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WisBusiness: Venture Investors' Neis a Key Player in Growth of Many State Firms

By Brian E. Clark

MADISON – Getting early stage companies off the ground is no easy thing. They need money, management help and other guidance. And then often more money.

That’s where people like John Neis, a co-founder and senior partner at Venture Investors, come in. His firm - which dates to the mid-80s – manages more than $80 million in private equity that is dedicated to funding innovative and growing early stage technology firms.

Though Venture Investors has backed companies in Milwaukee and around the Midwest, its primary focus is in Madison, where it has close ties to scientists at the UW-Madison – one of the nation’s leading research universities. Neis says the situation for state start-ups is "far ahead of where we were five or 10 years ago."

He says state support has been good, but there's always room for improvement.

"I’m afraid that we have a fear here of doing anything bold," Neis says. "They want to throw relatively small dollars at these initiatives – and given the budget situation in recent years, I understand that – but then they spread out the money so thin to make sure there is a little bit on everyone’s bread. The net effect is minimal. We need to be more aggressive and not be afraid to pick sectors where we have core competencies and a willingness to go for it."

Neis serves on the boards of Third Wave Technologies, TomoTherapy, NimbleGen Systems and Deltanoid Pharmaceuticals - all Venture Investors portfolio companies.

He is also on the advisory board of the UW-Madison Business School’s Applied Ventures Entrepreneurship Program. An avid cross-country skier, he has completed the grueling, 30-mile Birkebeiner cross-country ski race in northwestern Wisconsin an impressive 17 times.

WisBusiness.com editor Brian Clark spoke to Neis recently about his firm and its work.

Clark: Why is what you do important?

If you look at the industries of the future with the high-paying jobs, they are in sectors where there is a high degree of intellectual property. These are companies that are venture-backed.

The typical salary is about double the state average. And growth rates in venture-backed companies – in terms of revenues and employment – are on a totally different scale than the rest of the economy. It is 40 percent per annum vs. flat or even declining in some sectors.

It is important for us as a state to focus on new, high-tech companies as a part of our economic future. It is a challenge for us to get people to understand that.

The first place in Wisconsin to recognize this was Dane County, specifically the Madison area because of the university and the huge asset that it is. Milwaukee was very slow to pick up on it, in part because of its historical manufacturing base.

I recall conversations with people from there 10 to 15 years ago who were very dismissive of what we were trying to do here. Milwaukee is getting it now. The Medical College of Wisconsin and the Biotechnology Alliance are players. And the fact that UW-Milwaukee is aspiring to become a significant research university is very good.

I’m not sure it’s understood in other pockets of the state, or even in the Legislature, which is evident with what has been happening with criticism of UW-Madison. Some like to say Madison is on a different planet, and are dismissive that we aren’t in touch with reality. They think that what goes on here is not relevant. We need to do a better job of helping the rest of the state understand that fostering and nurturing new companies is a good thing and that they can benefit from this same phenomenon, too.

Clark: What kind of return do VC investors hope for risking their money?

If you look at funds as a whole over the average holding period of six to seven years, we hope for a return of three times investor capital – or about 20 percent per year. That would put us in the top half or top quartile.

Every company we invest in, though, has the potential of being a home run and returning 10 to 15 times the initial investment. But the reality is that a third of all deals lose some or all the money invested. That’s why you need those companies that are potential big winners.

Clark: What is the name of the new fund that your company recently initiated?

It is the Venture Investors Early Stage Fund IV, Limited Partnership and we closed on $69 million. The major institutional investors are the State of Wisconsin Investment Board (SWIB), Century Insurance, American Family Insurance, Wisconsin Alumni Research Foundation, Wisconsin Alumni Research Foundation (WARF), U.S. Bank, Northwestern Mutual, WEA Insurance, MGE Energy and Thrivent Financial.

Clark: How is this fund different than others?

The strategy remains the same. Our last fund was $37 million. We now have substantially more money and are able to do more per deal. We have greater capacity and more staying power. We also have expanded our team and have a lot of experience around the table in venture capital investing. We have more than 60 years of combined experience. We’ve often gotten involved in very early stage companies and made our initial investment at a time when they were just setting up operations off campus. We’ve seen situations where a little more help was needed with company formations to get them up and running. By adding people with operating experience, we can be very helpful in those formative stages until professional management is on board.

Clark: Who have you brought in?

Winslow Sargeant is one. He’s a UW-Madison graduate, in his early 40s and originally from Boston. He got his PhD in electrical engineering here and then went off an worked for IBM and Lucent, and then co-founded his own company. It was a company based in Allentown, PA, that designed semiconductors and then outsourced the work. It started in 1997 with initial seed funding from CISCO and was sold in 2000 for $900 million. Their timing was good. It was the top of the bubble. Winslow has the entrepreneurial experience of working through all the challenges.

Clark: Did you say the company was in Allentown, PA?

Yes. And that’s not the semiconductor capital of the world. It proved to him that you don’t have to be in Silicon Valley to create a very successful company. From there, he went off to the National Science Foundation, where he was a engineering Small Business Innovation Research (SBIR) grant program manager for four years. He became sort of a venture capitalist for the government. He has been an advisor to our fund since 2002.

When he finished his appointment at the National Science Foundation, he wanted to get involved with developing companies again. We saw a good fit. He’s also a WARF trustee and sits on the UW Foundation.

Clark: How did you get here?

I’m a Milwaukee native. After finishing my undergraduate degree at the University of Utah, I started and ran a furniture business for about six years before coming back here for graduate school.

I went out there for the quality of the education, it had nothing to do with the great skiing at places like Snowbird, where I had a season pass. (Chuckle). But I got the entrepreneur bug in Utah.

While I was in graduate school here, I had one professor I really enjoyed and spent a lot of time talking with him about case studies. He made me aware of Roger Ganser, who had started what was then Madison Capital Corp., which was spinning out of Madison Development. He constantly had people coming down from campus, looking to start a business around a high-tech idea.

But it was not something you could do with fixed-asset lending. So he started a venture capital fund, raised $1.5 million and made the first two investments in 1984. They were Promega and Office Solutions, great initial investments. I joined him in May of 1985 on a part-time basis during my last year of graduate school.

Clark: What did you get your degree in?

It was a master’s in finance and marketing. When I graduated, Roger and I developed the strategy of trying to focus in on early-stage companies. We recognized that it was a niche that nobody was really going after. We then got support from our investors and increased the pool of capital to about $7 million.

Clark: Were you Venture Investors at that time?

We changed the name from Madison Capital Corp. to Venture Investors of Wisconsin in 1986 to reflect a statewide focus. It’s been 20 years.

Clark: How did that fund do?

Very well. We had some big success stories with the likes of Third Wave Technologies, Northward Press and Promega. That fund was set up as an evergreen fund where we would roll dollars over as we exited and reinvest them. We invested about $9.5 million in companies and turned it into about $40 million.

With that, we felt that we could raise more money. We also came to the conclusion that we were doing well enough – and the IRS was doing well enough off us because that fund was set up as a corporation. We were paying corporate-level taxes, though the more traditional way to set up a venture capital fund is a limited partnership. In 1997, we decided we would wind up the affairs of that first fund and raise a more traditional limited partnership.

We closed on our second fund in 1997 and raised additional funds in 2000 and now have had a closing on our fourth fund of $69 million.

Clark: What are some of the other major VC firms in Wisconsin are?

You’ve got Mason Wells in Milwaukee, and their roots can be traced all the way back to the old M&I Ventures, Baird has a significant fund, though they are focused on a little later stage than we are. Frasier has an office here, but I’m not aware of any investments they’ve made at this point, but they do have an office in the state. (NOTE: After this interview was completed, Avolte Venture Partners Midwest announced it plans to open a Madison office to invest in startup life science and information technology companies in Wisconsin and the Midwest.)

Clark: Do you take over after the angel investors have gotten a company off the ground? How do you work with them?

That can take a variety of forms. Look, there are some companies that will never need venture capital or will never be a good fit for venture capital. The angel route might make sense for them. For companies that need very little capital over time, that could be an easier or better route.

There are other companies that are going after such big opportunities that the size of the capital requirements right out of the chute are so significant that it doesn’t make sense to go after an angel round. They should go after venture capital right away. And then there are companies that may need significant amounts of capital over time that may need angel money first to get to certain milestones to make them more attractive to venture capital firms.

We have co-invested with some angels. And we’ve had many situations like with Third Wave, where we backed them when it was the three founders looking for office and lab space. So there is a variety of ways we can look for angels. Overall, a lot more companies get funded by angel investors nationally. But the average size of the funding is relatively small.

The average round of venture capital financing is about $6 million, and most companies go through multiple rounds of financing. It’s not uncommon for a company to raise $20 million over time. Clearly, that is a very difficult amount of money to raise in an angel environment. But there are overlapping circles of investment activity.

Clark: When you invest money in a company, what sort of equity to you take?

Our funds have a 10-year life. Our goal is to make our investment and have a liquidity opportunity within the life of the fund. I think the industry data shows that a lot of funds’ lives extend beyond their horizons because there is a trailing company or two that doesn’t create the exit opportunity.

What we do best is try to help companies when they are in their formative stages and get them to a point in development. Our investors are institutional investors for the most part, but also some individuals. They need eventual liquidity, so we are looking for companies that share our vision of trying to have very rapid growth and have liquidity either through a sale or through a public offering.

We have found that our average holding period is about six or seven years, though sometimes longer or shorter.

Clark: Is it just Wisconsin companies that you invest in?

No. We view our target market as a seven-state area, but the vast majorities of the deals we have done have been here for the simple reason that we want to be actively engaged. We want to be able to interact on a regular basis, pull upon experts in a variety of areas that we know and all of that is a lot easier to do for a company that is local.

Let’s face it, I’d rather walk down the hall of the (MGE) Innovation Center to meet with a portfolio company rather than get on an airplane. For companies in Wisconsin, in most cases we are a lead investor. When you start looking outside the state, we are more commonly a participating investor. Someone else who has a stronger local presence is serving as the lead.

It is important for us to not create artificial boundaries at state borders because we are trying to maximize returns for our investors. But it is also important from the standpoint of building syndicate relationships. We are never the sole source of financing for a portfolio company. We have a lot of companies that have raised $20 million to $50 million over time, but we only provide a portion of that. By participating in deals outside the state and inviting people into our deals, we are building networks that make us more effective by syndicating these rounds of financing.

Clark: The Midwest is often described as “flyover” country by venture capitalists on the coast. Is that an advantage for you?

It is a double-edged sword. The advantage is that if there is someone at Stanford with a good idea, there are hundreds of venture capitalists nearby looking for that next opportunity. From our standpoint, we feel like we have a much greater breadth of quality deals to look at. Also, we are here, we have relationships in the community and are a known quantity. People can check with other companies we’ve backed and find out what we are like to work with.

The challenge we all have in the Midwest is that we need to pull together a syndicate for companies that need $20 to $40 million over time. And that can mean going to the coasts. That gets easier as a company goes down the development path. But some of the early obstacles are skepticism about our ability to attract experienced people here. But we’ve shown time and time again that if you back a company adequately, you can attract stellar people.

Some companies will tell you that when they have gone to the coasts early on to seek funding, VCs said they have a great idea and as soon as they move, they would back them. But once you have established yourself and attract quality people, you can get over that hurdle.

Clark: When you say attract people into the company, does that mean scientists or managers?

We have a phenomenal pool of scientific talent in this community. I don’t want to downplay the managers we have here because we have a highly skilled group of people in that area, too.

We often are approached by people who went to school here, have roots here or spent the early parts of their careers here and want to come back. They may have been on the coasts, have a tiny home worth $800,000 and have kids in school or aging parents. It could be a wide array of things bringing them back – if there is the right opportunity.

Historically, one of the challenges is the fact that a significant number of startups don’t make it. So they are concerned about moving their families here. The other side is that if the company is wildly successful, it might be acquired in four to five years and they find themselves looking for their next opportunity. They wonder if they might have to uproot their family again.

Now, though, I can point to a number of serial entrepreneurs in our community. They are people who have been involved with one company after another as new things have emerged. So I think now people have more comfort with relocating here.

Clark: What do you see happening in the next five to 10 years. Are Madison and Wisconsin reaching any kind of critical mass?

Yes. We have a couple of assets that many other areas would be envious of having. We have one of the greatest research engines anywhere in the world with the University of Wisconsin. Let’s face it, you can’t easily replicate that. You either have it or you don’t. We are also blessed to have the Wisconsin Alumni Research Foundation as the licensing arm of the university. WARF is very good at what it does and is one of the most successful licensing offices in the country.

WARF understands the entrepreneurial model and is willing to throw the technology over the wall and give people a chance to run with it. They also have a huge foundation that they have developed over the years. And that gives them the wherewithal to do things that other licensing offices can’t do.

Madison is also on the top 5 of just about everybody's "places to live" list for good reason. It was interesting to go to a place like BIO 2006 in Chicago and walk the floor and see every state touting their quality of life. But I’ve been to Omaha and it’s not the same as here. That’s a huge asset.

We have been capital-constrained historically. But I think we are making great progress. It’s not where I’d like to be, but it’s getting better and we are far ahead of where we were five or 10 years ago.

Clark: What has changed in that time?

Mason Wells and ourselves have larger amounts of capital than we ever did in the past so we have active funds that are actively engaged in this kind of investing. We’ve had some success stories. Prior to having those success stories, it’s hard to get anyone to believe that you can make it happen here. So the institutional investor interest is higher than it’s been.

A lot has happened in terms of developing angel networks and that is getting a lot more companies going, some of which will never need venture capital. That’s fine, but some will and that helps create a “farm team” of opportunities that are moving down the development path. Act 255 (which increased tax breaks for angel investors) also has been helpful.

For us to get up to the per capita level of venture capital, we have to move a lot of these companies down the development road. We have a lot of early-stage companies, but we only have a few that have grown to the level of a Promega or a Bone Care or a TomoTherapy. We’ve had very few public companies in this community. If we suddenly had a couple of billion-dollar market cap companies, I think that would accelerate things in a couple of ways.

One would generate more investor recognition. It would also serve as role models for others who want to make that entrepreneurial leap and give them greater confidence that those kind of things can happen here.

Clark: In light of recent harsh criticism by John Jazwiec of Waukesha-based Red Prairie Corp., what is your opinion of the state’s economy?

(Sigh) For early-stage companies, it is reasonable. But I think the answer is different for companies at different stages of development. Rarely is an early-stage company worried about the tax rates that it will pay when it becomes successful because it has a long path before that happens. What is key to them for success is finding the right scientists and other right people.

We are developing a reputation – at least in the Midwest – as a place where there is a lot of interesting innovation. We’ve had a number of initiatives similar to Act 255, like the Certified Capital Company program, which unfortunately did not get a fair shake. We’ve tried a bunch of things here to foster an positive environment for investing in new companies. Initially in Madison and now in the state, there is a recognition that fostering the development of these kinds of firms is a key to the future.

Obviously when companies reach a different level of development, they have different issues.

Clark: Do you have any concerns of your own about creating new biotech companies in Wisconsin?

One significant concern is bills that keep coming up in the Legislature to restrict stem cell research. I think those kinds of bills are extraordinarily destructive on a couple of levels.

First of all, stem cells are a huge opportunity for us. In the whole field of regenerative medicine, this is clearly a place where we have a huge leg up. I understand that this is a complicated issue and is somehow connected to the abortion debate.

But if these people are motivated from an ethical viewpoint, they also should be trying to ban in vitro fertilization because that results in more discarded embryos than stem cell research ever does. They also should be having that debate at the federal level, because doing some at the state level will not stop anything.

Those who are doing the research strongly believe the moral imperative is to come up with cures for diseases. If we ban it in this state, it won’t stop it. It will just move elsewhere. My concern is all the ancillary impact a ban would have, like wiping out nearly all the activity in regenerative medicine here. In addition, it has a ripple effect because this sends a message through the whole biotech and financial community that Wisconsin is a hostile environment for a biotech company.

Let’s not forget that the idea of in vitro fertilization was just as controversial. Before that, it was transplantation -- another area in which we have leadership in solving. Biology is the study of life and you know new things are going to come up and be controversial.

Leading researchers might not want to come here because of this and others would leave – in a heartbeat. There is no doubt they would go where they can do their work. That is a big overarching concern I have now.

Clark: Are you worried that worried that Congressman Mark Green, who has voted for some restrictions on embryonic stem cell research, might become the state’s next governor?

Yes. (Pause) His position on stem cells is a major issue for me. If I am correct, he has voted in Congress not only for a bill that would criminalize therapeutic cloning, but would have made it a felony to travel abroad to seek (stem cell-based) therapy for juvenile diabetes, for example. So yes, I’m very concerned.

Clark: Any other thoughts?

Yes. We’ve done a great job of testing out new ideas for economic development here. The Capco program – which was implemented in 1998 and uses tax credits to create specialized VC funds - was a great program. Basically, it’s for investment in Wisconsin companies and is tightly focused. Three funds were established in the state. One was Vantage Capital, which we managed.

We did something very novel. These tax credits were targeted to insurance companies. What is sold to insurance companies is a bond instead of equity ownership. We did a great job and really leveraged the dollars.

Unfortunately, there has been a lot of distortion of the relative merits of the program. The Capco programs have run into unfair criticism. And where the criticism has been legitimate, these programs can evolve to deal with unintended consequences.

Unfortunately, when the second Capco bill came up, it passed the state Senate, but died in the Assembly. At this point, I’m not sure there is the political appetite to do it again. And most all of the initial $50 million has been invested. When it’s done, it’s done. And the funds were one-tenth the size of the national average. It was done at a small scale, but I think we can point to success with what we did.

Clark: How about Act 255?

It’s good, but it’s also too small to have a major, meaningful effect. I’m afraid that we have a fear here of doing anything bold. They want to throw relatively small dollars at these initiatives – and given the budget situation in recent years, I understand that – but then they spread out the money so thin to make sure there is a little bit on everyone’s bread. The net effect is minimal. We need to be more aggressive and not be afraid to pick sectors where we have core competencies and a willingness to go for it.


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