With the 32nd Michigan Growth Capital Symposium set to open tomorrow morning, MGCS founder David J. Brophy tees up the event by providing a quick snapshot of the current growth capital investment landscape.
That landscape is evolving rapidly, says Brophy, who is professor of finance at the University of Michigan Ross School of Business. The dramatic shifts taking place in both the venture capital and private equity industries provide savvy entrepreneurs and owners of young, high-potential companies with significant fundraising and growth opportunities, if they can ride the wave of change.
Currently, the VC sector remains tepid and lackluster as a result of sluggish economic growth. However, the PE industry is booming, especially in the middle market area, and picking up the investment slack by moving deeper into the growth capital side of the business. Brophy reports smaller PE shops are now more willing to take a growing company through the later stages of fundraising and to manage it until it is sold or has an initial public offering. “PE firms have adopted a two-pronged approach,” he explains. “They’ll provide growth capital and/or they’ll do buyouts. If you want money, they’ll feed your company, and if you want to sell it, they’ll buy it from you. The PE link to venture capital is getting extremely tight.”
Brophy expects this trend toward a gradual melding of the VC and PE industries to continue. Already the growth capital industry is seeing more leverage for recapitalizations and partial ownership deals, as bigger PE funds move into that investment space. These new entrants are creating greater competition for existing venture capital funds, but also generating opportunities to partner in areas such as seed and early stage investing, which are less familiar ground to larger funds. The potential for more available capital, from seed stage through later fundraising rounds, would be a bonus for entrepreneurs.
One bright spot in the venture capital investment scene today is the emergence of innovation hotbeds outside Silicon Valley. In Michigan, the venture capital industry is gaining momentum and attracting attention as it continues to thrive despite the national dip. “Right now, everybody else in the country seems to be down, and we’re up,” Brophy says. “I think that reflects the fact that we had a nice clustering of deals that have come together at one time. The trick is sustaining that momentum. Success is vital.”
Over the past decade, Michigan has built a strong ecosystem of entrepreneurship, innovation and venture investment that has made its University Research Corridor, or URC, one of the top seven university innovation clusters in the U.S. The URC has generated $15.5 billion in economic impact statewide, exceeded $2 billion in annual research expenditures and awarded more than college 31,600 degrees in a single year. “We have a cadre of good, smart entrepreneurs, great universities and a tremendous intellectual-property pump,” Brophy says. “We’re only now beginning to figure out how to turn these assets into economic production.” The most successful sector plays for venture capital thus far have been medical devices and health care, but information technology and energy efficiency also offer great potential.
Michigan’s slow but steady rise as an investment hotspot reflects its ongoing support for motivated venture investors, entrepreneurs and high-growth start-ups. Currently, the state has 25 business incubators, 25 venture-capital firms, eight angel funding organizations and 2 funds-of-funds with $325 million in capital to invest in VC firms that support Michigan companies. The MGCS has fueled this success by connecting entrepreneurs with venture investors for three decades. Venture-backed Michigan start-ups have had 25 successful exits over the past 10 years.
“We’ve got a very effective venture capital and private equity provision through Credit Suisse and the Michigan 21st Century Investment Fund and Venture Michigan Fund,” Brophy says. “That’s a public/private partnership program that’s absolutely working.”
Kelly Williams, the global head of the Credit Suisse Customized Fund Investment Group, will provide an industry perspective of the Michigan venture capital industry when she delivers the keynote address tomorrow at the MGCS. Her talk, which begins at noon, will touch on the key drivers behind the state’s success, provide comparisons against a national backdrop and examine emerging trends that are shaping today’s growth capital investment landscape.