Startups Still Abandon Wisconsin, But Growing Cluster Keeping More Here

8/4/14Follow @XconomyWI

SurveyMonkey has come a long way since Ryan Finley started the company in his Madison, WI, apartment.

The online polling service, which counts Facebook and Harvard among its customers, began in 1999 after Finley earned his computer science degree from the state’s flagship university.

It survived the dot-com era’s collapse, reportedly bootstrapping its way to $30 million in sales before selling to Spectrum Equity and Bain Capital in 2009.

Last year, a huge new financing round valued the company at $1.35 billion. SurveyMonkey now employs more than 250 people in the U.S. and Europe.

But Wisconsin is reaping none of the benefits of SurveyMonkey’s growth—no jobs, no tax revenue, and none of the industry buzz that comes with housing such a valuable company. That’s because Finley moved SurveyMonkey to Portland, OR, in the company’s early years, and later established its corporate headquarters in (you guessed it) Silicon Valley.

SurveyMonkey isn’t the only prosperous startup that Wisconsin has missed out on. Silver Spring Networks was founded in the Milwaukee area in 2002, but relocated two years later to California. That company, which makes software for smart grids, raised $81 million in an initial public offering last year.

More recently, tech startups like TrustEgg, Spill, and Understory have left America’s Dairyland for what founders see as greener pastures in other parts of the country. Others, like StudyBlue, remain incorporated here and have kept a few key staff members local, but have shifted most of their operations and employees elsewhere.

There’s no doubt losing those companies hurts Wisconsin’s efforts to wean its economy off a dependence on agriculture and old-school manufacturing by building a high-tech cluster. Although the state continues to rank poorly in entrepreneurship rates and venture capital investments, it’s starting to build some momentum with new micro-VC funds, groups striving to nurture the nascent startup community, and a small-but-promising crop of growing young companies.

But Wisconsin still has few tech startup wins to its name—which underscores the missed opportunities with success stories like SurveyMonkey and Silver Spring Networks.

“Had both of those companies stayed in Wisconsin, we’d even be further along today,” says Tom Still, who has helmed the Madison-based Wisconsin Technology Council since 2002. “They would have been significant players in this state to this very day. But I don’t think anyone is dwelling on the fact that they felt they had to leave at that point in time.”

These company relocations still occur. But Still points out that there are more reasons now for a startup to stay here than there were a decade ago.

“I think our ecosystem is as strong as it’s ever been in my experience,” Still says.

Joe Kirgues, who co-founded Wisconsin startup accelerator Gener8tor in 2012, has watched that strength grow. The 23 companies that have graduated from Gener8tor’s program have gone on to raise about $25 million and create more than 150 jobs, Gener8tor says.

“The number of companies that are being funded [in Wisconsin], the quality of those companies, and the velocity of activity is almost unrecognizable” compared with four years ago, when Kirgues began directing angel investments, he says. “I think we’d all admit that as far as we have come, it almost underscores for us how much farther we have to go before we hit our full potential.”

So what’s holding the state back from realizing that potential? Over the years, the reasons most often cited by founders for uprooting their companies from Wisconsin include a dearth of nearby investment dollars, more abundant talent elsewhere, and a desire to be close to a more developed industry cluster or startup ecosystem.

Startup founders, eyeing a buyout to get a return for their investors, might also move to the coasts because there’s more merger and acquisition activity, particularly involving software startups, Kirgues says.

“A big issue is that the Midwest doesn’t have a lot of companies that acquire startups. It’s holding up liquidity here,” Kirgues says. “We’re surprised that there’s not more corporate acquisitions in the Midwest by Fortune 500s located here that are looking to gain capable talent and products in mobile or the Internet of things.”

It’s unclear exactly why SurveyMonkey’s Finley chose Portland over Madison, and he and the company’s public relations team didn’t respond to requests for comment. But money was the issue for Silver Spring Networks, which was named after the Butler, WI, street—Silver Spring Drive—where it was born.

When the company tried to raise money in 2003, it couldn’t find any interested investors in the Midwest, co-founder Eric Dresselhuys told the San Jose Mercury News in 2011. The startup ended up being funded by a Denver angel investor and Foundation Capital in Menlo Park, CA. As a condition of Foundation Capital’s investment, Silver Spring had to move to Silicon Valley.

Spill, started by Heidi Allstop in 2009 while she was a University of Wisconsin-Madison junior, was drawn to Boston in 2011 when it got accepted into the Techstars accelerator program there. The company started as a social network aimed primarily at college students seeking an anonymous forum for speaking openly about their personal problems and emotional struggles. Allstop, a former crisis counselor, initially decided to keep the company in Boston because of its dense concentration of college campuses. In 2012, she moved it to California because Spill was shifting toward being a social network for the masses, not just students, and there are more industry mentors, peer companies, and resources for social networks in Silicon Valley, she says.

“Moving back to Madison would’ve been awesome, but it just didn’t make sense for our business,” Allstop says.

Roughly a third of Spill’s $650,000 in equity funding came from Wisconsin investors, Allstop says, but she has struggled to raise money from Midwest investors who aren’t as willing to place risky bets and who often pursue startups that are generating revenue and have concrete financial projections.

“For a social network, it’s impossible to show that kind of stuff, which makes fundraising challenging,” Allstop says. “They can get the idea and know the space is hot. But since it’s not their forte, it’s harder to find angels who will write a check.”

San Francisco has its own set of challenges, not least of which are the outrageous cost of living and the spiking prices for office space.

“If I were to start another company, I would love it to be in Madison,” Allstop says. “I’m really jealous that I’m not there for this exciting time of growth for the entrepreneurial community.”

Observers say talent is no longer a barrier for Wisconsin startups, thanks to strong college programs like computer science at UW-Madison, and the fact that salaries for software developers and engineers here are a fraction of the rates in Silicon Valley. It has also become easier to lure C-suite talent to middle and late-stage companies in Wisconsin because there’s a more robust group of employers they could jump to if the venture fails, Still says.

“I think it’s reached the point where CEOs need not necessarily worry that if something doesn’t work out with a company, that they automatically have to pull up their family and move elsewhere,” he says.

And while VC funding still remains a concern, Wisconsin has grown a healthy network of angel groups, thanks in part to a state tax credit passed in 2005. Several new in-state VC funds are also ramping up, and some Wisconsin startups have successfully raised later-stage funding rounds from investors outside the state—without relocating their companies.

“I think that there’s less pressure today than five or 10 years ago for companies to move simply because of the investment dollars,” Still says. “That doesn’t mean it doesn’t still happen, I just think it’s not as prevalent as it was in the past.”

Propeller Health, the Madison-based startup that has developed a cloud-enabled device for monitoring respiratory diseases, has raised $8 million from a group of investors that includes Palo Alto, CA-based The Social+Capital Partnership; Oakland, CA-based Kapor Capital; and the California HealthCare Foundation. Propeller has 29 employees at its Madison headquarters, plus seven more sprinkled around California, Nashville, and Chicago, CEO David Van Sickle says.

Van Sickle previously worked as an epidemiology service officer for the Centers for Disease Control and Prevention in Atlanta. He moved to Madison for a Robert Wood Johnson Foundation fellowship, and says he was excited about living there because UW-Madison is a leader in respiratory and population health research.

He co-founded Propeller in 2010 and says that so far, its location hasn’t really affected the business.

“With digital tools and constant collaboration, the fact that some of us contribute to that effort from here or there just hasn’t been a barrier to our progress,” he says.

The same goes for JAMF Software, which is proving that IT companies can thrive in smaller cities with tech centers that are even less developed than Madison and Milwaukee. JAMF was founded in 2002 in Eau Claire, WI, a city of about 67,000 people about 90 miles east of Minneapolis.

JAMF, which develops enterprise management software for Apple products, has attracted $33 million in VC and grown to 150 employees in Eau Claire, with another 100 at its Minneapolis headquarters and small offices of about a dozen people in New York, Amsterdam, Sydney, Hong Kong, and Cupertino, CA.

“I don’t believe that just being in a location is what makes you successful,” founder and co-CEO Zach Halmstad says. “The people you have around you and how you act toward them, and how you act toward your customers, is more important than where you are.”

For JAMF, the Midwest’s central location is a plus because it has customers nationwide, Halmstad says. He has also found Midwest-bred employees to be quite loyal. “I haven’t seen significant reasons why we shouldn’t be in Wisconsin, why we shouldn’t be in Minnesota,” Halmstad says.

Another reason to stay put? Auspicious Wisconsin startups are bigger fish in a smaller pond here, Allstop says.

Even though there might be fewer startups leaving Wisconsin these days, and there’s arguably a more compelling case for them to stay than there was even five years ago, it’s inevitable that some companies will continue to move away. And disappointed locals shouldn’t denounce those startups for that choice, observers say.

“Every company has to make a decision that’s in that company’s best interests,” Kirgues says. “To offer a blanket explanation of why you should stay or go misses a lot of the nuance that explains really what’s going on.”

Kirgues prefers not to play the “what if?” game with cases like SurveyMonkey and others.

“There is a little bit of a hangover from having missed out on these opportunities over a decade ago,” Kirgues says. “But I think it’s important to be looking out the front window and not out the back mirror.”

Jeff Engel is the editor of Xconomy Wisconsin. Email: jengel@xconomy.com Follow @XconomyWI

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