By John Neis

The Wisconsin Technology Council will publish a new set of white papers this month including bold ideas to stimulate venture capital investment in the state.

Inevitably, some may question Wisconsin’s ability to afford these proposed programs. But the better question is whether we can afford not to pursue new ideas as we try to transform the economy.

We have no shortage of innovations. We have one of the world’s greatest research universities, one that became increasingly entrepreneurial in the 1990s. The Wisconsin Alumni Research Foundation began accepting equity in lieu of upfront fees for University of Wisconsin-Madison spinoffs at that time and began investing directly near the end of the decade. Initiatives such as the Burrill Business Plan Competition helped to create a more entrepreneurial culture.

But there was not enough capital to match the demand.

Over the last dozen years, Wisconsin has served as a laboratory for policy experiments designed to stimulate capital formation. Incentives were rolled out to encourage private investors to put their money into Wisconsin’s entrepreneurs, giving the most innovative the courage to make the entrepreneurial leap:

• Wisconsin used tax credits to launch a Certified Capital Company program (CAPCO) in 1999 to create three Wisconsin-focused venture capital firms, managing $50 million.

• In 2000, the State of Wisconsin Investment Board was focused on return on investment, not economic development, when it made the first of $200 million in commitments to invest in venture capital funds with offices in Wisconsin. SWIB officials saw world-class research and early successes, such as Third Wave Technologies, and believed there was an opportunity to generate superior returns.

• The Accelerate Wisconsin program, established in 2004, provided tax credits to encourage formation of traditional venture capital funds and to stimulate angel investor activity.

• The Wisconsin Angel Network was formed in 2005 to foster the formation of angel investor groups.

• The Burrill Business Plan Competition model was adopted statewide with the Governor’s Business Plan Competition.

These catalysts encouraged early stage venture capitalists and angel investors to make seed investments and to launch the commercialization process. The goal was for skilled managers to be hired and for the companies to attract capital from venture capital firms and out-of-state investors. The idea was that as the companies matured, high-paying jobs would be created and investors would receive competitive returns. The new economic activity would generate tax revenue that would exceed the incentives, ultimately shrinking rather than expanding Wisconsin’s budget deficit.

Politicians needed courage to support the programs, because they take more than one election cycle to produce results. The skeptics tried to measure results while the programs were in their infancy, declaring them a failure before they got their footing. But the skeptics were wrong as two announcements in the past month show.

Two of the Wisconsin CAPCOs released a study recently that detailed the payback that their funds provided to the state. The capital investments materialized as advertised, high-paying jobs were created and the companies have grown. Payroll taxes from the new jobs alone have paid back the tax credits offered by the state twofold, and they will pay it back again every 31 months into the future.

The data was made more tangible with the announcement in June that Virent Energy Systems had closed on a $46.4 million round of financing to accelerate its biofuels business. Virent, a spinoff from UW-Madison’s chemical engineering department, is focused on developing the next generation of biofuels. It took advantage of these initiatives. In 2003, it was a winner of the Burrill Business Plan Competition on the UW-Madison campus.

Co-founder Randy Cortright caught our eye at Venture Investors, where we manage a CAPCO for Advantage Capital and have two funds backed by SWIB. In May 2005, we led $1.6 million in angel financing with two of these funds, Advantage Capital and Venture Investors Early Stage Fund III Limited Partnership, a fund that SWIB backed.

In May 2006, the company began to attract capital from outside the state with a $7.5 million round of financing led by CargillVentures. That round included funding from Venture Investors, WARF and Honda. Virent combined the investor capital with federal research grants.

In April 2007, the company began a strategic collaboration with Royal Dutch Shell, and in August 2007, Venture Investors led a $22 million round of financing. This enabled the company to attract Lee Edwards as chief executive, an experienced energy industry executive. The investor dollars were combined with strategic partner support to construct the world’s first bio-gasoline production plant. This 10,000-gallon demonstration facility was completed in late 2009, meeting its objectives and providing the confidence that resulted in June’s announcement of the $46.4 million round of financing.

The result is that Wisconsin has a recognized world leader in the development of biofuels. While still facing the typical challenges of any development stage company in an emerging industry, the company is well-positioned. There is potential for significant growth in high-paying jobs, new tax revenue, a royalty stream to WARF, investment returns that signal Wisconsin is a good place to invest and role models for the next generation of entrepreneurs.

Wisconsin Technology Council has vetted innovative ideas from around the country, advancing the best of them in its white papers. Our political leaders can consider these ideas knowing that they are not just a wish and a prayer. We have evidence that they work.

This year’s Best of Madison Business Awards honor three organizations and their leaders whose fingertips are all over the social, physical and economic landscape of our growing city.

Successful business people are builders. Whether it’s a company, a product line or a reputation, the best in business—through vision, talent and determination—build. This year, our 2010 Best of Madison Business Award winners are builders in the truest sense of the word, building a foundation for this community’s most important civic assets, building a new employment and economic development sector and building … buildings.

Rich Lynch
J.H. Findorff & Son Inc.

Madison would not look the way it does without J.H. Findorff & Son Inc. For 119 years now Findorff has been constructing the built environment in which many of us live, work, worship and play. The company’s website has pictures of nearly 150 Findorff projects. They ring the Capitol Square, highlighted by Monona Terrace, then stretch out to CUNA Mutual Insurance’s headquarters, The Don & Marilyn Anderson HospiceCare Center, Epic Systems, and back to the UW campus, the zoo, hospitals, schools and churches, and the magnificent Chazen Museum of Art addition going up before our very eyes. And in a meaningful and symbolic commitment to this city,

Findorff rebuilt its own headquarters on the South Bedford and West Wilson site of the company’s offices for the last 100 years, a stunning building that is itself a contribution to the city’s architecture and design. Findorff president and ownership partner Rich Lynch is adamant about crediting the strong leadership team at the helm of the company. But there is no better ambassador than Lynch himself. His personality and generous spirit and love of community are reflected in Findorff’s support for the American Diabetes Association’s “Tour de Cure,” Project Home’s “Hammer with a Heart,” the Construction Careers Initiative and especially United Way, where Lynch takes the helm for the 2010 campaign.

Kathleen Woit
Madison Community Foundation

If Findorff’s buildings are the bricks and mortar foundation of this community, the philanthropic infrastructure has been built by the Madison Community Foundation. From modest beginnings in 1946, MCF today encompasses more than 860 individual funds with assets in excess of $100 million. Donor advised and designated funds meet rigorous standards in support of this community’s most important cultural and civic institutions. Under the leadership (since 1997) of MCF president Kathleen Woit, an experienced and talented staff, and an outstanding board of some of the city’s most prominent leaders, the foundation has earned the trust of those with the means and the interest to invest in Madison’s future. But even more impressive is Woit’s passion and commitment to the Madison of today, nimbly allocating undesignated funds to the community’s most pressing needs. It’s a reflection of her, too. She’s a native, a “homey,” and she wears her love for this city on her sleeve. Healthy communities have a handful of bedrock pillars of support upon which they rely. The Madison Community Foundation is one of those for this community and Woit’s role in building it has won respect, trust and admiration.

John Neis
Venture Investors

Successful building requires innovation. In the context of Madison’s increasingly important and successful biomedical sector, innovation is typically associated with science, research and discovery. But as every start-up and aspiring entrepreneur has learned, innovation is a fundamental need in funding as well. John Neis has been recognized by none less than Forbes as one of the top 100 dealmakers in the world. The managing director of Venture Investors and head of that company’s health care practice, Neis has served on the board of directors of companies from formation to initial public offer or sale, including Virent Energy Systems, Deltanoid Pharmaceuticals, Tomo Therapy and Third Wave Technologies. The governor appointed Neis to the board of the Wisconsin Technology Council and he serves on the advisory board of the University of Wisconsin School of Business. Simply put, the future of greater Madison as a globally recognized and competitive biotechnology center depends on a steady and growing stream of venture capital and angel investments.

Neis is widely respected for his skill, his knowledge and his style. As we considered candidates for this honor we’ll just say he was highly recommended. His contribution to cutting-edge research and science companies was just what Madison Magazine’s late editor Brian Howell had in mind when he drew attention to the importance of innovation in the life sciences and new technology. John Neis is this year’s winner of the Brian D. Howell Award for Excellence in Innovation.

Look around this great city and you’ll see the Findorff cranes dotting the skyline. Look deeper and you’ll see the biotech companies emerging, growing and forming a cluster of economic development. Look deeper yet and find a foundation of philanthropic support and structure that make this city great. Madison is built upon all three.

Neil Heinen is editorial director of Madison Magazine.

The sale of Ann Arbor-based HandyLab Inc. in October, for what was  reported to be $300 million, went a long way to help local venture capitalists forget what a tough year it’s been.

That sale, and what promises to be a flurry of investments in coming weeks by the local VC community, made for smiling faces at the recent annual awards night of the Michigan Venture Capital Association.

And it’s a turnabout from a year ago, when most venture capitalists and investment bankers looked ahead to another year of recession and a lack of deals.

Investment bankers are buoyed, too, by what they say is a swarm of serious buyers from India and China who have been kicking the tires in the auto supply chain for a long time and have started to spend their money on acquisitions and ramp-ups.

“It seems like we see someone from India or China in our office every week. Twice a week. They are swarming all over major assets in this town,” said Charles Chandler, partner at Birmingham-based Amherst Partners L.L.C.

The HandyLab deal, and others like it, are giving a perception boost to those in the Michigan finance world.

Jim Adox, partner in the Ann Arbor office of Wisconsin-based Venture

Investors L.L.C., helped found HandyLab when he was with Ann Arbor-based EDF Ventures. He said its sale, as well as that of Ann Arbor-based HealthMedia

Inc. to Johnson & Johnson last October, will help all local VCs as they seek outside VC partners to help fund local deals or as they try to raise their own investment funds.

“Every exit like this helps,” said Adox.

The HandyLab sale to Massachusetts-based Becton, Dickinson and Co., a publicly traded company, made headlines on national Web sites devoted to VC and private equity, which raises awareness of a state long referred to as a fly-over state.

“When you see two exits like this happening in Ann Arbor in a year where there’s tough times, when no one is having an exit, nationally, it stands out even more. It shows companies here can attract investors, and, more important, it answers the things that outsiders often ask: “Can you build a company here? Can you attract management here? Can you attract employees?’ That deal was 300 million yeses.”

Lindsay Aspegren, general partner of Ann Arbor-based North Coast

Technology Partners L.P., an investor in early stage companies, tempered his enthusiasm over the HandyLab deal.

“It’s a terrific deal and it’s terrific to have stories like this to tell. And it will have a limited positive impact,” he said.

“Although the GDP numbers might lead one to conclude that the recession is over, the credit crisis of 2008 is still here. All businesses still have limited access to capital, and the impact will last for months.”

Aspegren expects limited VC fundraising success next year.

“In 2007, VCs raised $36 billion in the U.S. In 2008, it was $26 billion. In the first nine months this year, it was $8.4 billion,” he said. “There are still huge national macro issues to deal with.”

Some Michigan VCs did close on investment rounds recently, including North Coast, Ann Arbor-based RPM Ventures and Kalamazoo-based TGap Ventures; the state got its $95 million Venture Michigan Fund and $109 million 21st Century Investment Fund fully deployed; the Detroit Renaissance VC fund raised $40 million; and the state’s Invest Michigan program has much of its $300 million left to invest.

“It’s total Charles Dickens,” said Aspegren. “It’s the best of times; it’s the worst of times.”

Chandler said Amherst Partners has engagements from three Asia buyers looking for auto suppliers in the U.S., Canada or Mexico, and has proposals out to three other Asian buyers.

He said that while deal valuations are still off by an average of 40 percent from where they were early in 2008, “on the positive side, six months ago, who would have expected to see the Dow hit 10,000 this year? For the first time, people are saying, “I can look past the end of my nose.’ “

He said that while deals will require more equity and less leverage to get done, “there are a lot of opportunities in the market.”

Brian Demkowicz, the managing partner at Detroit-based Huron Capital

Partners L.L.C., the most active private-equity firm in the state in recent years, said that the pace of deals slowed down dramatically this year but shows signs of heating up. The firm had three deals in the first nine months, announced one early in November and hopes to close on a fifth by the end of the year.

Last year, it did nine deals; it did 14 in 2007.

Demkowicz said he expects a busier 2010, but is more cautious than many of his peers.

“I’m not sure there will be strong growth. I’m certain it won’t be a V-shaped recovery. It won’t be off the charts, but there will be improvement,” he said.

Demkowicz said one driver for improved deal-making is that a lot of companies that might have been on the market in normal conditions have sat on the sideline. Meanwhile, they have fixed their balance sheets, have taken a lot of costs out operating expenses and will be much more attractive when they enter the market.

President Barack Obama announced his intent to nominate Venture Investors’ Managing Director Winslow Sargeant, Ph.D. to a key administration post as Chief Counsel for Advocacy, Small Business Administration. The nomination is subject to Senate confirmation. Dr. Sargeant is currently Managing Director at Venture Investors LLC, a venture capital firm that is principally focused on initiating investments during the formative stages of technology and biotechnology companies that have spun out of leading research institutions in Wisconsin, Michigan and the Midwest.

“Naturally, we are disappointed about the potential loss of a valued member of our investment team. On the other hand, we share Winslow’s excitement over a once in a lifetime opportunity,” said John Neis, Managing Director of Venture Investors.

In leading the Office of Advocacy within the U.S Small Business Administration, Dr. Sargeant’s role will be to protect, strengthen and effectively represent the nation’s small businesses within the federal government’s legislative and rule-making processes. The Office of Advocacy works to reduce the burdens that federal policies impose on small firms and maximize the benefits small businesses receive from the government. Advocacy’s mission, simply stated, is to encourage policies that support the development and growth of American small business. 

Dr. Sargeant’s experiences as an entrepreneur, a SBIR program manager at the National Science Foundation, and a venture capitalist give him a unique range of private and public perspectives that make him an attractive nominee for this important position. The team at Venture Investors looks forward to the opportunity to continue to work with Winslow in his new role.

Dr. Sargeant has been a Managing Director in the technology practice at Venture Investors since 2006. “Winslow served as an advisor to our firm for several years before joining our team”, said Managing Director Scott Button. “It has been an honor to work on several deals with him, and we are confident he will bring a unique set of experiences to his new role.” Sargeant currently serves on the Boards of two Venture Investors portfolio companies, Silatronix and Pattern Insight.

From 2001 to 2005, he was the program manager for the Small Business Innovations Research (SBIR) Program in Electronics, a new office in the National Science Foundation’s (NSF) Engineering Directorate. Previously, Sargeant co-founded Aanetcom, a fabless semiconductor chip startup company with seed funding from Cisco systems which was acquired by PMC-Sierra. Prior to Aanetcom, he held senior engineering positions at Lucent, AT&T Bell Labs and IBM. Sargeant currently serves as a Director of the University of Wisconsin Foundation and is the Vice Chairman of the UW-Madison Astronomy Board of Visitors. He is a member of the Boards of Directors of WiCell, WiSys and the Waisman Center. Sargeant is a Trustee for the Wisconsin Alumni Research Foundation (WARF) and also serves on Purdue University Discovery Center’s Research Board of Visitors. He is a member of the Advisory Board of NSF’s Industrial Innovation and Partnership Division (NSF/SBIR). Winslow received the inaugural 2002 Wisconsin Distinguished Young Alumni Award and was a 2003 Outstanding Engineering Alumni Awardee from Northeastern University. He received a B.S. from Northeastern University, an M.S. from Iowa State University and his Ph.D. from the University of Wisconsin-Madison, all in Electrical Engineering. Sargeant is also a Kauffman Fellow.

About Venture Investors LLC

Venture Investors is a venture capital firm with $200 million under management. The firm invests in seed and early-stage life science and technology companies in the Midwest, with a primary focus on opportunities that spin out of the region’s leading research universities. Formed in 1982, Venture Investors has offices strategically located next to the country’s third and fourth largest research institutions in Ann Arbor, Mich., and Madison, Wis. For additional information on the firm, visit www.ventureinvestors.com

2007 Rank: NA

Age: 52

Wisconsin native heads health care practice for Madison venture firm. Funds technologies developed by Midwestern research universities. Financed high-def genomics company NimbleGen Systems, sold to Roche in August, May IPO TomoTherapy, improved cancer radiation that treated his father-in-law. Lives in a converted church in Madison with his wife, an artist who works in film, sculpture and performance art. Believes making art and building companies require similar creativity.

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