Microsoft. But this is the first time he’s had to raise money.

“It’s been really bad,” he said. “I used to work out west a lot with Disney and Pixar, a lot of movies, and I’ve never seen a city so much in its own way as Milwaukee. My honest advice to any young entrepreneur would be: ‘leave.’”

Most disconcerting was that Randall, who is African-American, would email investors and get immediate interest, but once they met him face-to-face, they weren’t as engaged.

“I think it’s the investment community. Our conservative culture, bundled together with our propensity to make everything about race,” Randall said. “They would always call us back, sometimes the same day. But the minute that they saw our face, it always was so many excuses.”

But when Randall emailed West Coast flash sale retailer TouchofModern.com, he quickly got a placement on the company’s site and had sold $10,000 worth of product in five days. No paperwork or protracted process required.

Northern Elements is now working to get crowdfunding through a Kickstarter campaign, which was 10 percent funded after its first week, Randall said.

“It’s just super conservative and all this talk happens and quite frankly, especially with millennials, (Wisconsin investors are) getting left behind,” he said.

“They’re not keeping up with the speed of business. The new business economy is completely antithetical to the slow Wisconsin glad-handing…this old boys’ network. You don’t become successful because of Milwaukee, you become successful in spite of Milwaukee.”

Platt, the co-founder and chief executive officer of Classmunity, has only just started raising seed funds, but has had the opposite experience.

“This is my first startup company, so I don’t really have a lot to compare it to,” she said. “The biggest thing that I’ve been seized with so far is how supportive different groups have been. In Wisconsin, there seems to be a real emphasis on paying it forward and trying to help each other.”

Platt pitched her startup, a fundraising platform for school districts founded in 2015, for the first time at the Early Stage Symposium.

“We had been previously contacted by some investors, so we chatted with them and got a sense for what they’re looking for, but that was kind of our kickoff,” Platt said.

Classmunity has two employees, plus five founders, and has six school districts paying for its service as of May.

So far, Classmunity has operated on a few hundred dollars from each founder and a two-part Ideadvance seed grant totaling $75,000 from the University of Wisconsin-Extension.

Since its Early Stage pitch, Classmunity has received interest from a number of different investors and is setting up meetings to tell them more.

Platt has thought ahead to the series A round and knows Classmunity will have to prove its concept further before it can get to that level.

“Everything that we’re looking to do, it’s all based around customer acquisition and growth because we know that we need that as a company and we know that is going to make us desirable for a series A round,” she said. “We were warned to expect Midwest investors to expect your idea to be further along. Here, people expect you to have revenue, and your cost of customer acquisition is less than what you’re bringing in, and you actually have a product that people are willing to pay for.”

Good ideas attract money

Tim Keane, director of Brookfield-based Golden Angels Investors LLC, says it shouldn’t matter if Wisconsin has enough home-grown venture capital, when the best startup ideas will attract funds from afar.

If out-of-state venture capitalists want to invest in a Wisconsin company, state lines aren’t stopping them, Sobotka said. Money finds good deals, wherever they are.

Wisconsin may have a lower risk appetite than other regions, Keane said. Culturally, Boston or Chicago might have more risk takers. Probably, startups need more customer proof here than in California.

“There’s a lot of money around that’s just more comfortable being in the stock market or being in real estate rather than startups. Startups are risky. We lose 50 percent of the time,” Keane said.

“It kind of depends on who you ask,” Daelemans said. “If you talk to investors, they’ll say they don’t have enough good companies to invest in; if you talk to entrepreneurs, they’ll say there’s not enough money available.”

“Where you stand depends on where you sit,” said Cory Nettles, managing director of Milwaukee-based Generation Growth Capital Inc. “The investment community feels there is enough (venture capital). The entrepreneur who’s told ‘no’ doesn’t.

“It’s always nice to have more capital, but all the capital in the world without the ideas and the entrepreneurs and the ecosystem to support it doesn’t really move the needle.”

Not every investment starts with an entrepreneur and a venture; existing businesses with the infrastructure and reputation to succeed are a less risky investment, and some investors are attracted to that, he said.

Like Nettles, Jerry Jendusa, co-founder of Wauwatosa-based consulting and investing firm Stuck Inc., is one of those more cautious investors. He prefers to acquire or invest in a more established company and then use traditional strategic methods to help it grow.

“In our particular case…we’re believers in the management team and the tools, their current customers, and creating ‘aha’ moments that could help a company grow,” Jendusa said. “It’s just a different thought process. We can be a patient investor, not expecting a big return really quickly.”

Entrepreneurs have a stake in whether they get funded, Kirgues said. They need to convince venture capitalists that they’ll get a good return on their investment. And that happens by creating scalable business models and products that are fundable.

Kirgues said universities could do more to help students create new companies, forming a funnel of entrepreneurship that could attract venture capital.

“I don’t think there’s enough accountability about where the community’s investing resources to facilitate more startup creation and the outcomes those organizations are achieving,” he said. “I think everyone who takes economic development dollars related to startups should be accountable to one metric, which is how many of your startups receive angel and venture financing.”

Other options

“If you don’t get that next stage, things get ugly,” Steininger said, which is why startups should think ahead on funding. “Long before you start your business, you have to think about: What are you going to do after angel?”

There are other pathways to funding that are often overlooked, Steininger said. Beyond the traditional funding rounds, early stage companies can seek capital from crowdfunding, contests and business grants, credit or a loan, an incubator, a corporate investor, an interested distributor, a barter deal or a customer grant.

Tom Still, president of the Wisconsin Technology Council, introduces investors to startups seeking their series A round funding at the Early Stage Symposium.

Tom Still, president of the Wisconsin Technology Council, introduces investors to startups seeking their series A round funding at the Early Stage Symposium.

“That’s the problem. There’s too many entrepreneurs starting companies thinking about making a boatload and exiting. They don’t think about profit. They think about investor capital because that’s where they want to get their money and get out. That’s sad,” Steininger said.

He pointed to Joe Bartolotta, Barry Mandel, Sue Marks, George Mosher and other Milwaukee entrepreneurs who have done it for themselves, bootstrapping their ideas into major names in the Wisconsin business world.

“They created thousands of jobs and you know what they all have in common?” Steinger asked. “They all have in common that they built profitable businesses right from the get-go.”

A cautious state

Torinus has been brainstorming with a group including the Wisconsin Economic Development Corp. and the Milwaukee 7 regional economic development partnership to determine how to build up a better venture capital pool for Milwaukee’s entrepreneurs.

Among the ideas that have been proposed by stakeholders across the state:

  • Offering loan guarantees like those obtainable from the U.S. Small Business Administration or the Wisconsin Housing and Economic Development Authority, which could help a business obtain bank financing.
  • Big companies could invest in smaller counterparts that are coming up with innovative industry solutions, and could eventually be strategic acquisition targets.
  • Foundations could designate that their investment portfolios’ alternative investments go to Wisconsin startups.
  • Raising the limits on early-stage business investment credits, which can be claimed by those who invest angel or venture capital in a young Wisconsin company that meets certain criteria and has the potential for significant economic impact and job growth.

And while there is a need for additional venture capital to help grow Wisconsin’s early stage companies, the state’s startup scene has come a long way from just 15 years ago. At that time, there were no incubators, accelerators or campus entrepreneurship programs, Torinus said.

“Entrepreneurs need two things—they need a support system and they need capital,” he said. “Today, there’s a very nice support system across the state.

“When I hear dearth (of available venture capital), I don’t like that word because we’re so much better than we used to be. That doesn’t mean we couldn’t use more capital. We could use 10 more of my fund.”

Series A seekers

“The ‘valley of death’ seems to be going on forever today,” Steininger said. “Twitter has never had a profitable day in its life. It’s still living on investor cash. It’s a problem in Milwaukee; it’s a problem nationally.”

In Wisconsin, part of the reason for the long-lasting valley of death is the difficulty of obtaining bank capital in the tight regulatory environment, Torinus said. Even if a company has receivables, collateral and equipment, it’s a tough sell.

“Theoretically, you become bankable,” he said. “The truth of the matter is it’s not in the current mission or business space the banks want to be in. It’s especially hard because the regulators at state and federal levels are being especially scrupulous, maybe overly scrupulous, about any deal that has some hair on it, some risk.”

Torinus has vouched for companies his angel fund has invested in as they seek to get to the next level by obtaining bank or venture financing. With revenue, a proven market and some customers, many companies are growing quickly and could use some operating capital to help them expand.

“Every entrepreneur that comes in shows you his hockey stick,” Torinus said. “They’re zero today and they’re going to be $900 million in three years. We only have a few companies that have met their original hockey stick.

“Every one of them’s different but they’re generally at the point where they’re starting to expand. You’d love to get debt capital versus equity capital because it’s less expensive and it’s not dilutive.”

Badger battle

In 2015, 128 Wisconsin companies received some kind of seed or series A funding, according to Daelemans, who tracks Form D filings, investor surveys and announcements. Of the 128, 70 of them are in the greater Madison area, while 36 are in southeast Wisconsin. In 2016, Daelemans has so far tracked 64 companies receiving funding, 44 of which are in Madison and 18 of which are in southeast Wisconsin.

“There’s a large gap between Madison and Milwaukee, maybe not in dollars invested, but in the number of startups,” Daelemans said.

Madison’s startups are spread throughout the metropolitan area, while most of Milwaukee’s startup activity is concentrated in the Historic Third Ward and in Walker’s Point, he said. That could contribute to the less prominent entrepreneurship ecosystem in Milwaukee, he said.

“It seems that the states around us, the states that we’re sort of ‘competing with’ or that we’re measuring ourselves against, it’s hard, in my opinion,” Daelemans said. “If you add Milwaukee and Madison together, we’d still be a small city compared to Chicago or Minneapolis-St. Paul or Detroit. Having that separation (between Milwaukee and Madison) doesn’t really make it easier.”

“Milwaukee desperately needs better community leadership around entrepreneurship activities,” Keane said. “We have too many people trying to do their own thing and not enough proven expertise. It’s like talking to a neurosurgeon about dermatology.”

“Madison has a good chance of being a health care IT hub over the next decade, with Epic being there,” Sobotka said. “There’s just no way around that. Madison does have a little better vibe right now. It ebbs and flows. Is there greater activity right now, so it seems, in the Madison area? Yeah.”

“I don’t think there is any Milwaukee and Madison (competition),” Keane said. “Nobody that I’ve ever met said, ‘We will fund your company if you move down the road to Madison.’”

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