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Angel investing should lead to more venture funding, Ward says

Madison — Wisconsin may have received only three of the 35 Midwestern venture capital deals reported during the first quarter of 2006, but one local observer isn't alarmed.

A MoneyTree Report released this week said 35 Midwestern companies attracted a total of $185 million during the quarter, compared to three Wisconsin companies with at least $7 million. Given the state's historic difficulty with attracting venture capital, some view this as the continuation of an ominous trend. But David Ward, president of NorthStar Economics, said the quarterly total is consistent with Wisconsin's average quarterly experience during the past several years. "I don't know if I would express alarm about that [MoneyTree Report]," he said. "I think we average about 12 deals per year."

Ward said there is hope on the horizon in terms of increased angel investing, which should help build early-stage companies to the point where they can attract venture investments. According to NorthStar's report on 2005 angel investing in Wisconsin, individual angels and organized angel groups invested a total of $19 million last year, $14 million from individual angels and $5 million from groups. The number of group deals increased from 9 to 20, and angel investors took full advantage of the $3 million in tax credits available under Act 255, the report said.

"We've been at that 11 or 12 venture deal average per year for three or four years now, but we've had an increasing number of angel deals, from which venture capital deals will eventually come," Ward said.

Unfortunately, the venture capital target keeps moving. Ward said venture capitalists are making their investments at even later stages in a company's life cycle, a trend that was verified by Baiju Shah, president of BioEnterprise, an early-stage healthcare accelerator firm based in Cleveland. "They [venture capitalists] want to see a consistent revenue stream and a complete management team in place," Ward said, "and they want to see some accelerated growth prospects where a company is really ramping up."
Apparently, a number of firms are in that position, according to the MoneyTree Report, which was produced by PricewaterhouseCoopers and the National Venture Capital Association. Nationally, they reported that first quarter venture capital investments totaled $5.6 billion, with 761 deals funded.

In Wisconsin, the Madison-based lured $7 million from venture firms on both coasts. Receiving an unknown amount of venture dollars were 5 Alarm Fire and Safety Equipment, a Fort Atkinson-based fire safety equipment dealer, and Dr. Comfort, a Mequon-based maker of custom shoe inserts for people with diabetes.

Healthcare market

In a related story, Midwest healthcare start ups raised $128 million in the first quarter of 2006, including $3 million in Wisconsin, according to the latest quarterly survey from BioEnterprise. Company President Baiju Shah said the healthcare segment that is receiving the most attention from venture investors is medical device manufacturers; biotech and biomedical companies have to rely more on funding from the National Institutes of Health and state government programs. The State of Wisconsin has provided direct funding to research companies such as Cellular Dynamics International, which was awarded a $1 million technology development grant and received a $1 million technology development loan from the Department of Commerce. One of CDI's founders is UW stem cell researcher James Thomson.

Shah believes it's essential for any region to develop and maintain a continuum of capital from angel and seed funding to venture financing. He said the biggest gap is at the early stages, including companies that are spun out of research institutions. "That is a chasm that is difficult to cross," he stated.

Businesses that have been successful in wooing outside investors, particularly the parochial coastal financiers, typically have a novel technology and a matchmaker in their region - a conduit that knows what venture investors are looking for and can broker a deal. "If I know of a fund in Boston that is only interested in neuro stimulation devices, I can steer them to it," Shah said. "That makes it much easier to find national investors."

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