As state capital for early-stage companies has continued to plummet in Wisconsin over the past two years, now down to about $25 million, a new nonprofit organization has taken the first steps of a revolutionary approach that it hopes will fill the financial gap to fuel job growth and business development.
Milwaukee-based BrightStar Wisconsin Foundation, which was incorporated July 1, is turning to the state's pool of philanthropic individuals and foundations and asking them to donate a portion of their pockets to state-based startup companies.
Funding for early-stage companies has historically been provided by the government in the public sector or angel investors and venture capitalists in the private sector. BrightStar's experimental approach, however, will rely on contributions from "cheeseheads that care about our state," particularly those who want to find a way to keep it from lagging, according to Tom Shannon, co-founder, president and chief executive officer of the nonprofit.
Shannon, who has pumped at least a dozen of his own investments into companies in the early-stage space, argues that while Wisconsin's wealthiest may not be interested in spreading their funds among startups, many of them do have a sincere interest in job creation.
"The truly wealthy don't have an incentive to invest in early-stage companies, but they have a great incentive to create jobs for the kids they're educating and to make Wisconsin's economy flourish," Shannon said.
According to BrightStar's business model, the group will work to acquire $150 million in donations during the first three years of its operation. That figure represents the group's "stretch" goal. While Shannon expects to collect about $60 million in the first three years, he said $150 million is necessary to really make a difference.
All returns from the investments of those donations will be reinvested back into the foundation to upkeep its operations. While the nonprofit may retain a pool of consistent donors, it will primarily rely on continued investments making positive returns, propelling startups forward and opening up job opportunities.
Shannon concocted the concept behind the core of BrightStar late last year while lamenting the lack of capital for early-stage companies in the state. During conversations with his friend and colleague, Jeff Rusinow, who originally founded the angel investment network Silicon Pastures, and his business partner, Jeff Harris, Shannon began to brainstorm a link between educating Wisconsin students and forming businesses to hire them.
BrightStar has emerged as that link.
"Wisconsin has such a rich history of the wealthy donating to education," Shannon said. "(We thought) that if we could create a vehicle for them to be able to donate for job creation so that there were actually jobs to place our best and brightest when they came out of school, that these people would want to do that."
No such vehicle previously existed in the state, he said.
To build the base of BrightStar, Shannon and Harris assembled a team of eight core founders who would lend the organization financial credibility and a well-regarded reputation.
The group of founders is comprised of seasoned business executives, many of whom have experienced successful exits from former business ventures. Along with Shannon, Harris and Rusinow, founders include Shannon's brother, Mike Shannon, and sister, Susan Engeleiter, who live out of state but have strong ties to Wisconsin. The group also includes angel investor George Mosher; Mark Burish, a partner in Hurley, Burish & Stanton S.C. in Madison; and Michael Drescher, co-founder and chief executive officer of Okanjo Partners, Inc. in Milwaukee.
Together, founders have pledged $6 million to get the nonprofit up and running. About $200,000 of that pot will cover organizational costs such as legal bills, website creation and media assistance.
Prior to securing founding members this year, Shannon met with Ryan Murray, chief operating officer and deputy secretary of the Wisconsin Economic Development Corporation (WEDC) in January to discuss the prospects of launching an organization such as BrightStar.
"We were immediately interested," Murray said. "Just the whole vision for it of taking the conversation way from the investment side and moving it toward a philanthropic one – we were really intrigued with that idea."
The WEDC has pledged $300,000 to help cover BrightStar's operating costs as its structure begins to come together.
"We wanted Tom to be able to go to donors and say that their money was going to get invested in companies, and so to the extent that we could subsidize the operational costs of the organization we thought it would make their fundraising more effective," Murray said.
The actual awarding of this collection of funds is contingent on BrightStar's recognition as an official 501(c)3 by the Internal Revenue Service (IRS). After requesting fast track status with supportive letters to the IRS from officials such as Mayor Tom Barrett and State Sen. Alberta Darling and organizations such as the WEDC, BrightStar's team is currently waiting to hear the IRS' decision. Should they be granted fast track status, which they will learn in the coming weeks, Shannon predicts they'll have their determination letter from the IRS by the year's end.
In the meantime, the organization is in a sort of holding mode. The nonprofit has moved into its headquarters, a space in downtown Milwaukee's Empire Building provided by Zilber Property Group, and hired its first two employees, but until the organization has that determination letter in hand, Shannon is waiting to reach out to potential donors and screen potential startup companies.
Following the green light from the IRS, BrightStar will have an investment committee in place to screen companies. The nonprofit plans to partner with angel networks, angel fund groups and venture fund groups throughout the state to spur developments in the early-stage space. Rarely will BrightStar fund a startup or complete all of the due diligence exclusively. Collaboration is more efficient in terms of both cost and effort, said Shannon, who plans to donate his time at the head of BrightStar for its first three years before transitioning to a board role.
Although turning to philanthropy to plant the seeds of startups is highly experimental, a highly experienced team of investors and entrepreneurs overseeing donations and monitoring startups has its founders confident that their organization can build a pipeline of jobs.
While BrightStar will prioritize job creation over rate of return to retain Wisconsin's best and brightest, Shannon aims to match investments with the Kauffman Metrics, which project a near 26 percent annualized return on investment.
"This could really be a difference maker," he said.