By Tom Still

Will 2014 be the “Year of the Early Stage Investor?”

While mid-January is a bit early to make predictions for the
next 50 weeks, there are some encouraging signs that angel, venture and other
private equity investors are warming to Wisconsin’s startup and emerging

Even so, a healthy dose of caution is advised – and the
state’s angel investor corps needs to see more old deals pay off before
committing to new investments.

That was the message Thursday in Wauwatosa at a Wisconsin Innovation
Network event, where three investors sized up the market, described their
investment targets and generally concluded the entrepreneurial climate is
stronger than it has been in years.

“What’s happened over the last two years has been fantastic
in (Milwaukee) and in the state,” said Dan Einhorn, a general partner with
Wauwatosa-based Capital Midwest Fund.

Capital Midwest formed in 2008 and is investing from its
second fund, which has so far made investments in 10 companies.

Einhorn acknowledged he would have been much less positive
two years ago. Since then, however, he’s been encouraged by the potential of
startups tied to co-working spaces, incubators, accelerators and mentored pitch
events, all of which are designed to sharpen young companies.

Milwaukee County Executive Chris Abele, an entrepreneur
before running for public office, has put $10 million of his own money into a
fund that will focus on startups. Abele told the WIN group he’s obviously
bullish on the startup scene in Milwaukee and Wisconsin – but advised patience,
as well. The last thing he wants to see, Abele said, is “a lot of flashy
announcements at the beginning and burnout at the end.”

Read this commentary in the Milwaukee Journal Sentinel here

Dan Palay of Tactics II Ventures, based in the Chicago area,
said his firm has invested in two Wisconsin biotechnology firms and will likely
consider other deals, perhaps venturing into health information technology and
other sectors. Palay said Wisconsin’s “startup landscape looks completely
different” than it did even a few years ago, although cautioning not every
young company will make for a good investment.

Those are just three voices, of course, but their comments
aren’t isolated from other trends and happenings. Here are some factors that
may influence Wisconsin’s early stage investing in 2014:

  • The state of Wisconsin is on the verge of
    selecting a manager for a fund backed by a $25-million state investment, a $5
    million initial private match and more private co-investment over time.

  • The State of Wisconsin Investment Board and the
    Wisconsin Alumni Research Foundation have pledged $30 million to a joint fund,
    4490 Ventures, which will focus primarily on information technology and
    engineered products.
  • Venture Investors, a Madison-based firm with
    offices in Ann Arbor, Mich., has already made six investments from its latest
    $80-million fund.
  • Brightstar Wisconsin Foundation has received
    Internal Revenue Service clearance to move ahead with its plans for a fund with
    a non-profit model, starting with $7 million.
  • More major state companies, such as American
    Family Insurance in Madison, are investing in young companies for reasons often
    tied to their own core businesses – but sometimes not.
  • Investors from outside Wisconsin are making
    their presence known through involvement in accelerators, startup events and
    more, not to mention direct investments in young state companies. At the
    Wisconsin Early Stage Symposium in November, investors from Texas, New York and
    California were among those kicking tires on new companies.

Not all is rosy, however. Wisconsin’s angel networks and
funds, as well as its individual angels, were generally the first to invest in
young companies over the past decade. Many of those angels must see profitable
exits – such as a company sale or merger, an initial public offering or a
follow-up investment that buys out their interest – before they plow money into
new deals.

One of Wisconsin’s historic sweet spots is biotechnology,
but there aren’t as many investment dollars in the health-care sector as there
were in the past.  The reasons include longer regulatory pathways for
drugs and medical devices and fewer investors in that asset class, which means
more deals must be syndicated among multiple investors to get done.

On balance, prospects for more early stage investments in
Wisconsin appear better than they have been since before the Great Recession.
The devil lurks in the term sheet details, however, so the real test is whether
a spurt of fund activity leads to new deals in the New Year.