About 15 years ago Brian Gunning noticed that when he left a piece of cheese in a skillet, it formed a crispy wafer-like chip that tasted delicious. For Gunning and his family, those wafers quickly became a favorite snack.
The chips also had another great property: It had no carbohydrates. When low-carb diets became the rage, Gunning knew the timing was perfect. Why not sell these?
Gunning and his wife thought up the name Wausome while listening to pitches for a new slogan for Marathon County. He snapped up the online domain wausome.com, and the ideas for a brand new business were starting to come together.
Then it came to packaging. Being big fans of Toblerone candy, they were inspired by Toblerone’s triangle-shaped container. Armed with studies that showed that 70% of shoppers who pick up a package eventually buy it, and learning that Toblerone took off after the company changed to its triangular packaging, Wausome Wafers had its signature three-sided box, and the business was officially born.
After its debut in 2014, when the first box was sold at Downtown Grocery, the Wausome Wafer didn’t want for customers. The cheese crisps were considered a high-end item to be paired with wine at a party, picnic or event. They sold in 100 stores across the state and in high-profile places such as Fortune Foods in Chicago and Surdyk’s Liquor and Cheese shops in Minneapolis.
That success eventually turned out to be their biggest problem.
Wausome quickly outgrew its first space in Rib Mountain, then started outgrowing its second location in Wausau—one with a state-of-the-art kitchen. The business was growing fast, and Gunning needed an infusion of cash to expand and meet the increasing demand.
That capital never came. That, combined with some not uncommon business glitches that otherwise would have been surmountable—a vendor nonpayment and a packaging problem around the holidays—Wausome Foods had to close this year.
Gunning’s story highlights a growing problem in the state, says Romey Wagner, manager of the Entrepreneurial and Education Center in Wausau. Wagner worked with Gunning to attract investors, but they couldn’t find anyone willing to invest in the expanding company, despite Wausome Foods’ seemingly promising product.
Gunning’s problem highlights a familiar catch 22 in business: In order to expand and grow, a company needs capital; to get capital from a traditional source such as a bank, you need money of your own. To get that money, you need to grow.
In bigger cities, there’s often a solution to take a business to the next level. Venture capitalists, who can front money to companies in order to grow them, generally take over a company to manage its growth and reap the rewards.
So-called “angel investors” provide capital in expectation of a return, but otherwise don’t get involved. They’re typically choosy in the companies they fund. Think TV’s Shark Tank and you get the picture.
In most large metropolitan areas you’ll find organized networks of such investors. In Wisconsin, several such groups exist in the Fox Valley, Madison or Milwaukee, but they’re focused on supporting their local economies and communities.
Central Wisconsin hasn’t had these kinds of investors. Until now. While they didn’t exist in time to help Wausome Foods, two new group of angel investors have entered the picture in Central Wisconsin. And they might provide the funding gap to help small businesses grow.
Why is that important? There are huge economic consequences.
A study from the Kaufmann Foundation shows that 95% of businesses in the U.S. employ fewer than 50 employees. And almost all job growth comes from new or young businesses—those generally in existence 5 years or less. That’s because they tend to grow, thus needing more employees. It’s easy to see where the economic impact comes from, experts say.
But the small business industry isn’t thriving in Marathon County. The ratio of small companies has been falling since the 1980s, from more than 75% of all local businesses to now less than 68%.
Economic experts and area business leaders say more must be done to grow businesses locally, instead of pinning hope on major employers moving into town.
Think small, think young
During the Great Recession companies shed jobs at alarming levels. But here’s a stat that often doesn’t get mentioned: Small businesses with less than 20 employees bucked the national trend, maintaining positive net growth from 2006 through 2009.
That’s according to the Kaufmann Foundation’s policy brief The Importance of Young Firms for Economic Growth. The report is used by economics experts such as UW-Stevens Point’s Randy Cray or UW-Madison’s Steven Deller when they talk about the importance of home-grown companies.
Stevens Point resisted the job-loss trend during the recession years, typically posting lower unemployment numbers than much of the state. Cray says that’s because the area has a number of successful, homegrown companies. Travel Guard and Skyward all started here and were able to grow.
Examples of big companies moving in and bringing jobs overnight are much more rare, Cray says.
“Small businesses are dynamic with the potential to grow,” Cray says. “Large companies tend to be less dynamic. Their employment isn’t going to change much, in fact they might decrease their employment.”
According to the Kaufmann Foundation’s report, U.S. businesses in existence less than five years contributed more than two million jobs in 2012 (the last year data was available); companies around longer than 11 years contributed less than one million jobs.
Keeping all that in mind, there’s a scary trend: Post-recession, small business creation is on the decline, and has been since 2014, the Kaufmann report says.
Wisconsin should take note, Deller says. He says Wisconsin would do well to focus on small business creation. But the biggest problem lies in capital. Since the recession in particular, Deller says, banks have tightened up on the risks they take. That means businesses need more upfront cash or assets (collateral) in order to get a loan.
“When they say it takes money to make money, this is why,” Deller says.
On the cusp of growth
The scaling up stage is right where Dr. Noodles, a company founded in Weston, is at now. Started two years ago, the business is ready to hit the national stage, says owner Steve Frazier.
Slow growth has been the key so far, Frazier says. It’s a tricky balance. Frasier says he has sampled his noodles in countless grocery stores, and to 25,000 customers. Founded with his wife Brenda, the company produces a gluten-free, protein- and fiber-rich pasta that has found a following among those with gluten sensitivities or anyone making their diet a little more healthy and low-carb.
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There’s a lot of similarities to Wausome Foods. Both are a specialty food product sold at a premium; both capitalize on a health trend; and both tend to be sold in high-end grocery stores that can sell niche products. Just as the Wausome Wafer wasn’t supposed to compete with a bag of potato chips, Dr. Noodles isn’t competing against regular pasta, Frazier says.
One difference—something Gunning says was smart and wished he’d done—is that Frazier is taking things more slowly.
He’s about to enter Whole Foods, but only the Wisconsin region for now and other regions as the company grows. Dr. Noodles soon will sell on their revamped website, and nationally through Amazon. The key is that Amazon allows a seller to set inventory levels—he won’t wake up one day with 1,000 orders he can’t possibly fill.
And Frazier has had to say no. One grocery company in Minnesota wanted Dr. Noodles in 26 stores with a 4,000-unit first order. He turned that down, knowing their facility—the commercial kitchen at Red Clover Market—couldn’t possibly fill the order, let alone sustain reorders. That would require equipment and staff, paid for with capital he doesn’t yet have. Fortunately the grocer told him to come back when he’s ready. But saying no to a major contract wasn’t easy.
Frazier’s plan: Slowly build enough capital (cash) until the company has enough to secure a commercial loan and then truly scale up. Eventually a business gets to a tipping point, Frazier says: Either go bigger or go home.
He likely won’t take outside investors (he also says, always listen, and never say never) but if he did to expedite an expansion? He would purchase $25,000 pasta machines that can produce 70 pounds per hour versus the 18-pounds per hour capacity he has now. He would move to a larger facility, hire employees, say yes to orders he previously has turned down, and pursue selling regionally in Whole Foods instead of just Wisconsin.
Angels in the portfolio
Small Business Administration loans, Romey says, can help a business get funding for that next step by guarantee up to 80% of the loan. That reduces the risk to the bank.
The problem? For one, a mountain of paperwork. And many people simply just don’t know about the program.
But two new angel investment groups in Central Wisconsin can provide another option.
Jeff Ebel and Leon Ostrowski saw the regional gap and decided to change that. They’ve been working for about a year on Midwest Wealth Ventures, a new angel investment firm based in Plover. Ebel, who teaches classes at the UWSP Small Business Development Center and sold a successful architecture firm in 2007, says a lot of resources exist for small businesses but there’s a huge funding gap for expanding a business.
Ebel partnered with Ostrowski, who worked for 35 years for Dow Corning, a silicone manufacturer and Fortune 500 Company, to create a group of investors who will invest in businesses with potential but lacking the capital to reach that next level. It’ll operate like a mutual fund, Ebel says; investors will invest in a portfolio of local companies, which minimizes risk.
Typical angel investments make money because out of seven companies in a portfolio, one will be a “home run,” two or three will be moderate successes and maybe two or three will be a total bust.
Midwest Wealth Ventures will take a different approach, Ebel says. Their group won’t provide just capital, it’ll also use its expertise to help mentor businesses with potential. It’s often not the idea that makes or breaks a business, Ebel says, but the execution. Factors such as the right management team and the right strategy often make the difference. “You can take a mediocre idea and turn it into a gold mine,” Ebel says. “Or you can take a brilliant idea and lose everything.”
The second new player in the area, BrightStar angel investor group, is unique in that it operates as a non-profit. Donors are former successful business people who want to help younger companies in Wisconsin grow so that they can spur job creation, says BrightStar Business Manager Fred Raasch.
In the last year, the BrightStar foundation has received a number of donations from the Wausau area. So now the foundation will increase its focus on Marathon County. BrightStar looks specifically at early stage start-ups that have the ability to grow and support jobs, Raasch says.
More than making money
The Wausome Foods story is one that visibly bothers Wagner when it comes up. Wagner takes great pride in the businesses that come from the entrepreneurial center and he takes their success and failures to heart.
“He’s probably the best example I know of a hard-working entrepreneur who showed great success and had nowhere to turn to get a few hundred thousand dollars of operating capital needed to enter a larger market,” Wagner says. “The concept was proven, the customers were there, the distribution was in place; but he couldn’t meet the distribution needs. It’s an example of how the system failed.”
Business experts such as Wagner, Deller and Cray say that kind of situation needs to change for Central Wisconsin—and the whole state for that matter— to truly see economic success. Local, homegrown companies need to be nurtured, they say.
For people like himself, Ebel says, angel investing is about more than making money. It’s about supporting their community and seeing the local economy flourish.