Can anyone explain to me why the Wisconsin business media doesn’t get the profound impact of successful exits on the state’s startup economy?
I tried peddling a nice story on the successful exit of a Milwaukee advanced manufacturing startup, Mikkelsen Cutting Tools (MCT), to Gerber Technologies Inc. and could garner only one small notice.
Exits are critical to the state’s prosperity. The high capital gains from new venture exits are what attract investors to take the extra risks that startups entail.
Like most new ventures, the MCT exit was a heroic struggle to get to the finish line. Steen and Nicolai Mikkelsen launched the company in 2011 and brought in outside investors, including the Wisconsin Super Angel Fund (disclosure: I am a WSAF general partner) in 2013.
The Mikkelsens are veterans of the digital cutting segment in the printing business, having started and sold an earlier company in the same niche. They had a vision of making a next generation of cutters that could keep up with digital printing, which has been exploding because of ever-higher speeds and ever-sharper resolutions.
The two sets of MCT software to connect a powerful camera system to its intricate cutting mechanisms took two years longer than projected, but the Milwaukee startup finally won the Product of the Year award for cutting at the nation’s biggest printing show in 2016.
Even with the leading technology, it was a David-versus-Goliath battle in the marketplace against better-funded competitors. And the longer timeline to market success meant multiple rounds of fund raising, often just to make payroll.
The sale to Gerber involved a cash payment and then an earn-out over three years. Investor expectations are for several times the equity investment in the business.
“In general, the earlier the exit, the better the return for investors,” said Tom Schuster, a WSAF general partner who stepped in as interim CEO to guide the company to its exit. “We found the perfect strategic partner in Gerber, which is a major player in the global digital cutting business, so we felt comfortable with an earn-out structure.”
The combined company, which relocated and expanded in New Berlin, will benefit from the combined global sales forces and manufacturing synergies. MCT now employs about 30 people here.
The growth and eventual success of MCT over the last five years required stubborn support from many places. Here are key players who had a hand in MCT’s success:
• Two founders who developed the initial software and mechanics with their own seed funds. No venture gets started without visionary, driven founders.
• WSAF, which has 62 limited partners in the M7 Region, including five foundations. Don’t say old money in Milwaukee doesn’t step up.
• Milwaukee Economic Development Corp, a city agency, made loans for $300,000. It received equity warrants on top of the interest charges.
• Wisconsin Economic Development Corp. stepped outside its normal real estate lending to provide a bank loan guarantee of $200,000. Is there a model there for the future?
• Commerce State Bank, which provided a line of credit and hung in there with the young company during its ups and downs. Federal bank regulators made patience and loyalty difficult.
• Angel investors who doubled down in later investor rounds and received attractive terms to account for the risk.
• Wisconsin Economic Development Corp., which efficiently provided 25% investment tax credits to de-risk the equity investments by the angels. The credits help greatly in attracting capital for high-growth deals. With a success record, should the state go to 40%? We still lag half the states on venture capital levels, even though we have doubled the levels from 2013 to 2017.
• The 30 MCT employees who believed in the company, persisted and fought for marketplace wins.
• An outside, independent board of directors that guided the firm through numerous challenges to the rewarding exit.
• Local vendors who provided extended terms at critical junctures in the startup journey.
• Customers, some local, who took a chance on a young company. There’s no business without them.
The successful collaboration is reminiscent of the adage in education that it takes a whole village to educate a child. In the same vein, it takes a whole state to create a high-growth company.
The collective effort is worth it; entrepreneurs are the primary job creators here and in the country. They are also the re-inventers of the economy. Ergo, one of the main metrics for the state’s economy needs to be the number of exits and their valuations.
Respectful business press coverage of successful exits might help, too.
