Venture Capital is Down in Wisconsin. What Does That Say About the Health of the Startup Community?
Over the past three years, Madison experienced record-breaking years for venture capital financing: $312M in 2014, $168M in 2015, and $158M in 2016. These numbers meant Madison ranked as a top Midwest city for venture capital; a top 30 for all US cities; and top 15 worldwide for venture capital per capita. The outcome of this success has been a robust technology ecosystem, stable new job growth, and an improved quality of life.
Unfortunately, all signs point to Wisconsin numbers being down this year. Initial calculations indicate that Wisconsin based companies only raised $116M in 2017, down from $234M in 2016. Madison based companies raised $77M in 2017, down from $158M in 2016. Nationwide, Madison will still have a solid number raised, but obviously less the past few years’ record highs.
Has a bubble burst? Has our streak ended? Is 2017 an anomaly? Should we be concerned?
Venture capital is an easy metric to use to indicate the startup community is working well. Access to capital is important issue when your community is not on the coast. Madison has experienced record growth, which has been an indication that we are doing something right. Madison has been gaining traction and many feel our community is on the cusp of becoming a national technology hub for innovation. Our local capital is growing and becoming more sophisticated. Companies are having success. Watching venture capital numbers are a good thing to care about.
Even if the numbers are down over the course of one year, the underlying community still may be healthy. A healthy community should form a venture capital pyramid comprised of a base of early stage companies raising $250k-$1M, a body of mid stage raises at $1M-$20M, and a top of a few large late raises >$20M. Madison is still a relatively small community with a limited number of total deals, so a mid or late capital raise happening in 2016 instead of 2017 will have can have a major impact on annual numbers.
When the numbers drop, it is important to understand why. If this cannot be explained by natural trends or other mitigating factors, it could mean a couple of negative things: our startup companies are not solving venture-worthy problems, there aren’t enough early stage ideas being funded, investors have soured on the region, or local companies are failing to raise later stage capital rounds. Anecdotally, this does not seem to be the case. The base of the pyramid is still relatively strong. Several mid-stage companies have said they were looking to raise in 2018 and only a few companies have closed.
Also, it is important to note venture capital totals are only one indicators of the health of a startup community. Venture capital totals won’t capture the continued success of Epic Systems or the growth of companies like Zendesk or Bunker. Rather, we should also be looking at the relative speed that it has taken local startup companies to grow to 20 or 50 employees. Companies like Ideas that Evoke, DotComTherapy, BlueTree, and AkitaBox would be leading the way. If anything, there are respected names in technology that argue that we stop caring about large venture capital rounds and focusing on the effectiveness of capital.
So, we should use this data to be reflective. Ask entrepreneurs and investors why numbers were lower in 2017 and should we actually be concerned. Ask organizations that support entrepreneurship to look at their metrics and outcomes and determine how we can better support startups in 2018.
Want to have a deeper conversation about startup growth data? In Milwaukee on January 30th, Milwaukee Institute will dive further into these numbers with Tom Chapman, an expert in startup growth numbers and member of the Startup Champions Network at 3 pm for this free conversations. Details. Then in Madison on January 31st, join us at 1 pm for a conversation focused in great detail about south central metrics, moderated by Aaron Olver of the University Research Park. Details.
(Story contributions from Chandra Miller Fienen)