Donors getting BrightStar started; all returns would add to fund
A new group led by angel investor Tom Shannon will tackle the question that has dogged Wisconsin for more than a decade: With its wealth of ideas and well-educated students, why can't the state produce more job-creating start-up companies?
Shannon and seven other businesspeople on Wednesday will announce the formation of BrightStar Wisconsin Foundation Inc., an unusual nonprofit fund that will invest donors' money in high-growth, technology-based companies across the state.
Shannon and BrightStar's seven other founding donors have pledged at least $500,000 each, for a total of $6 million, to seed the foundation.
They say they hope to raise at least $60 million more over the next three years.
To have the impact they are seeking, the foundation will have to reach $150 million or more of assets, Shannon said.
BrightStar is unusual because it would seek tax-deductible donations from companies, foundations and wealthy individuals rather than ask them to take big risks in complicated investments where their money could be tied up for as long as a decade.
In doing so, the new foundation could provide a needed boost for the state's job-creating start-ups.
"It needs to be done," said Shannon, who oversaw the sale of Prodesse Inc., a Waukesha biotech company, for $72 million in 2009. "It's a challenge, and I think that my group of founders and I are uniquely positioned to get it done."
Shannon has committed to be the foundation's unpaid president and chief executive officer for three years.
The formation of BrightStar represents an ambitious economic development proposal by members of the state's private sector.
And it comes after much public hand-wringing about a lack of investment capital, countless public initiatives and committee meetings, and years of effort by lawmakers in Madison to craft legislation to fund the state's young, high-growth companies.
Pursuing tax exemption
The foundation's ability to operate as planned hinges on its securing Internal Revenue Service approval for tax-exempt status so that donations could be tax-deductible.
There are few models for a foundation that would use charitable contributions to make angel- and venture capital-type investments — but Brightstar has support from state government for the plan.
Reed Hall, CEO of the Wisconsin Economic Development Corp., the state's commerce agency, said he is not aware of anything like BrightStar around country.
But as organizers have structured it, BrightStar has "a very good chance" of getting IRS approval, Hall said.
BrightStar hopes to file its application with the IRS by Aug. 1, and will ask for fast-track treatment, Shannon said.
"Hopefully we'll be able to vet business plans by mid-fall and invest money by early 2014," Shannon said.
The foundation will reinvest in state companies all earnings and returns from its portfolio. Aside from the tax breaks, donors will not receive any return on their contributions. BrightStar will hire two staff members in the near future, he said.
In their initial discussions with potential donors, BrightStar organizers have encountered "lots of enthusiasm," said Jeff Harris, a founding donor who encouraged Shannon during a phone conversation in November to pursue the idea.
Along with co-investing in young state companies over the last decade, both Harris and Shannon have for years participated in committee meetings and panel discussions about how to address Wisconsin's lukewarm entrepreneurial environment.
"This could be our last kick at the can," said Jeff Rusinow, a founding donor who was principal investor in BuySeasons.com, a successful online costume retailer, among other companies. "This is a special opportunity to get it right."
Start-ups bring jobs
The majority of new jobs in the U.S. are created by start-ups, according to the Ewing Marion Kauffman Foundation, one of the country's key entrepreneurship analysis and support organizations.
Wisconsin ranks among the worst-performing states in terms of its rate of entrepreneurial activity and the size of its decline in entrepreneurial activity over the last decade, according to a Kauffman Foundation report released earlier this year.
Wisconsin has lagged the nation in job growth since the mid-1990s, partly because of its low rate of business starts when measured as a share of all private firms in the state, according to a report released earlier this year by the Wisconsin Taxpayers Alliance.
That rate averaged 2.2% in 2011, well below the national average of 2.9% and ranking Wisconsin 49th in the country, ahead of only Iowa.
The more start-ups there are, the more opportunities there are to grow bigger companies and create jobs.
Other states that are further ahead in this area either have a large number of angel investors funding early stage companies or state funding that is driving more investment, Shannon said.
Wisconsin has only about 300 angel investors — wealthy individuals who provide funding and other support to emerging, high-growth potential companies, Shannon said.
About 50 of those are active, and about 10 are very active, he said.
Wisconsin politicians several years ago began trying to pass a $400 million, state-sponsored investment plan, but recently settled on $25 million for venture and angel investing.
Even that came with political strings, with a prohibition against using the money for investment in biotech companies.
That caveat came even though more than half of the research funding at the University of Wisconsin-Madison, one of the world's largest academic research organizations, is in life sciences
"We'll never have enough angels, and we're not going to get the state money because we're frugal, and that leads to the philanthropic model because Wisconsinites have proven to be extremely generous," Shannon said.
His pitch to potential donors: You're making contributions to UW-Madison and other Wisconsin-based colleges and universities; why not add a little more to help BrightStar create jobs for all of those graduates?
Shannon said his commitment to getting the foundation off the ground without compensation comes from the frustration he has felt as an angel investor who hears week after week from start-ups that are seeking funding and coming up dry.
"I have the background, I have the time and I have the desire," Shannon said. "I don't want us to go the way of Detroit."
BrightStar founding donors
Tom Shannon: Former lead investor and chief investment officer at Prodesse Inc., a Waukesha biotech company that was sold in 2009 for $72 million; founder of Shamrock Investments, which puts money into early stage companies.
Mark Burish: Partner at Madison law firm Hurley, Burish & Stanton; chairman of Sonic Foundry Inc.
Michael Drescher: Co-founder and CEO of Okanjo Partners Inc.; co-founder of JDTV Inc., a Glendale cable television listings business that was acquired in 1999 by Tribune Media Services.
Susan Engeleiter: President and chief executive officer at Maple Grove, Minn.-based Data Recognition Corp.; former administrator of the U.S. Small Business Administration. Tom Shannon's sister.
Jeff Harris: Former general counsel at Sybron Dental Specialties, which became Apogent Technologies; investor in early stage, state-based companies including Somna Therapeutics Inc., Shamrock Energy Corp. and Okanjo Partners Inc.
George Mosher: Co-founder of National Business Furniture, which he sold in 2006 for $82 million; one of the state's most prolific angel investors.
Jeff Rusinow: Former Kohl's Corp. executive and a principal investor at BuySeasons.com; active angel investor and founder of Silicon Pastures, Milwaukee's first angel investing network.
Mike Shannon: Managing director of KSL Capital Partners LLC, a private equity firm. Tom Shannon's brother.