Ann Arbor Remains a Beehive of Entrepreneurial Interactivity Amidst a National Decline in Under-30-something Entrepreneurs

The decline in the number of young entrepreneurs starting companies in the U.S. has put some industry observers on edge. In January, the Wall Street Journal reported that the share of under-30-somethings who own private businesses has reached a 24-year low.

New York City, Chicago and other well-known start-up hotspots have seen the greatest contraction, but the tide has been slower to turn in Michigan, which is nurturing a strong entrepreneurial ecosystem. The national downturn in entrepreneurship stems from a number of factors, says David Brophy, finance professor and director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business. These factors include:

Economic recovery: “During the 2008 economic downturn, entrepreneurship in many cases was a substitute for a job,” Brophy observes. “Now that the U.S. economy is rebounding, jobs are becoming more plentiful.”

Increased hiring: “A lot of established companies find that smart, entrepreneurial young people make attractive employees, especially with respect to analytics, big data, technology and marketing,” he says. “These aspects of business increasingly have become recognized as important for stimulating faster growth in companies ─ not just start-ups, but also those in the second or third stage of growth, as well as large, established companies.”

Entrepreneurial hard knocks: Young people who opted to follow an entrepreneurial pathway have discovered it is not as easy as it looks, according to Brophy. “They may have tried to start their own company or watched others struggle to get a start-up off the ground, so they have experienced the downside of being an entrepreneur,” he says. “It’s not all skittles and beer. When faced with a job opportunity, many young people choose to take it instead of going down the start-up pathway.”

Student debt: “The overarching drag on entrepreneurship is rising student debt,” Brophy remarks. “Student debt is a dead weight and a liability that individuals must pay. It is not forgivable, even in bankruptcy.” That debt depletes the amount of money available for bootstrapping a new enterprise.

“A” Round Funding: “It’s becoming evident to many entrepreneurs that securing the A round of funding is very difficult,” Brophy observes. “In fact, the A round has been called the ‘New Valley of Death.’ A lot of money is available for start-ups, but not for companies as they move up the ladder. The tests for financing get harder as entrepreneurial businesses attempt to go forward.”

The confluence of these factors has proven daunting to would-be entrepreneurs under age 30. “The appetite for start-up risk is being reassessed,” Brophy says. “In the future we will probably see fewer flippant entrepreneurial start-ups launched by someone who gets a wild idea and starts a company.”

In Ann Arbor, however, entrepreneurship is still flourishing, in large part through the efforts of the Zell Lurie Institute, CVP and the Michigan Growth Capital Symposium. “Ann Arbor, despite its small size, has become a beehive of interactivity for young people who are interested in starting or joining entrepreneurial companies,” Brophy reports. “There are dozens of meet-ups going on at bars and restaurants, and around the University of Michigan, where individuals have an opportunity to test their ideas, personalities and smarts against the common standard.”

The University’s faculty and professional staff are becoming more engaged in the practice of technology transfer and the role entrepreneurship plays in its commercialization, according to Brophy. “Now there is greater interest in linking breakthrough technologies to start-ups and early-stage companies across the Michigan campus, and this trend is gaining traction,” he reports. “Our new president, Mark Schlissel, for example, is active in the biotechnology field.” One of Brophy’s graduate courses, Financing Research Commercialization, attracts Ph.D. students from science and engineering who want to learn how to commercialize and fund the development of companies based upon new technologies.

“The bottom line is that we need to build strong companies that produce value-providing products based on innovative methods or technologies which people want to buy and use,” Brophy concludes. “This is important if Michigan, both the University and the state, wants to further the development of our local market.”

Silicon Valley Bank’s Mike Kohnen Looks at Emerging Trends in the Midwest Innovation Ecosystem

Mike Kohnen has developed strong ties across the Midwest “innovation ecosystem.”  During his 18-year banking career in Chicago, he has worked with early stage, growth stage and late stage large corporate ventures. For the past eight years, he has put his Midwest work ethic into action at Silicon Valley Bank, where he is the managing director of the Midwest Technology Group in the company’s Chicago office.

“What attracted me to Silicon Valley Bank is the clear differentiation the bank has created,” Kohnen explains. “SVB consistently has been focused on specific market segments, particularly technology and life sciences, over several decades.”

SVB is not a direct investor in the entrepreneurial companies it serves. Rather, its core business is to provide debt and unique banking services, often working closely with equity providers to complement and optimize capital strategies for high growth companies. “As a commercial bank,” Kohnen says, “we provide venture debt, growth capital and late-stage senior debt, and work with the venture capital community or the private equity community, depending on the stage of the company we are supporting.”

Recently, we spoke to Kohnen, who constantly seeks to identify trends and opportunities with Midwest entrepreneurial start-ups, other commercial banks and venture capital and private equity investors.

MGCS: How does the Midwest stack up to the rest of the country in terms of access to capital?

Kohnen: I think it’s important to correct the widely accepted notion that there has been an absence of funding to innovative technology and life science companies in the Midwest region, which is sometimes referred to as the “fly-over states.” Capital finds innovative companies at the various stages of growth wherever they exist. It may be more difficult in some regions versus others, but the Midwest has proven the capacity to attract great thinkers and the ability to launch innovative companies. That is why Silicon Valley Bank has been committed to the Midwest region for nearly 20 years.

MGCS: What trends do you see emerging in the Midwest innovation ecosystem?

Kohnen: We’re seeing a sustainable increase in venture capital investing in the Midwest from both regional and coastal venture capital firms. The fact is, there are great companies to invest in across the Great Lakes and Great Plains region, but start-ups tend to fund their growth in different ways.  For example, a coastal start-up company may raise a higher amount of capital quicker in the early stages to accelerate to a high growth phase. The Midwest pattern tends to be to bootstrap companies initially and, in many cases, raise institutional growth capital from later stage venture investors or private equity firms at a later growth stage. Midwest start-ups progress from bootstrapping with capital raised from friends and family to angel investors to local venture capital firms based in various metropolitan areas, such as Chicago, Minneapolis, and Columbus, to name a few.

MGCS: What are some of the factors behind this increase in VC investment in the Midwest?

Kohnen: First, there is a thriving ecosystem and unique character-building in the various metropolitan centers across the Midwest, and more companies are gaining visibility. The region has a few important ingredients to support this trend, including great universities and a talented labor pool. In the last couple of years, several new factors, such as the emergence of the cloud, have been favorable to Midwestern entrepreneurs, because these advances have allowed early stage companies to reach a certain point in the growth cycle without having to raise as much capital. However, once these start-ups move from ideation and product development to become thriving companies, you tend to see some late stage venture investing or even some growth capital investment come into play.

MGCS: What sectors offer investors the biggest bang for their buck?

Kohnen: On the technology side, we see a lot of business-to-business, or B2B, software companies in the Midwest that use technology to help other companies improve their performance. In many cases, those B2B companies are relatively unknown, yet there are some great growth stories here. We are seeing evidence of other sectors popping up, including business-to-consumer, or B2C, and social media, which represent evolution beyond the strength in B2B software. This is pretty exciting.

MGCS: How does Silicon Valley Bank help to fund growth?

Kohnen: We work with innovative companies when there’s a venture partner involved across all stages, including early, growth and late corporate stages. We can put debt into many companies before general-industries banks can, because of our sector focus on technology and life sciences. We have a deep network with the VC community and work with them on early and growth stage companies, and with the PE community on later stage growth and corporate stage companies. By providing debt capital on top of equity capital, we give companies additional runway and the option to avoid taking on an unnecessary amount of venture capital, which dilutes the ownership stake of the company founders and other managers. Through our experience over various market cycles in the last several decades, we also tend to know when it’s good to use debt versus when debt is less optimal, if a company is too early in its growth phase.

MGCS: Do you assist high-potential start-up companies in other ways?

Kohnen:  The service side of our business can be overshadowed by discussions on how companies get funded through debt and equity.  However, in the context of a rapidly growing global economy, our service side can be just as important and strategic for the types of companies we work with.  Many companies at a very early stage have complex cash management needs or international growth strategies ─ areas where we have created unique offerings and assigned product specialists who can assist and increase the probability of our clients’ success.

MGCS: How has SVB benefited from participating in the Michigan Growth Capital Symposium?

Kohnen: It’s a great forum and one of the most important events in the Midwest. The MGCS gives innovative, early stage companies access to the venture investment community and opportunities to showcase their products and services. Over the years, I’ve created long-term relationships with many entrepreneurs and members of the venture capital community, both coastal and regional.

Advanced Battery Concepts Restructures its Business Model to Drive Fundraising and Future Profitability

Advanced Battery Concepts has come a long way since 2008 when Ed Shaffer II and his wife bootstrapped the entrepreneurial enterprise in their garage using money from his 401(k) retirement savings account. Over time, the company has tapped an array of entrepreneurial resources available in Michigan to help accelerate product development and attract investment. Recently, it completed a restructuring of its business model that will bolster fundraising and build a pipeline of profitability.

The company’s proprietary bi-polar GreenSeal battery technology is engineered to enhance the performance of existing lead-acid battery designs while lowering the production costs and material content. In an energy-hungry world, Advance Battery Concepts’ product is well-positioned to meet the growing demand for storage and battery development arising from renewable energy, e-bike growth in Asia and advanced-vehicle technologies, such as hybrid and stop/start vehicles.

“We’re taking a known chemistry and using manufacturing processes and product-design rules to improve performance,” Shaffer says. “We are cognizant of adoption costs and time, so we have designed our battery technology to work in existing applications.”

Advanced Battery Concepts won first place in the 2009 Great Lakes Entrepreneur’s Quest business plan competition and $25,000 in prize money, which allowed it to move into the MidMichigan Innovation Center in Midland, Mich., and to secure its first seed round of financing led by the BlueWater Angels. Two years later, Shaffer opened up an A-1 round of financing to attract additional grant money and angel capital, which was used to accelerate engineering development of the GreenSeal technology. The additional funding also enabled the company to move to a small commercial facility in Clare, Mich.

In 2013, Advanced Battery Concepts was approached by a company that asked it to scale up its battery production quickly. “We tried to meet that production goal, but we were too small a facility,” Shaffer explains. “So, we restructured the company to focus on licensing our GreenSeal technology to other battery makers rather than capitalizing our own facility and building our own huge manufacturing plant. Our technology leverages 80 percent of the existing capital in a conventional lead-acid battery manufacturing facility, so companies don’t have to green-field a completely new production line to make our product.”

With its new business model in place, Advanced Battery Concepts has installed a small pilot line to demonstrate all of the unit operations and to build a limited number of full-scale batteries for distribution to potential licensees. The batteries also have passed industry-standard testing, which has confirmed their performance quality as lower-cost, higher-performance products versus conventional lead-acid batteries. “We’re getting good traction by producing real-size big batteries with a scalable operation in our Clare facility and fielding them at independent test houses, where data show they meet above-industry standards and have formats that can be easily adopted,” Shaffer explains.

In June, Advanced Battery Concepts opened a $3 million A-2 follow-on round of financing and Shaffer made a formal pitch to investors at the Michigan Growth Capital Symposium. Since then, the company has closed on $2.5 million of angel investment, initiated discussions with several potential licensees and aggressively pursued the possibility of an early exit via acquisition.

“I’ve appeared at the MGCS several times and have found it provides excellent exposure to venture capital investors in the state,” Shaffer says. “I’m happy to be an entrepreneur here in Michigan.”

A Michigan-minted, High-growth, Life-sciences Start-up Blazes a Trail of Success in the State’s Contract Pharmaceutical Manufacturing Industry

Grand River Aseptic Manufacturing has all the earmarks of a Michigan-minted, high-growth, life-sciences start-up super star. GRAM evolved from a joint venture spun out of Michigan’s Life Sciences Corridor and received initial funding from Michigan’s angel investment community. Its top management has deep-seated experience in Michigan’s pharmaceutical industry, and much of its highly paid, 55-member technical team is drawn from around the state. The company is now headquartered in Grand Rapids, where it is expanding its operations and customer base. By the end of 2015, GRAM expects to achieve significant growth and profitability.

“We’re very excited to be a new leader in the life-sciences industry in Michigan,” says President Tom Ross, who has more than 30 years of executive and operational management experience, including a top financial position at Perrigo Co. “We’ve benefited from our relationship with both the Van Andel Research Institute and Grand Valley State University, which helped us launch GRAM as a separate entity.” A predecessor company, Grand Rapids Aseptic Pharmaceutical Packaging, or GRAPP, was originally started as a joint venture by the institute and the university in 2004. GRAM acquired GRAPP’s assets in December 2010 and developed it into a start-up contract manufacturing organization.

Today, GRAM manufactures small to mid-size batches of sterile injectable products for the pharmaceutical market. It has more than a dozen customers, which include companies seeking clinical trial materials as well as those selling their FDA-approved products commercially. When GRAM started, its investor base was largely composed of angel investors in West Michigan, along with two private equity firms based in Indiana. The company’s management team also provided seed funding.

“I initially invested in GRAM as a private investor through Grand Angels,” Ross explains. “Two years ago, I was approached about providing advisory services. A year and a half ago, I was asked to become president of GRAM, and I’m honored to lead the company.”

GRAM’s fundraising efforts have been rewarded by enthusiastic early stage angel investors. In 2010, the company raised $5 million in Series A and B funding to purchase GRAPP’s assets and start up its own operations. In early 2013, it closed on another $2 million round to continue funding those operations. In early 2014, the company raised an additional $9.8 million to cover bridge financing, a term loan and a Series C round, which is being used for capital improvements, including the equipping of a recently opened 28,000 sq. ft. finishing facility.

GRAM was invited to appear at the 2014 Michigan Growth Capital Symposium, where it originally intended to pitch to angel and venture capital investors. “By the time June came, we had already closed on our Series C round of funding, so we didn’t need any additional money,” Ross says. “Instead, we used the opportunity to showcase our position as a new leader in Michigan’s burgeoning life-sciences space and to present our growth story to leading investors in the state. We were able provide updates on our progress to several of our current investors and to establish relationships with other potential investors who may provide expansion capital in the future.”

In 2014, GRAM reported revenues of under $5 million. Its revenue target for 2015 is double that amount: $10 million. “The challenge in raising capital as a start-up with an operating-loss history is to convince investors to focus on future growth and cash flow,” Ross explains. “This year, we expect to be profitable, attaining significant growth and positive cash flow. That will greatly increase our ability to attract new capital to fuel our future growth. We are very pleased to be considered a success story here in Michigan.”

Tickets for Bay Area Michigan in Fintech event now available

On April 28, the Ross School of Business Alumni Club will host the inaugural Michigan in Fintech event at the Ross Bay Area Alumni Club in San Francisco.

This event will be an opportunity to hear from alumni who have been, and continue to be, part of the changing technological face of the financial services industry. The evening will feature Michigan alumni guest panelists, including:

  • Ajay Ajay Amlani, EVP You Technology, Ross MBA
  • Anil Arora, CEO Yodlee, Ross MBA
  • Dave Girouard, CEO, UpStart, Ross MBA
  • John MacIlwaine, CTO Lending Club – Engineering Alumnus

The panels will be followed by informal networking, drinks and appetizers.

New publicly traded companies, emerging start-ups and incumbent players alike are all changing how people make, spend and invest money and how capital markets operate. Fintech innovation will not only change how people interact with their money in the future, but it may very well be one of the fastest growing sources of business and technical jobs in financial services for the foreseeable future.

The event begins at 7:00 p.m., and all are welcome. Tickets are free, and available here.

MVCA’s New Executive Director Develops an Action Plan for Elevating Venture Capital’s Role in Driving Michigan’s Economy

Since assuming her new position as executive director of the Michigan Venture Capital Association on December 1, Maureen Miller Brosnan has not wasted a single minute.

“As one of the premier membership associations in our state, the MVCA has a lot to contribute to advancing Michigan’s economy, especially the entrepreneurial community, where our 100 member companies have made considerable investments,” explains Brosnan, who succeeded former MVCA Executive Director Carrie Jones. “Our association’s role as an economic driver in our state has been on a steady upward trend, and we expect to see that continue.”

Right now, Brosnan’s biggest job is getting to know the venture capital industry from the inside out. “During my first month as executive director, my goal was to meet as many MVCA members as possible,” she says. “I asked them where they envision the organization heading and what they would like to see it accomplish in the next few years.”

One of the top priorities identified by MVCA members is the formation of a new state-funded fund of funds that would invest in VC funds located in Michigan. “There is a new crop of state legislators in Lansing who will be trying to make decisions that are best for the state,” Brosnan says. “One critical decision facing these legislators in 2015 will involve the launch of another major fund of funds and the amount of money allocated to the fund to support Michigan’s growth curve in venture capital investment. We want to make sure the MVCA is their first point of reference when they talk about investing in entrepreneurial business and raising the state’s VC investment profile nationally.”

MVCA members also have asked the trade association for assistance in grooming new, capable leaders within the venture capital community. “We are continuing our Venture Fellows program, which enables venture funds to bring new, younger people into their firms as analysts or associates,” Brosnan says. “In addition, we are launching a new Executive Connect program later this year.” Executive Connect builds and curates a list of current and retired Michigan C-level executives and CEOs who want to continue contributing to the state’s economy and entrepreneurial companies at a board level. These individuals would serve as board members for Michigan start-up and early stage companies, fulfilling their need for seasoned advisors.

Brosnan’s 25 years of experience in nonprofit, government, association and corporate communications and management has prepared her to take the helm at the MVCA. She has been elected four times to four-year terms on the Livonia City Council, beginning in 1996, and currently is council president/mayor pro-tem and chairperson of the Committee of the Whole. As an independent contractor, she worked on former Governor Jennifer M. Granholm’s 2002 election campaign and served as campaign manager for Connie Kelley during her 2012 bid for a seat on the Michigan Supreme Court. A stint on the State Transportation Commission provided insights into the policy-making body for all state transportation programs. In addition, Brosnan is chair of the board of directors of St. Mary Mercy Hospital in Lovonia and serves on the board of directors of the St. Joseph Mercy Health System as immediate past chair.

“Having served as an elected municipal leader in a Michigan community struggling to rebuild its economic base, I understand that an aggregate of small, entrepreneurial, high-tech businesses ─ rather than a single large manufacturer ─ will be needed to stimulate its economy,” Brosnan says. “That perspective will help me bridge the conversation gaps in discussions of what it will take to drive growth in local communities and the state’s economy.” She also plans to leverage her prior experience as executive vice president of Publicom Association Management Inc. and the many valuable relationships she’s forged over the years in the Michigan legislature and various industry sectors.

“My new world is venture capital and I’m working hard to get up to speed and totally embrace it,” Brosnan says. “The MVCA is a great organization and I’m proud to be leading it.”

Favorable U.S. Economic and Financial Conditions Could Give Michigan’s Venture Capital Industry a Boost in 2015, Predicts CVP’s David Brophy

“Right now, from the viewpoint of political and economic stability, North America is the best place to invest in emerging companies, and it’s going to be that way for quite a while. That augurs well for the venture capital business in the U.S. ─ and in Michigan,” remarks David Brophy, finance professor and director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business.  “The serious decline in global economic expansion has dampened enthusiasm for international risk capital investment as these markets have run into a series of practical problems that have stunted their rate of growth.”

There are several caveats to Brophy’s optimistic prediction, however. The major unknowns include the policy decisions of central banks and taxing authorities in the U.S. and other developed countries and the political economy issues that face developing nations of the world. Volatility in financial markets, commodities and services will dominate the U.S. and global economic picture in 2015. The ability of the private equity system to thrive in times of uncertainty will be sorely challenged this year.

“While the stock market seems to be bouncing back from the current oil shock, the question is whether it will stay strong or begin to slump once the support of the Federal Reserve System is reduced or removed,” Brophy says. “If the Fed succeeds in orchestrating a smooth transition from full to less-than-full support, I think conditions will prove favorable for venture capital and private equity investments.”

He anticipates Michigan will benefit from a stronger investment climate, because it has a well-trained, knowledgeable workforce. “People in Michigan can produce things and make things happen,” Brophy says. “This is attractive to investors who are looking for innovative companies that can tackle tough problems. When you add the juice of intellectual depth emanating from our universities to the tacit production knowledge of our labor force, you have a great recipe for success.  The recovery of Michigan and the improvement in Detroit stand in evidence of this.”

For entrepreneurs seeking funding for new ventures, 2015 will be both challenging and rewarding. “Entrepreneurs are becoming better informed, but so are angel and venture capital investors,” Brophy observes. “Investors still have the edge because they have the money, and time is on their side.” While crowdfunding has gained popularity, its future trajectory is uncertain and held captive by Congress. “The intense due diligence examination that accompanies real funding is costly in terms of time and fees,” he adds. “Doing away with that process is not as easy as people may think.”

The IPO market took center spotlight in 2014 when, for example, Alibaba Group Holdings, China’s biggest online commerce company, claimed the title for the largest global initial public offering in history, raising $25 billion.  Not all initial public offerings have stirred the same level of enthusiasm among investors, however. That uneven performance has diminished the notion of the IPO as an automatic money machine, according to Brophy, but that part of the market remains open as an attractive harvest route for entrepreneurial firms.

Still, there’s plenty of VC investment money looking for high-growth companies with disruptive products and clear market opportunities, according to Brophy. “We now have the Internet of Things in which products connect with other products in new ways ─ such as adapting Google Glass for use by surgeons in the operating room,” he says. “These innovations are only as scarce as our inability to think of new applications for technologies and bring them to market. However, our rising problem is the difficulty facing the glut of startups attempting to raise the Series A round of venture funding.  Michigan should move quickly to encourage development of investment facilities for providing access to this stage of finance for its entrepreneurial firms.”

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