Credit Suisse Principal Sean O’Donnell spoke with us this month about the Customized Fund Investment Group’s (CFIG) role in Michigan’s venture capital industry, how Michigan’s venture capital industry has grown and the CFIG’s plans for the future.
How does the CFIG play a significant role in the Michigan VC industry?
The CFIG has been involved with private equity and venture capital investing in Michigan for nearly 15 years. Kelly Williams formed CFIG in 1999 and the State of Michigan Retirement Systems was our first client.
The Michigan relationship and connection has grown from multiple angles since that time. We were able to get involved early as an original member of the Michigan Venture Capital Association over a decade ago. Around this same time the groundwork for Venture Michigan Fund was laid through the passage of the Michigan Early Stage Venture Investment Act. As Venture Michigan Fund came to fruition in 2006, the Michigan Strategic Fund bolstered its commitment to private equity and venture capital and the Michigan 21st Century Investment Fund was launched.
CFIG has been privileged to manage both these funds and we were able to continue to invest capital into Michigan venture capital through Venture Michigan Fund II, for which we raised the financing in 2010 and are now actively investing. We have also had a great deal of success with funds that invest directly in Michigan companies, and now manage three funds under the Invest Michigan! program which are focused on providing growth equity and mezzanine financing. In total, CFIG manages six funds and more than $600 million of capital dedicated to Michigan.
How has the VC industry grown in Michigan since the implementation of the 21st Century and Venture Michigan funds?
When compared to the early 2000s, the current venture capital environment in Michigan is almost unrecognizable. A decade ago you could count the number of venture firms in Michigan on one hand. Many of those original venture funds are active today. There also is a new wave of participants who are launching funds locally, as well as larger funds that are showing an interest in Michigan, putting resources in the state and ramping up their local investment activity.
By the latest numbers, there are now 20 venture capital funds headquartered in Michigan and 27 firms with a presence in Michigan, managing approximately $3 billion. As impressive as these numbers are, I think it is a little understated. We are working with the Michigan Economic Development Corporation to help review venture manager candidates for an innovative program they put together called the Venture Development Fund.
I believe we are going to see a dozen or more applicants to that program in total, all of which are headquartered in Michigan, and most of which are first-time funds not included in the previous count. I also know of three or four out-of-state venture funds that are looking to put a professional on the ground in the next twelve months. Those funds manage $400 to $500 million combined, which is a tremendous amount of new capital with a dedicated interest to investing in Michigan.
Beyond counting venture managers and the amount of capital they manage, the real impact that we have observed is the development of an ecosystem. Resources have been put in place that help fund companies at every stage of development; there is a critical mass of capital at work in Michigan; and there is a growing talent pool to help generate ideas for, operate, grow, and invest in local companies.
How will the CFIG contribute to increased investment and success?
Michigan’s success and growth has happened as collaboration between numerous companies, individuals and leaders around the state. The programs we manage are generally geared toward venture and growth capital, which is a spectrum that starts with early stage venture capital fund managers who are raising their first institutional capital and extends out to investing directly in a growth financing for a company with tens of millions of dollars of revenue.
From a capital perspective, Michigan has been incredibly proactive at developing capital solutions and we have identified nearly $1 billion of capital targeted at investing directly in Michigan through a variety of strategies. Each of the CFIG-managed programs is returns-driven, meaning our primary objective is to maximize the return to our investors under a given strategy. There are multiple strategies within these funds, but they all share the common goal of growing and strengthening the Michigan venture capital and private equity ecosystem.
There is an extraordinary amount of effort that goes into defining, implementing and measuring the success relative to this underlying goal. To work toward these program goals, our commitment goes well beyond managing capital. For example:
• We have had an office in Michigan for the past seven years, staffed by two senior investment professionals.
• CFIG has held major private equity conferences in Michigan and is a significant sponsor of important events and groups such as the Michigan Growth Capital Symposium and the Michigan Venture Capital Association.
• Investment activity in CFIG-managed programs has led to investments in over 50 companies, impacting more than 5,000 Michigan employees
• We have met with hundreds of entrepreneurs to help them find the right sources of capital for their businesses.
Can you share a bit more about CFIG’s investment strategies and any other future plans?
CFIG will continue to work to develop innovative programs in Michigan. In the past two years we have launched two Michigan-focused successor funds in Venture Michigan Fund II and the Invest Michigan Growth Capital Fund II. We secured the financing for Venture Michigan Fund at a very difficult time in the marketplace and deployed the capital for the first growth capital fund in three years with significant returns in order to raise the Invest Michigan Growth Capital Fund II.
We have been working with the US Small Business Administration on a number of initiatives nationwide, with Michigan leading the way as the first impact investment fund with the formation of the CFIG and Beringea-managed Invest Michigan Mezzanine Fund. We also continue to explore a number of new programs for Michigan ranging from an urban-focused investment fund to the next source of capital to support venture capital fund managers.
CFIG continues to grow by, as the name indicates, developing customized investment solutions. This strategy has led to incredible growth from the first relationship with the State of Michigan Retirement Systems in 2000 to the diverse range of programs CFIG manages today.
Kelly Williams, Managing Director and head of CFIG, will present the keynote speech at the MGCS. What can we expect from the speech?
We are going to continue to explore along the lines of some of the topics discussed in this interview. How has the Michigan venture capital industry developed? What are the key drivers? What has and hasn’t worked? Beyond that, Kelly is going to talk about how Michigan compares against a national backdrop for venture capital, what some other venture hotspots are doing and some of the themes we are seeing in the private equity and venture capital industry.