Ability Network Exit a Win For WI Investors Outside Metro Hubs
When Boston-based Summit Partners acquired a majority stake in Minneapolis-based healthtech firm Ability Network in April for $550 million, the deal got no press in nearby Wisconsin. That wasn’t a surprise: Ability Network has no major presence in the Badger State.
But the deal, which was among the largest healthtech transactions nationwide in the first half of 2014, brought a big payoff for a group of Wisconsin investors. One of Ability’s early investors was the Chippewa Valley Angel Investors Network (CVAIN), based in Eau Claire, WI, 93 miles east of Minneapolis. When Summit Partners bought out most of Ability’s shareholders, CVAIN’s return was 11 times the size of the three investments it made in Ability since 2006, says Pete Marsnik, the group’s manager. He declined to specify the exact figure, but considering he says the group invests an average of about $250,000 per deal, with the group’s largest single investment in a company being around $650,000, the Ability windfall was likely well past $1 million—and potentially a lot more.
It was the second exit for CVAIN’s roughly $4 million portfolio, which includes investments in 11 companies, Marsnik says. The first exit was BioSystem Development, a Madison, WI, biotech firm purchased in 2011 by Santa Clara, CA-based Agilent Technologies—netting CVAIN double its investment. Only one CVAIN portfolio company has called it quits, Marsnik says.
The successful exits are a reminder that not all of Wisconsin’s startup investing activity takes place in and around Madison and Milwaukee—and that the angel groups located in less populous areas outside of southern Wisconsin can achieve wins, too.
“This is what angels root for with high-risk investing: Staying with a company as it grows and raises additional rounds, and eventually leading to significant returns,” says Dan Blake, director of the Wisconsin Angel Network in Madison. “These are the deals that can make others with the means perk up and explore what it means to invest in impactful entrepreneurs.”
CVAIN is one of the most successful of these lower-profile Wisconsin angel groups. Founded in 2003, CVAIN doesn’t operate like a fund. Instead, its 20 members, scattered across western Wisconsin, decide individually which deals they want to jump on. The group invests mainly in local Chippewa Valley companies, as well as making deals in the Twin Cities and Madison areas. It’s industry-agnostic, with investments in software, aircraft diesel engines, energy-efficient log splitters, and medical devices, among others, Marsnik says.
Xconomy recently chatted with Marsnik (pictured left) about CVAIN’s investments, his outlook for startups in more remote parts of Wisconsin, and the impact of new venture funds in Milwaukee and Madison on investors around the state. The following is an edited transcript.
Xconomy: How important is an example of a successful exit, like yours with Ability Network, for investors in areas of Wisconsin outside of Madison and Milwaukee?
Pete Marsnik: I think it’s very important. It’s a good example of what…angel investment…is all about. It’s the high risk, high reward potential. If you have 10 investments, one or two might hit it big [and] two or three are going to go out of business. The balance is going to be struggling, probably creating jobs and contributing to the economy, but the investor is going to be getting a return somewhere down the line. This is what patient money is. It’s the big hitter that covers everything else.
With that said, every time the group makes an investment in a company, it always looks like it’s going to go out of the park. There are just so many things to happen that you can’t predict or you can’t foresee. I’ve yet to see an investor say, “this company looks like it’s not going to make it, it’s going to be a dog—and here’s my $10,000 portion of the investment.” They all look like a good investment that’s going to hit it out of the park when you swing at it. That’s the reason that most of the angel investment goes after the high-growth ventures or the ones that can really have a double-digit multiple.
X: How would you describe the startup scene in west-central Wisconsin?
PM: We have quite a bit of activity going on in a lot of areas. There seems to be, in the last several years, quite a bit in software and information technology. [JAMF Software founder] Zach [Halmstad] is a real fun story. He bootstrapped his company. They finally took some strategic investment in the last year or so. [Editor’s note: CVAIN is not an investor in JAMF.]
There is other, what I call guardian angel or super angel activity in the region that you see happen. That stuff is going on.
And I see a lot of the IT-type of stuff, which probably is a residual from the Cray Computer days, which was the major player in the region. Now that’s turned into Silicon Graphics, TTM [Technologies], and all the spinoff companies, including the Cray Computer that’s still there.
But then programmers and the other high-tech type companies were affected by that and are here because of that. I think that’s part of the reason why Chippewa Valley Technical College developed their nanotechnology development center. And UW-Stout has their Discovery Center with an incubation center as well, and there is a pretty good-sized materials science lab at UW-Eau Claire. There’s a lot of the support structure in the area for that type of high-tech that’s really somewhat quiet from a statewide view.
Then you have companies like Phillips Plastics [now Phillips-Medisize], and I know there have been offshoots that have come off of them.
Then also in the lifestyle businesses, there’s a lot of activity that’s going on. It could be camping equipment; it could be grow boxes for growing flowers and plants inside apartments.
There’s also been some growth in entrepreneur networks. The Innovation Foundation of Western Wisconsin is something that’s popped up to help people who want to start up companies. There are a lot of ideas out there that aren’t yet ready for primetime and ready to kickoff, and there are some that are just bootstrapped, and they’ll start it up and they can get going.
X: Are you bullish on the future for startups outside of Wisconsin’s two major hubs?
PM: Yeah, I am. I think that it’s a good time. I think that the economy is improving, which I think helps. When the recession hit, I think you saw…a lot of people starting things up because they didn’t have any other options, and they may not be really meeting a market need. Then they might move back into the labor force when things improve.
But now, the ideas I’ve been seeing in the last year and a half or so seem to have a little more substance to them. That’s a combination of things, but I think it looks pretty good.
No matter who does it and when they do it or where they do it, it’s always hard work. It’s just as hard in Eau Claire as it is in Madison or in Ladysmith.
X: Is there anything holding back your region from having startup activity?
PM: There are a lot of resources, but they’re spread out. It’s not the same way if you’re coming out of [Wisconsin Alumni Research Foundation] technology that goes to University Research Park [in Madison], or what you might see in the Twin Cities with the medical device opportunity.
But I do think there might be advantages. The cost of living is lower. For recruiting, it’s a nice place to live. It’s a good environment, good schools. So that part is a positive. But the resources are more spread out. So they might not have the same things at UW-Eau Claire—or you might need to go to Stout, or you might need to go to River Falls—that you might find on one campus in Madison. But when it really comes down to it, I don’t know how limiting that really is.
What I’m not totally sure of yet is the overall entrepreneurial spirit of the region. I think that it’s becoming more [strong]. …In the past…you had a lot of what I’ll call offices or manufacturing centers for companies started elsewhere. The question is, when you start a company as an entrepreneur, if the company doesn’t survive, do you go back to another job or do you start something new? Seeing things like JAMF move it in the direction of, “there’s an entrepreneurial spirit here that is going to make good things happen.” [Editor’s note: Technically, JAMF headquarters are in Minneapolis, but the majority of its employees remain in Eau Claire, where the company was born.]
X: There’s been a lot of buzz over the past year about new funds cropping up in Wisconsin, including 4490 Ventures in Madison, CSA Partners in Milwaukee, BrightStar Wisconsin Foundation, and the state-backed Badger Fund of Funds. 4490, BrightStar, and the fund-of-funds have explicitly indicated they’ll invest statewide. But it’s quite likely the majority of deals will still happen in Madison and Milwaukee. How optimistic are you that other parts of the state, including the Chippewa Valley, will reap any benefits from these new funds?
PM: I guess we’ll wait and see and find out. There are some opportunities statewide that I think fit. I hope that they see those and participate in those types of deals. But you’re correct, just the sheer volume of deals, lends it toward most of those investments are probably going to be in the major population centers.
I think any time that you have more money coming into the system, it’s generally a good thing. I also think we’re going to see the M&A process heating up some. When you start to see more mergers and acquisitions, that means more exits. There have been fewer exits in the last few years coming out of the recession. That makes the early investor more patient and less likely to invest in new stuff. When exits happen, that lubricates the process in the future.
My hope is, as the angel investor group spokesman, we don’t go too far to where there’s bigger money in VC, but [where] we lose sight of some of this early-stage stuff. There’s a lot more companies getting funding, and they need it when they get to that next level. We don’t want all the funds to just go to the VC area because when that happens, there’s usually fewer deals with more money.
There’s nothing that will dry up that supply of businesses quicker if early-stage investors don’t get the most rewards for taking the most risk.