In November at the Michigan Venture Capital Association annual meeting, Kelly Williams, who leads the Credit Suisse Customized Fund Investment Group, told an over flow crowd of private equity finance professionals that Michigan was bucking the national trend – its Venture Capital sector was growing rapidly, while nationally the industry was in steep decline. She described it as the Michigan miracle.
William’s group manages or co-manages over $625 million of capital dedicated to investing in Michigan, including the Invest Michigan Growth Capital Funds, Invest Michigan Mezzanine Fund, Venture Michigan Fund and Michigan 21st Century Investment Fund. But her group also manages a total of $23 billion for all its institutional investors. So her words carry much weight in the private equity finance world.
“Michigan is in the midst of a steady increase in venture capital activity by every measurable metric,” Williams said. “At the beginning of the last decade, Michigan had seven venture firms. A decade later there were 20 Michigan-based venture firms and another seven firms with an office in the state. These Michigan-based firms manage $1.5 billion, which is up nearly 70 percent from five years ago.”
Since 2000, Michigan lost roughly one million jobs as the state No. 1 industry, auto makers, got trapped in a downward spiral that only last year began to return the industry to production levels closer to the former norm. Ironically, last year Michigan venture-backed companies landed $232 million, the best year since 2000.
“This is tremendous progress, which we expect to see continue,” Williams said. “By contrast, the US venture capital industry has been contracting for the past ten years with fewer venture firms and investment activity still only about one third of the 2000 peak levels.”
More than half of the money invested in Michigan last year went into three companies: $72.64 million for Protean Electric in Auburn Hills that’s developing drive systems for electric and hybrid vehicles; $32.5 million to EcoMotors Inc. in Allen Park; and $16.44 million to medical device company CertoPherx Inc. in Ann Arbor. So autos still remain the dominant industry. But the lost first decade of the 21st century, as it is referred to in Michigan, finally hammered home a point that many government, academic and business leaders had been making for a long time – Michigan had to diversity its economy and return to the entrepreneurial roots that made Detroit the Silicon Valley of a century ago.
“What if an industry gets so big it absorbs all the resources in the state?” asked David Brophy, a University of Michigan Associate Professor of Finance who also is Director of the Office for the Study of Private Equity Finance. “Fur, copper, mining, and timber all dominated the state economy in their time and disappeared. Somehow we thought car manufacturing would remain forever. We kept saying let’s diversify the economy. But we never did. And in the last decade we paid the price for it.”
In 1980, Brophy took a leave from the U-M to do a study on why Michigan had so many startups, but never developed into a Silicon Valley type of region. The reason he discovered was the auto industry sucked the financial juice out of the state, leaving nothing for entrepreneurs, a word that was just starting to come into vogue. There were home grown banks, like National Bank of Detroit, and Manufacturers Bank, started by the auto industry so if you were a supplier that needed a line of credit to build a million car parts, you got the loan with General Motors’ backing.
Silicon Valley had its own financing mechanism for home-grown ideas that spun out of the high-tech companies in Northern California, as well as the innovation hot bed of Stanford University – Venture Capital. Unfortunately Michigan had become in the 20th century a big corporate state – both for auto and medical device manufacturers – letting what Grand Rapids entrepreneur Rick DeVos, the grandson of Amway co-founder Richard DeVos, described as the atrophy of its entrepreneurial muscles.
Brophy, results of his study in hand, decided to do something to help match entrepreneurs with capital when he launch the Michigan Growth Capital Symposium in 1980. The symposium brought together about 100 people to take a look at a handful of Michigan startups. Most of the Venture Capitalist came from outside the region, many former Brophy finance students.
In May 2013, the 32nd edition of MGCS will host upwards of 500 Venture Capitalists and Angel Investors who will hear pitches from 32 pre-qualified Midwest companies seeking up to $20 million. In the past decade alone, more than 300 companies have presented at the symposium where about 70 percent raised capital totaling more than $1.7 billion. Twenty percent of these companies have had successful exits.
“Financiers go where deals are,” Brophy said. “As we get more smart people who like living here, the extent that these people can combine good living conditions and business they like to do, they become our new bedrock. Our growth is not sustainable if you fund start-ups and they go someplace else. We still have to make Michigan a place for growth oriented, innovation oriented companies and then gets the job you want, not putting lug nuts on the rear wheels of a car, but putting them to work in building medical devices or advanced manufacturing.”
Fast forward to 2013 and Williams of Credit Suisse said Michigan has now become an investment destination and local investment firms have built a reputation that is recognized nationwide.
“We expect the level of innovation to accelerate and continued support for local entrepreneurs,” Williams said. “In the future as the ecosystem becomes more fully developed we believe a culture of innovation will become more deeply embedded with Michigan’s talent base, making it easier for innovative companies to gather the talent and expertise needed to grow. We also expect to see a more diversified landscape of companies. Life sciences have long been the dominant sector of focus for venture capitalists in Michigan. There has been a trend in recent years toward IT companies and the level of innovation and investment interest in this sector has increased. We expect IT to continue to expand as an investment sector for venture capital.”
Top business leaders in the state also saw the lack of Venture funding as a major obstacle to Michigan’s economic success. Members of the organization then known as Detroit Renaissance – since renamed Business Leaders for Michigan – had decided in 2007 to raise a fund of funds that would invest in venture capital companies that would, in turn, invest in tech start-ups in southeast Michigan. They managed to raise $45 million with corporate investors including the Kellogg Foundation, Huntington Bank, Blue Cross Blue Shield of Michigan, AAA and DTE Energy Co. It was the first effort of its kind in the nation — large companies raising a fund to invest in start-ups.
Today the Renaissance Fund has raised $110 million, invested in 11 funds, and made financial commitments of about $40 million, said CEO and Fund Manager Chris Rizik, who is Michigan Gov. Rick Snyder’s former business partner in VC Fund Ardesta LLC.
“For every dollar we’ve invested, Rizik said, “we’ve attracted $3 from other investors who also have brought along other VCs. “And seven of those companies have already had exits, returning 2.7 times their investors’ money. Our money has been leveraged 15 times into Michigan companies. Our $110 million will lead to more than $1 billion coming into Michigan.”
The Renaissance Fund has been so successful that Procter & Gamble has used it as the model for Cintrifuse, a Cincinnati regional fund that has raised more than $55 million to boot strap Southern Ohio Venture firms.
“In Michigan, technology we’ve always had,” said Rizik. “Now the culture has changed. 2008 was a terrible year for this state, but it was the final straw in a decade-long recession. We saw a lot of people who hadn’t thought about doing things entrepreneurial, 2008 was the tipping point for them. Folks saw anything not a big company was a high risk. But then they saw two of the largest employers in the state go through bankruptcy. So they focused on entrepreneurial activity and tried to manage it. It opened the door for entrepreneurs to break out. Not just college kids, but people in their 30s and 40s.”
Rizik said it is still difficult to raise capital in the Midwest. Despite all the efforts by Michigan government, business and academia, the state has less than 2 percent of the nation’s Venture Capital under management. But the trends all point up, he said.
“We used to be in the middle of the pack nationally among states,” he said. “Now Michigan is in the top 20 moving towards the mid teens.”
Three very active Michigan governors have contributed to the Michigan miracle. First Gov. John Engler started to monetize the $1 billion Michigan was scheduled to receive from the Tobacco Settlement to invest $50 million a year in grants to fund Life Sciences companies along the so-called Michigan Life Science Corridor, stretching from Kalamazoo, to Grand Rapids, to Lansing, to Ann Arbor, to Detroit.
When Gov. Jennifer Granholm was elected, she took the tobacco money in 2005 and created the 21st Century Jobs Fund, broadening the state’s investment portfolio to include not only Life Sciences, but also Alternative Energy, Advanced Auto Manufacturing and Materials and Homeland Security and Defense. She also created the Venture Michigan Fund, now two fund-of-funds that have $215 million to invest in VC funds that invest in Michigan companies.
Under Gov. Snyder, the state has put added emphasis on the Michigan Growth Capital Partners fund, launched in 2008 as part of the $300 million InvestMichigan! Program. In February 2013, Credit Suisse and its investment partner Beringea announced the launch of Michigan Growth Capital Partners II, a $180 million fund dedicated to providing growth equity to Michigan companies. Since 2008, more than 1,200 deals have been reviewed with investments made in 28 companies that employ more than 5,000 people in Michigan.
Rizik said what’s particularly pleasing to him is seeing a lot of high-net worth individuals in the state, and institutions that previously watched from the sidelines start to invest in VC funds.
“We’ve seen two large programs, the Renaissance Fund and the Venture Michigan Fund, set aside to support creation and growth of VC funds in the state,” he said. “We’ve seen the state pension funds more active in investing. We’ve seen foundations, and to a lesser extent, the university community doing it. The capital piece is not yet there, but it keeps getting better.”
Certainly, the role of the state in rebuilding the private equity finance infrastructure in Michigan can’t be underestimated, said Paul Brown, vice president of capital markets for the MEDC.
“The largest 13 funds were all supported by the state in one form or another,” he said. “Most of them were helped with their seed rounds. Engler started it. Granholm increased it. Gov. Snyder also is a Venture Capitalist and entrepreneur who understands this space.”
He also pointed out that the unintended consequences of the 2008 recession was to unleash a lot of skilled talent that was resident at big Michigan corporations, many of whom have gone on to create the latest round of technology and life sciences startups.
“Michigan is awash in Life Science and auto engineering talent because of troubles with the big OEMs in those industries,” Brown said. “It was a painful transition, but when you have a lot of smart people with time on your hands, you get a lot of deal flow that attracts investors.”
Brown said the only a couple pieces are lacking in Michigan, the first is large venture funds. Michigan has a few, such as Beringea, RPM Ventures and Arboretum Ventures. But he said the state needs many more.
“If a company needs $5 million for a round they can find that locally,” he said. “If it needs $50 million, they have to go to the coasts and then they tend to move there. Secondly we hope to have a larger number of diverse smaller funds gaining more traction.”
But what Michigan does have in its Venture Capital sector is a tight knit community of firms that work well together.
“The Michigan venture community is modest in size, but a well balanced group of professionals that have developed a unique community amongst themselves,” Brown said. “They feel camaraderie; something I think is unique to Michigan.”
Mike Brennan is Editor & Publisher of MITechNews.Com