Schuster: Milwaukee Has Good Startup Ideas, Still Lacks Capital

Milwaukee’s economy still relies heavily on legacy manufacturing companies, but there’s a growing recognition of the need to seed new businesses in sectors with prospects for growth. Efforts are afoot to foster more entrepreneurship in sectors like water technology, energy, and software, and to spin more startups out of the area’s universities.

And while most Wisconsin startup observers would agree that the state’s biggest city trails the state capital, Madison, when it comes to startup activity, that doesn’t mean Milwaukee lacks good ideas. That was one of the takeaways from a presentation Thursday by Tom Schuster, managing general partner of the Milwaukee-based Wisconsin Super Angel Fund (WSAF).

“Everybody says all the good technology is located in Madison. That’s an illusion,” Schuster said, speaking at a luncheon in Wauwatosa hosted by the Wisconsin Innovation Network, an arm of the Madison-based Wisconsin Technology Council.

He’s putting money where his mouth is. WSAF, a more than $9 million fund that launched in March 2013, has invested in six companies: three in the Milwaukee area, two in Madison, and one in Port Edwards in central Wisconsin. Those companies collectively employ 60 people, Schuster said, and span sectors from software (Fishidy, Cover5, RoofMarketplace.com) to advanced battery technology (Silatronix) to manufacturing equipment (MCT) to cranberry products (Simply Incredible Foods).

WSAF will invest between $250,000 and $1 million in each deal, typically coming in at the Series A round, after a company has a fully developed product and at least some early customers, Schuster said.

WSAF is backed by 65 limited partners and five foundations. But securing the initial $5 million to launch in 2013 was no easy task, Schuster said. “We spent almost two years raising that $5 million. It was like pulling teeth out of a chicken.”

Those who invested “could see the fact that the businesses that built Milwaukee are going away,” Schuster said. “That’s why we’re doing it.”

Madison has a well-established track record of churning out venture-backed life sciences startups that have gone on to big acquisitions, and in recent years, the city has produced a number of software companies that have snagged money from investors and gotten snapped up by the likes of Twitter (NYSE: TWTR) and Google (NASDAQ: GOOG). Much of the city’s startup activity is driven by the professors and graduates of the University of Wisconsin-Madison and the presence of medical records software giant Epic Systems.

Schuster’s assessment of Milwaukee’s efforts to spur more startups? There are some good companies out there, but there’s still a long way to go. Schuster thinks some of the necessary ingredients exist in Milwaukee, including a healthy group of accelerators, incubators, and business mentors. But the city (and really the state as a whole) still lacks enough early-stage funding options, Schuster said. “Without the money, we’re all cooked.”

There are signs of improvement. WSAF is one of several new startup investment groups that have popped up in the past couple of years. Others include 4490 Ventures, BrightStar Wisconsin Foundation, CSA Partners, and Madison HealthX Ventures, which is expected to make its first investments this year.

Those investors appear to be getting into the game at the right time, if Schuster’s experience is any indication. A couple deals per week were coming through WSAF’s office in its early days. Now, the fund is looking at one potential investment per day, Schuster said. “The deal flow in the last two years has gotten dramatically bigger and dramatically better.”

Jeff Engel is a senior editor at Xconomy. Email: jengel@xconomy.com Follow @JeffEngelXcon

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