The State of Michigan’s VC Industry: What the Buzz is All About

The Michigan venture capital industry is gaining momentum and attention as it continues to thrive despite a national dip. Michigan Growth Capital Symposium (MGCS) Founder David J. Brophy, Director and Professor of Finance at the University of Michigan Ross School of Business, joins us this month to discuss the state of Michigan’s VC industry – what’s going right and what people are buzzing about.

The president of the National Venture Capital Association recently used the term “the Michigan Miracle” while describing the VC industry in this state. Do you agree with him?

Yes and no. It’s a miracle that people have pushed the boulder uphill for a good many years – it’s a ’30-year overnight success.’ Right now everybody else in the country seems to be down and we’re up, and I think that reflects that we had a nice clustering of deals that have come together at one time. The trick is always sustaining it, and success is vital to that momentum.

Why has the VC industry grown in Michigan while contracting in other areas of the country?

We planted a slow-growing tree here a long time ago; it’s gradually developed and we got a good crop this year. Other areas may have crested a little earlier than we did. Remember, the same people that are praising us now didn’t have much time for us a few years ago when other places were hot. That doesn’t diminish what we’re doing and what we’ve done. And I do think we’re on a sustainable highway as far as this business is concerned. I think it’s the fruits of a lot of good hard work over the years.

What is the overall industry reputation of Michigan?

It’s definitely improving and growing. When we stand out, like we’re doing now, it can have a ratchet effect on the attitudes of people who otherwise would not see a trip to Michigan as potentially profitable. The MGCS is a bell-ringing event. On one hand it’s going to attract people to see what’s going on, and on the other hand it’s going to strike people as an affirmation of the quality of people – like Mark Weiser and Tony Grover – who they got to know out in California, and who moved back here and are doing very well.

What is the secret to Michigan’s success?

Just hard work, and ultimately the absolute need to do it. In a way, it finally took the dislocation of our industrial base, and we now have a total revision of the economic pillars of the state. We’ve got a new and philosophically different governor, and we’ve got right-to-work legislation. We’ve got a very effective venture capital and private equity provision through Credit Suisse and the 21^st Century and Michigan Venture funds of funds. That’s a public/private partnership program that’s absolutely working.

We also have a cadre of good, smart entrepreneurs. We’ve got one of the great universities in the world here at the University of Michigan, and many others. So there’s been a tremendous intellectual property pump, and we’re only now beginning to really figure out how to turn it into economic production. We’ve got a heck of a lot going on, and it’s catching the attention of people around the country and around the world.

What are the most promising sectors for VC in Michigan?

The one big area where we’re doing quite well is in medical devices and healthcare in general. Where we’ve got potential that has not yet been fully realized is in information technology. Those two are inter-dependent in a way, because there’s a lot of IT opportunity in healthcare, so we’ve got an opportunity to blend the talent pools here. You can say the same on the energy side, and I think our long suit in that area is in efficiency improvement.

Beyond that, we’ve got sophomores and freshman who are busy creating smartphone apps and all kinds of online companies. We’ve got probably fifty meet-up groups that are just humming all the time. Overall, we’re building an entrepreneurial community here that is going to grow to challenge anybody anywhere. 

The best place to get a pulse on Michigan’s VC industry is at the Michigan Growth Capital Symposium. For more information on this year’s event, visit www.MichiganGCS.com.

Innovation Hotbeds Sprouting Nationwide

While Silicon Valley remains a leading pillar of innovation, it’s certainly not the nation’s only one. Innovation hotspots continue to pop up across the country, enjoying relatively a high rate of growth. “I think that everybody’s got the message on innovation,” said Michigan Growth Capital Symposium (MGCS) Founder David J. Brophy, Director and Professor of Finance at the University of Michigan Ross School of Business. “Every university wants to improve the pure research that it’s doing. It’s getting a little more difficult because of federal budget difficulties; it’s tougher to get dollars from the research agencies, and you’ve got to learn to live with less. That should, and probably has, put pressure on the universities to speed up their commercialization and the rate at which they change invention into innovation, which really is the transition that happens when we license to a big company or when we license to a startup.”

Brophy noted that the market continually cries out for innovation, especially in the areas of healthcare and technology, so there is always room for new ideas and investment. “I think it’s in the self-interest of every locale to recognize that the application of knowledge-based industry is one of the keys to continued employment,” he said. “It’s just a natural evolution.We’ve got bumps occasionally that slow us down, but the trend is there.”

The MGCS strives to bring together all parties of the innovative process from Michigan, the Midwest, and across the country. “This is one of the most durable engines of innovation that we have,” said Brophy. “It’s where startups and investment capital and technology meet. We always try to present that mix, and we welcome all people with any interest to join and to get involved. Whether you’ve got a startup, an idea, money to invest, or if you want to just show up and meet these people. This is the place to be – and 33 years of existence has to mean something in that respect.”

Venture fund run by UM business students picks LearnZillion as its first investment

Check out this piece from Tom Henderson on UM’s student-led Social Venture Fund’s investment in LearnZillion:

The Social Venture Fund, a new fund operated by students at the Ross School of Business at the University of Michigan, announced its first investment this morning — in LearnZillion, a Washington, D.C.-based company that offers online video lessons for students in grades three through nine from top teachers around the country.

The Social Venture Fund makes early-stage investments of up to $200,000 in for-profit companies that have a social impact. The fund joined a syndicate of 17 investors from around the country in a $2.4 million round.

The fund is managed by Gautam Kaul,a professor of finance at UM, and 34 business school students.

UM now has three student-managed funds. The first, the Wolverine Venture Fund, co-invests in early-stage companies with established venture firms around the country. The Frankel Commercialization Fund does seed-stage investing in companies not ready for venture capital.

Revamping the Entrepreneurship Curriculum

This is the reign of entrepreneurship. Even staid universities are being transformed. A recent Kauffman Foundation study revealed that today, over 1,500 U.S. colleges and universities offer some form of entrepreneurship training, whereas only a handful did just 15 years ago. However, as quickly as university entrepreneurial programs proliferate, students’ expectations from them are also morphing.

Historically, university entrepreneurial programs have generally started in business schools and met the needs of those students wanting to launch a business, rather than join an existing one. These programs quickly expanded to include engineers and scientists who wanted to commercialize their high-tech gizmos. The entrepreneurial programs delivered on the students’ desires by teaching how to start and build a business. But something is changing on university campuses. There’s a new generation of students with very different views of their futures. They want careers with meaning and they want to study what they are passionate about. They want to learn how to earn a living from those passions.

Unlike the previous generation of students, this generation is not coming to entrepreneurship programs with solid business ideas; these students are coming with only newfound knowledge and interests. This greatly shifts their expectations and needs. While commencing an entrepreneurial-education program with a business-plan course made perfect sense to students coming in with solid business ideas, it makes no sense for this new generation of students with few businesses to launch. These students need to learn the complete entrepreneurial arch that spans from capabilities on one shore to an ongoing business on the other side.

Building from the capability footing of the arch requires first identifying an opportunity that’s actually feasible, given one’s resources and abilities. The next block in the arch is designing a business that exploits that opportunity. A feasibility study then needs to be done to see if this business meets the aspirations of the founders and any investors that may be required. Once a new venture is deemed feasible (or the conditions of that feasibility determined), one then traverses to the right side of the entrepreneurial arch, to the familiar elements more typical in classic entrepreneurial education: creating a business model and business plan, finding the human resources and financial capital needed to start the business, and managing the growth of the new venture.

Creating courses and entrepreneurial skill-building programs on the left-hand side of the entrepreneurial arch was not necessary for the previous generation of students who came to entrepreneurial programs with exciting new business ideas, but is essential for the current generation.  As a result, these pre-business planning entrepreneurial skills—opportunity identification, business design, and business assessment—are largely missing from most entrepreneurship curriculums.

We need to teach students how to create differentiated businesses from their differentiated capabilities, building upon their own unique knowledge bases and what they came to the university to study.  Business is the vehicle for creating and capturing value from your capabilities.  The discussion about how to leverage your capabilities to create value for the world should not start with the vehicle, but with your capabilities.  That is what students are passionate about, and that’s what they came to the institutions of higher learning to deepen their knowledge about.

Business schools like the University of Michigan’s Ross School of Business, with the help of successful serial entrepreneurs and alumni, are demonstrating how this can be done across a dynamic university.  While expanding entrepreneurial curriculum satisfies the needs of this generation of students, it also moves entrepreneurial programs significantly beyond “extracurricular” student activities and a few elective courses.  Staid institutions of higher learning must manage to sustain these transformations for the good of their graduates and the global economy.

Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow@BWbschools on Twitter.

Register Now for the Michigan Private Equity Conference

Mark your calendars – the 5^th annual Michigan Private Equity Conference is scheduled for October 14 and 15 in Ann Arbor.

The event will bring together more than 150 executives and professionals gathered to discuss new opportunities and assess lingering challenges in the nation’s economy and credit markets.  The pre-conference golf outing and half day conference will provide an exceptional opportunity to interact with private equity, investment banking and business leaders from across the country.

The event is presented by the Center for Venture Capital and Private Equity Finance of the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies at the Ross School of Business.  Register and check out the schedule of events, see:  http://www.michiganpe.com/registration.asp