Nonprofit Investor BrightStar Herds Startup Deals, Seeks More Donors

Some dealmakers weren’t sure what to expect from BrightStar Wisconsin Foundation when the nonprofit, which invests donations into Badger State startups, came onto the scene in late 2013.

Turns out, the organization has proven itself not only as a valuable, albeit small, source of capital, but also as a shrewd negotiator that has pushed fellow investors to wrap up deals more quickly, supporters say. That’s a boon for both cash-strapped startups and their backers.

“In a market where speed is the ultimate weapon, BrightStar’s ability to help rounds close that much sooner is a tremendous asset to the region,” says Joe Kirgues, co-founder of Wisconsin startup accelerator Gener8tor. Under a partnership formed last fall, BrightStar will invest $50,000 in each of the accelerator’s portfolio companies that have a Wisconsin presence.

BrightStar uses an unorthodox venture philanthropy method that pumps charitable donations from wealthy individuals and foundations into early-stage companies that are creating jobs in Wisconsin. Any returns BrightStar receives will get plowed back into its fund.

The organization has raised $7.85 million from donors so far, and it poured more than $2 million into 14 companies in 2014, BrightStar reported last week. It has invested in companies located across the state and in sectors spanning healthtech, software, life sciences, aircraft engine manufacturing, construction materials, dairy, beer, and more, BrightStar portfolio manager Todd Sobotka says.

The foundation still has a lot to prove about its model, including whether it can consistently pick startups that provide good returns and if the combination of a tax write-off and contribution to growing Wisconsin’s economy is enough to entice people with deep pockets to write bigger checks to the nonprofit.

Nevertheless, BrightStar in its early stages seems to be having a positive impact on a Wisconsin startup community whose entrepreneurs often complain that there are not enough sources of early-stage capital, and that local investors sometimes drag their feet.

Delays of weeks or months in closing a funding round can wreak havoc on entrepreneurs, who in some cases are living off of savings and credit cards. Waiting longer for the capital infusion can also mean putting off new hires, marketing campaigns, and product development, Kirgues says. “We’ve often found that the delay ended up impeding the investment’s ability to be successful,” he adds.

BrightStar never acts as a lead investor in a funding round, instead putting in around $200,000 to help fill out the deal as part of a syndicate of investors. That means that it doesn’t have to perform all the due diligence research on potential investments; it doesn’t negotiate deal terms; and it typically invests the amount requested by the entrepreneur, Sobotka says. Thus, BrightStar can move quickly, helping to balance out the cautious, slow-moving nature of some Wisconsin investors.

“Working with BrightStar, bringing them into a deal, is about the most pain-free and simple thing any entrepreneur could ever do,” says Forward Health Group CEO Michael Barbouche, whose Madison startup received BrightStar money through a recently announced $5.7 million round.

The nonprofit also has taken an earlier and more active role in the deal-making process than Kirgues anticipated. At times, Sobotka has coaxed other investors at the table to speed up their decisions and has acted as mediator to help the entrepreneur and other investors “find common ground on perhaps final sticking points,” Sobotka says.

“We thought just before a round closed, you might call BrightStar to close out the round,” Kirgues says. “What has happened is much better.”

Now, the challenge is for BrightStar to sustain and perhaps increase its level of activity. Sobotka says the organization has more than $2 million in cash on hand, which should be enough to make as many deals in 2015 as it did last year. But to remain viable longer term, it will need donations to keep flowing in and will need to see some exits from portfolio companies.

The fund was seeded with $5 million from eight entrepreneurs, investors, and business executives with Wisconsin ties. Early on, BrightStar secured a $1 million donation from Milwaukee investor Albert “Ab” Nicholas, and the nonprofit has since received another $1.85 million from more than a dozen individuals and foundations, president and CEO Tom Shannon says.

The $7.85 million is a respectable amount, but it means BrightStar is way behind the fundraising pace its co-founders initially targeted—at least $60 million in the first three years, on top of the initial pledges. “To make a difference, we really need to get some big bucks coming in,” Shannon admits.

But he’s not concerned with BrightStar’s fundraising pace in its first year. “I’m happy with how things went, and we look forward to continuing to have donations come in, and have a number of things in the works for 2015,” Shannon says. If BrightStar can snag “$2 million to $5 million a year, we’ll be just fine. Then with investment gains, we’ll get to where we want to get to.”

It helps to be a nonprofit that doesn’t have the same turnaround pressure as a traditional venture capital fund, Sobotka says. “What’s nice is we don’t have the normal horizon like all the other funds that need to make all their investments and wrap up within eight to 10 years. We’re an ongoing, perpetual entity.”

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

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