seed-stage valuations that, as time passes, start to appear unrealistically high, says Susan Healy, principal at Madison-based Ascendancy Advisors. That hinders their long-term fundraising ability, Healy says, because later-stage investors feel the need to put in preferences like liquidation rights and cumulative dividends to mitigate against the lofty valuations.
Companies who accept money from the fund of funds will get a “clean sheet of paper,” says Johnson, meaning they’ll be valued appropriately and the deals will use common stock only.
This, like the initiative’s overall investment strategy, is familiar territory for Johnson. “Kegonsa has done very few offerings when everything hasn’t been common stock,” he says, alluding to his previous fund.
Johnson cites “emotional investing,” where an investor’s initial love of a product overrides his or her better judgment, as one factor that plagues later-stage Wisconsin startups seeking more venture capital down the line.
A key next step is to name the recipient fund managers. Sun Mountain Kegonsa is doing “due diligence” on five prospects, says Johnson. If the fund decides all are fit for the job, two will be based in Dane County, with one apiece in La Crosse, the Fox Valley, and Northern Wisconsin.
One of the five is Michael Thorson of Inventure Capital, a Madison-based investment fund. If selected, Thorson says, he’d be running one of the Dane County funds.
Johnson says one benefit of the Badger Fund of Funds’ structure is the ability to pair senior fund managers with younger investors, who he says will have three to five mentors approving investments at first. The idea is to grow employees and venture capital as a whole in Wisconsin, says Johnson.
“I want to transfer everything I know to that next group so they don’t have to run into all the same problems I did,” he says.
