Startup exits sweet; early exits even better

Early stage investing is all about getting to exits, a sale of an entrepreneurial startup in one way or another. Southeastern Wisconsin had a big exit last week that was cause for applause but underappreciated.

bill-haackBill Haack and his investment fund partner sold the health insurance division of Zywave for undisclosed millions of dollars. He and Jim Mueller created Zywave while they were running Frank Haack and Associates, an insurance brokerage which they sold in 2004.

Milwaukee-based Zywave sells software for running insurance brokerages, and when you get liftoff in software, you enjoy big margins.

For, Haack and Mueller, this is the second payoff from Zywave. They had sold off a majority of Zywave in 2011, so this round represents a second exit from the insurance solutions side of the business.

A new division of Zywave, now named Advicent Solutions, which creates software for financial advisors, was not sold, so it will continue to grow and add jobs for the region.
Such entrepreneurial successes bear a lot of fruit:

• Mueller and Haack have reinvested some of their capital gains in local ventures, including other startups.

• They paid capital gains taxes at the federal and state levels.

• Their exits will encourage others in the region to make angel and venture investments. (The returns in early stage investments have historically been north of 20%.)

• Zywave created more than 400, and they are high-pay jobs. Its remaining division will create more.

The Zywave success is reminiscent of the recent recapitalization of Connecture, another IT company. Brookfield-based Connecture, which has contracts for three of the state health insurance exchanges, also grew to more than 400 employees under the leadership of Dan Maynard.

Maynard has since become CEO and investor in West Bend-based GrandCare, which sells monitoring and communication systems that allows senior citizens to remain in their homes instead of being institutionalized. It’s another software company that he hopes to grow alongside founder Charlie Hillman. In other words, the benefits from one exit spill over to other ventures.

The momentum for startups continues to build across Wisconsin. A new venture fund, BrightStar under the leadership of Tom Shannon, who had a big exit with Prodesse in 2009, will be open for business in January. It’s already at $7 million.

That comes on top of Chris Abele creating a $10 million early stage fund and the launch last March of the Wisconsin Super Angel Fund (WSAF) with $7 million from more than 50 accredited investors in Southeastern Wisconsin. (Disclosure: I am a general partner.) The WSAF fund has done four startup deals over the last 10 months.

In parallel, the support for entrepreneurs in the M7 region continues to expand through a plethora of non-profit organizations: BizStarts Milwaukee with 3000 supporters and mentors in its network; Scaleup Milwaukee; StartupMKE; Vetransfer; the Global Entrepreneur Collective; and a number of incubators and accelerators.

So the two principal ingredients for a startup economy, support systems for entrepreneurs and early stage capital, are rapidly gaining muscle in the seven-county region.

Over in Dane County, the University of Wisconsin – Madison and the Wisconsin Alumni Research Foundation have mounted a $3.2 million initiative called Discovery to Product (D2P) to stimulate the launch of new companies that deploy university intellectual property. Universities have learned that patents and licenses don’t bring as many returns as do entrepreneurs, who become the leading benefactors of their alma maters.
Amidst the new energy, all parties in the startup space have learned that exits take way too long. Studies put the average time from launch to exit at 7 to 12 years.

Some angel funds, such as WSAF, are aiming at exits in three to five years. That accomplishes two ends:

• It brings in cash-rich buyers who can expand the successful startups to national and global markets.
• It allows the early investors to say ”ca-ching,” enjoy their gains and then go on to reinvest in other startup deals.

It’s a virtuous circle, as the Zywave exits have demonstrated.

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