Below is the second part of IB’s interview with Sun Mountain Capital’s Brian Birk, who will partner with Kegonsa Capital Partners’ Ken Johnson to manage Wisconsin’s state-sponsored venture capital program.
To read Part I, click here.
IB: How did you meet Ken Johnson?
Birk: Surprisingly enough, Ken reached out to us in 2010, already four years ago, and he said, “I’ve been looking in Wisconsin about how we get more funds active here. I ran across what you did in New Mexico, and that’s exactly what we’d like to do in Wisconsin.” He and I met, and literally in 2011, we signed an agreement to partner, and to try to bring the Wisconsin fund of funds. At that time, we went out and met with several of the large companies based in the state that we thought would have some interest in supporting an initiative like this. Ken had discussions with a number of companies, and then suddenly the Legislature decided that it was going to get involved with a fund of funds, and the companies said, “We’re going to wait and see how it plays out before we do anything.” Literally, it’s been three years that we’ve been working on this.
IB: Do you think you can diversify the investments as much as the law calls for — to manufacturing and medical devices and other industries identified in the law?
Birk: I really do think we can. The reason is that before we really made a commitment to Wisconsin, we spent a lot time doing our own analysis of the state of the state. What were the strengths? What were the core innovation centers? We’ve seen these programs across the country, and you need to have a certain amount of raw material, or a certain amount of potential, for these to be effective. You can’t create innovation … you can’t create entrepreneurs with money. You need to have those things, and money can be an enabler to help them be successful.
I can tell you that there are a lot of states that have similar programs that we’ve looked at, that we’ve declined to pursue because we just didn’t think the raw materials were there for the program to be successful. In Wisconsin, that wasn’t the case. We think Wisconsin has incredible potential to tap into the university system, to tap into the number of companies, the management talent that exists in the state. There are so many positives around the state that we ultimately said, “You know, this is a place where we think this program can be a real catalyst.” If we bring together the stuff that’s already in the state, we can really achieve a much higher outcome, to realize the potential that’s there. You don’t want to start in a state that has no potential. Wisconsin has a ton of potential.
IB: You mentioned the university system and management talent. What other raw material do you see here?
Birk: We look at the university system. We look at the diversified set of companies that exist in the state and the resulting management pool. You’ve got talented people in many industries that exist in the state. You don’t have that in many other states. You don’t have the infrastructure and corporate network that exists in the state of Wisconsin.
You also have a very entrepreneurial culture. There are lots and lots of guys that have built successful small companies in smaller cities around the state, like Kenosha, Racine, and others. You could see those people being entrepreneurs and needing capital to start their next thing, or maybe to expand on what they are doing.
(Continued)
IB: Are there other potential benefits that perhaps are a little under the radar right now? Like creating a local ecosystem that could lure out-of-state investors to syndicate deals, further leveraging the state’s $25 million investment?
Birk: Yes, that’s exactly right. To get these big, national funds that invest anywhere around the country — and by the way they typically invest $5 million to $10 million in each company they invest in, and sometimes a lot more, but that’s kind of their minimum — you’ve got to have deal flow that is such high quality that it can compete with investments anywhere across the Midwest, anywhere across the country.
Two, you need to have the company at a size where it actually needs $5 million or $10 million. There are a lot of companies that never need that amount. But in order to get these top-tier national funds, you’ve got to have the deal flow, and you’ve got to have the companies at a size where they can put in $10 million in a single round. That’s why, to grow our crop of Wisconsin companies, we need money for minnows. We’ve got to get them to that size and that quality.
IB: What are you looking for in a limited partner fund?
Birk: There are a couple of different criteria we use to judge these funds. The first one is there is a statutory requirement for funds to be able to raise capital from the private sector. Those investors will conduct their own due diligence and can give the fund-of- funds some reassurance that the managers are of high enough caliber to be able to attract private capital. So that’s a statutory requirement.
Beyond that, we look at ideally if the person has a track record of having successfully built a business or helped to grow a business, or has been in a senior management position in a company where they had real responsibility to drive profitability. So they really have management skills and expertise that they can use to help put together companies and really assist their entrepreneur/CEOs in an underlying portfolio. That’s number one. They have to be hands-on, value-adding, experienced executives.
Number two is that ideally they have, in addition to that, a track record of having invested or having helped companies in the early stages be successful. That could be either as an investor — obviously, if there is an existing fund, they would have a track record — but it could be someone who was maybe an angel investor, who had an active role in the company, someone who has been on the board before, who has helped put together companies, who has written business plans and helped secure funding for the company. Again, someone who has the tools that these early stage CEOs will really need.
IB: That sounds like another area where Ken will be helpful because he knows so many people in the entrepreneurial and investment communities in the state. He knows a lot of the people who could potentially move into that role.
Birk: Yes, Ken’s extremely helpful because he’s got the network, and if he doesn’t know people, he knows people who know people. It’s going to be extremely helpful to us. What Sun Mountain brings is the fund-of-funds investment process. We bring a track record. We bring a lot of fund governance pieces that Ken doesn’t have with his background. What Ken has that complements what we bring is deep experience with investing in Wisconsin. He has a great network here of entrepreneurs and fund managers and investors, and so we look at it as sort of a nice combination, sort of that national brand and capability on the fund-of-funds side with the real deep local knowledge of what it takes to make these programs successful.
If we were to ship a Sun Mountain Capital person to Wisconsin, it would take months for them to learn, months or years, for them to be as deeply ingrained as Ken is. We look at it as a combination of complementary skills.
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