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Has Milwaukee Fallen Behind in High-Tech Startups?

A close look at the data behind jobs numbers and investment dollars

Jul. 18, 2017
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brightcellars
Employees working at Bright Cellars, a Milwaukee-based wine startup

As technology becomes more ubiquitous in our lives, the companies behind these innovations are growing increasingly paramount to the economy. The technology industry accounted for 7.1% of overall GDP and employed 6.7 million people in the U.S. in 2015 according to data by CompTIA, a nonprofit technology trade association. Forty-six states saw an increase in tech industry jobs during this time. While these numbers show the industry’s growth on a national level, some recently released statistics are not as optimistic for Milwaukee.

For the third straight year, the Milwaukee metro area (which includes Waukesha and West Allis) ranked 39th—tied for last place with Pittsburgh—in the Kauffman Foundation’s annual startup activity rankings. These numbers have caused alarm among the local startup community.

“It should be a serious wake up call,” said Matt Cordio, founder of both Skills Pipeline, a recruiting company geared to the tech industry, and Startup Milwaukee, a nonprofit organization that provides resources to local tech entrepreneurs. “It’s data, and anytime data doesn’t rank you in the top 10, there’s room for improvement. We’re not in the top 10, and that should concern people.”

The index is compiled through publicly available data and comprised of three factors: rate of new entrepreneurs, or the percent of the adult population that became entrepreneurs in a given month (0.15% for Milwaukee); opportunity share of new entrepreneurs, or the percentage of new entrepreneurs who were not unemployed before starting their business (67.53%); and startup density, which measures the number of startup firms (defined here as firms less than one year old that employ at least one person besides the owner) per 1,000 firm population.

Some business leaders have criticized the index for the narrow factors taken into account. “The thing that we believe really requires our attention and effort is to support the ability for businesses to grow,” said Elmer Moore Jr., executive director of Scale Up Milwaukee, an initiative of the Greater Milwaukee Committee that seeks to drive business growth in Southeast Wisconsin. “I don’t think that is necessarily captured in this index.”

 

A Risk-Averse Investor Class

While the Kauffman ranking isn’t perfect, it is the “gold standard” according to Joe Kirgues, co-founder and managing director of gener8tor, a startup accelerator with offices in Milwaukee and Madison that was recently given a gold ranking by the Seed Accelerator Rankings Project. “We believe that the Kauffman numbers are credible in part because we see such a scarcity of venture capital going into the Milwaukee market,” Kirgues said. In fact, startups in nearby Madison, which was ranked the number 10 high-tech metro area in the nation by a 2017 Cushman & Wakefield index (the Madison metro area is not large enough to be ranked by the Kauffman index), have seen more than three times the number of venture deals in recent years according to Chicago Inno, a Chicago tech publication.

Experts cite an older, more risk-averse investor class as a reason for the lack of capital going into local startups.

“There’s a lot of older money in the Milwaukee area,” Cordio said. “It’s traditionally put into less risky investments because you’re focused on preserving wealth. There is some investor education that needs to be done on getting more people into the venture capital or angel investor space. I think a lot of people have gone out there and maybe invested $25,000 in a family friend’s startup and never seen that money returned. Good angel investors say that it takes 10 investments to get one that pays you back and then some for all of your failed investments. There just isn’t a strong culture of that here in the Milwaukee area. That’s something that needs to change.”

This risk-averse attitude, perhaps more alarmingly, emerges once deals are finally in the process of being made through strict terms that heavily favor the investor.

“There are people in the area whose proposals for investment are unfair to entrepreneurs,” said Tim Keane, director of Golden Angels, a group of angel investors based in Brookfield and the former director of the Kohler Center for Entrepreneurship at Marquette University. Golden Angels, and many other investors in the area, use standard National Venture Capital Association documents, which give investors some normal rights when putting money into companies. But some local investors go beyond these standard terms.

He cited a specific term sheet for a company he was advising, which asked for: the right to force the entrepreneur to sell their company in a pre-set amount of years; participation rights, which is a set percentage that the investor receives on top of their stake at the sale of the company, just for being investors; and annual compounding dividends, which multiplies the amount of money the company owes the investor every year until the company is sold. “It’s very unfavorable!” Keane said. “I’ve never seen anything set up that way come out well.”

If these terms were so unfavorable, why would anyone agree to them? The entrepreneur Keane was advising did not, but inexperienced entrepreneurs who need funding can sometimes have little other choice than to take these bad deals. “If you’re not very savvy, and this is the only offer, and you’ve been looking for three months and think this is it, you take it,” Keane said. “But, if you take it and later find out that you’re in a difficult situation, it’s too late.” A lack of options puts those with capital in even more control.

These particular investors also put people on boards that “have no experience,” according to Keane. “They say things like, ‘I’m here representing Investor Group B,’” he explains. “Corporate law says that the directors are responsible to the stockholders of the company, not some group that got the right to elect them. [These investors] try and control the company with people that maybe don’t exactly have a grasp and are not adding a lot of value.”

Keane said these are not terms entrepreneurs would see in West Coast startup hubs like Seattle and Silicon Valley, and that some startup founders have hired out-of-state law firms that agreed that these are not standard terms.

 

A Lack of Available Tech Talent and Mentorship

“For a startup community to be successful, you need to have a strong tech community,” Cordio said. “That’s where you get the talent from.” While most agree that there is plenty of tech talent in the city, most of the qualified tech workers are not working at startups. Milwaukee unemployment is currently at its lowest level since 1990, and big firms like Johnson Controls, Northwestern Mutual and Rockwell Automation employ many of the qualified workers in engineering, software, hardware and other tech-related fields.

“I think that for the tech talent in Milwaukee, it’s less that they’re not here and more that it seems irrational to associate with a startup because of the comparatively poor outcomes those startups have achieved in the last 10 years,” Kirgues said. “In that case, it’s better to go to a corporate job.”

While the shortage is a challenge, many of these young companies have successfully built staffs with local talent. “We’ve grown the team, and a good portion of them come from UW-Milwaukee and UW-Madison,” said Richard Yau, co-founder and CEO of Bright Cellars, a subscription-based wine startup. Yau and his co-founder, Joe Laurendi, created the company while they were students at MIT before bringing it to Milwaukee through gener8tor. “I think we’ve been able to grow the team very well locally, and, in a lot of cases, we have employees who would’ve otherwise moved to Silicon Valley or Chicago,” Yau said. “I do get the sense that there are people with the right talent to grow startups here.”

Yau sees the lack of mentorship in the area as a challenge. Without many successful startups, there aren’t many leaders entrepreneurs can turn to for advice.

“Both my co-founder and I got to work at a Boston startup for three and four years before starting Bright Cellars,” Yau said. “So we got the chance to be early employees at venture funded startups. I think that’s something that may be missing, or not yet developed, here. So, when I think about why the rate of startup creation is relatively low, I think a new crop of entrepreneurs that have startup experience is still developing. We’re still in the early stages of that.” Like all successful startups, they had to begin small, taking risks and seizing opportunities to get to where they are today. Milwaukee’s startup community is no different.

 

The New Resources for Milwaukee Startups

“There has been an incredible amount of effort in the last couple of years to organize the many stakeholders and actors working to support entrepreneurship in this region,” said Moore of Scale Up Milwaukee. “This place is percolating with incredible opportunity for people who want to start and grow businesses. What’s even better is that we are getting to a place where we are coordinated and working in concert.”

Organizations like Scale Up Milwaukee, Startup Milwaukee, BizStarts, Startup Grind Milwaukee, Ward4, The Commons and many more are working to strengthen Milwaukee as a hub for entrepreneurs. No event more perfectly encapsulates this synchronized effort than Wisconsin Startup Week.

Launched last year by Matt Cordio as “Milwaukee Startup Week,” the event featured more than 25 events hosted by more than 28 community partners over six days at various locations around Southeastern Wisconsin.

Coby Skonord, founder and CEO of Ideawake, a software company that allows managers to crowdsource ideas from their employees, participated in a number of workshops at last year’s Startup Week. He praised the event’s potential to create a useful community around people’s individual businesses. “It’s really helpful to connect with other entrepreneurs,” he said. “There’s always synergy—even if you’re in completely different industries.”

This year, Cordio is expanding the event to the full state and is hoping that, through networking and education, he can help jumpstart the state’s startup community. “[The event] is an easy way to plug in to the community and see all of the different organizations that are there to help entrepreneurs, and there are a lot of serendipitous things that happen throughout the week,” he said.

And, while venture and angel funding remains relatively low, a number of grants and programs are now available to entrepreneurs that can get them tens of thousands of dollars to help grow their businesses. Kiva, WWBIC, WEDC, WERCBench Labs and even a local “Shark Tank” styled television show now all have options for entrepreneurs to fund big ideas.

While three years in a row of last-place rankings is definitely disheartening, entrepreneurs are carrying on.

“The community has built a lot of momentum, and there is still a lot of momentum,” Cordio said. “I think that a lot of people in the community don’t really care that we’re ranked dead last. Where there’s a dearth of activity, there’s a lot of opportunity. There are people that say that it takes about 20 years to build an entrepreneurial community in your community, and I don’t think that it really started until maybe 2010. We’ve still got a ways to go.”

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