Grim venture capital numbers don’t reflect Madison’s ‘sparkling’ startup economy, analyst says

By Erik Lorenzson | Read full article from Cap Times here. 

Wisconsin may rank last in the Kauffman Foundation’s startup index, and Madison’s venture capital numbers took a major dip in 2017. But according to Tom Chapman, things really aren’t so dire for area startups.

Chapman is a serial entrepreneur-turned-consultant based in Omaha, and the chair of a data committee within the national Startup Champions Network. In a presentation in downtown Madison on Tuesday, he shared his assessment of how the “entrepreneurial ecosystem” is faring locally and regionally.

Chapman, a self-described data nerd, shared a wide array of observations and recommendations, many of which were based on his own number-crunching. One of his key takeaways: Wisconsin is not last in the nation when it comes to entrepreneurship.

While stressing that he doesn’t think Kauffman’s numbers are wrong, per se, Chapman expressed skepticism over the usefulness of the measures it uses. For example, he noted that the group uses an “opportunity share” metric, which looks at Current Population Survey data on whether people become entrepreneurs out of necessity or by choice. Chapman pointed out that the measure could include people who pursue a side gig when they’re in-between jobs to make ends meet, and may not be a great metric for startup health.

Chapman added that he believed the Kauffman rankings may be biased toward trends that the creator of the index saw happening in Kansas City, where it’s based.

“He’s seeing stuff happening in Kansas City, and then he’s going to get a data set that’s comparing apples to apples that’s biased to things happening from where he’s from,” said Chapman.

Chapman also said that he believes states and cities should focus less on rankings, and instead focus on their own growth year-over-year. “But that doesn’t get policy leaders really excited,” he said.

When speaking to reporters later, Chapman also addressed the city’s latest venture capital numbers. Based on data collected by Pitchbook, Madison companies raised $77 million in financing in 2017, less than half of what they had raised the year before.

Chapman said that it’s likely that the numbers were attributable to weird timing: Lots of companies raised money in 2016, and plenty more would end up raising funds in 2018. 2017, he predicted, would be an outlier.

“When you’re playing a game of small numbers, you end up with weird data anomalies,” he said. “I’d say it’s a weird data anomaly.”

Chapman said Madison overall had a “sparkling” entrepreneurial economy, albeit one that had room for improvement. In his own personally developed startup index of major cities, Chapman had Madison ranked 8th in the nation in terms of its startup strength.

“I’m personally a believer that you should be in the third quartile, so you’re not embarrassed, but so you can say ‘We have a lot to work on,’” he said.

Chapman discussed a range of other metrics. One was density of “cool jobs” — a category of employment focused on positions in science, math and technology, stemming from research by urban studies scholar Richard Florida. Madison, according to Chapman’s analysis, has cool jobs in spades.

The city fared less well in Chapman’s assessment of the Inc. 5000 list, which ranks companies based on how quickly they grow. Madison had 14 companies on the 2017 list; Chapman felt it ought to have more making the cut.

Chapman suggested that one way to improve the city’s entrepreneurial health would be to forge stronger ties with Milwaukee.

“If Milwaukee sparkles, everyone in this state wins,” he said. “You’re all better as a collective in a way that few states could compare.”

He also noted that a lot of the city’s financing deals spring out of accelerators — programs that work closely with startups to connect them with funding and provide them with mentorship. Chapman said that while that’s not a bad thing, it’s something Madison needs to think more about.

“You should be thinking about, what would happen in gener8tor gets hit by a bus,” he said, referring to the city’s most prominent accelerator.

He also said that startup success isn’t necessarily a question of many startups being created. Rather, it’s a question of a few talented entrepreneurs achieving explosive success. He said there are ways for startup communities to try to foment such high-growth activity.

“I find the easiest way is to go to serial entrepreneurs who have done this already, and to ask them, ‘If you were to bet on someone … who would you choose?’” said Chapman.

StartingBlock, an upcoming startup center on Madison’s near east side, and the Milwaukee Institute, a nonprofit focused on access to advanced technology, organized Chapman’s presentation.