As entrepreneurs and venture-capital investors convene today for the 2014 Michigan Growth Capital Symposium, they face a common goal of building better companies and more attractive deals that can compete for institutional investment money flowing from local, national and, increasingly, foreign institutions worldwide.
“If entrepreneurial and growth companies in Michigan and the Midwest could compete for the pension and endowment money that institutional investors in their respective states are investing in deals on either coast, we would have no problem,” says David Brophy, professor of finance and director of the University of Michigan Center for Venture Capital and Private Equity Finance, or CVP. “However, in my view, institutional investors in our state and region are still judgmental rather than developmental in their investment approach. They feel they must balance investment risk with their fiduciary responsibility to their constituencies. This challenges our entrepreneurial and business-development community to build good, strong companies that can compete for our own in-state institutional money.”
According to a recent survey ─ reported in this year’s annual Michigan Venture Capital Association Research Report ─ venture-capital investors projected their Michigan-based portfolio companies will require at least $260 million in the next few years; yet VC firms have just $109 million in reserve for these follow-on investments. “We have to convert that need into demand,” Brophy says. “You can look at a company and say it needs money. But you have to ask if it is a good deal, a strong deal, and whether it will look like a great deal to investors. Going forward, we have to focus on building better deals to draw in local, out-of-state and foreign investors.”
According to National Venture Capital Association data, Michigan had $108 million in venture capital invested in 72 deals last year. The state currently has 23 venture-capital firms with $1.6 billion in capital under management. “What’s heartening to see is that more high-net-worth individuals are getting interested in this type of investment and are starting to invest in VC funds and entrepreneurial companies,” Brophy says.
Exits are an important gauge of the quality of Michigan start-up and growth companies. Last year, Esperion Therapeutics completed an initial public offering and acquisition deals were struck for four companies: Pioneer Surgical, ForeSee Results, Livio Radio and Relume Technologies. “When you harvest or exit a portfolio company by selling it or taking it public, money flows back to the original investors, hopefully, with a gain,” Brophy explains. “That gives them the appetite to re-up and put the money back to work in a different fund or company. Overall, exits measure the quality of companies being funded and the value increase being brought to those companies. The more exits we get here in Michigan, the better off we are.”
From year to year, the volume of deal making, the size of funds and the total amount of venture-capital investment in Michigan tend to fluctuate. However, Brophy sees one solid overall trend: steady growth. “We are making progress,” he says. “We have a steady increase in out-of-state interest in our deals. That leads to potential partnering with our local venture-capital firms, which encourages investors to invest in those firms. That investment provides our local funds with capital that is available for entrepreneurial companies being launched and grown in Michigan.”
To keep the entrepreneurial wheels greased, the state needs to focus on developing and commercializing its technology, strengthening its entrepreneurial companies and attracting venture-capital investment. “People who are inquisitive about what’s going on in Michigan will come to the Michigan Growth Capital Symposium to find out, and they will form a judgment about the state’s entrepreneurial environment and infrastructure,” Brophy says. “They also will make a determination about whether we can structure and offer deals that will fly in the bigger venture-capital market and compete for capital with other pockets of entrepreneurial activity in this country and outside our borders.”
The recent IPO filing in the U.S. by Chinese e-commerce company Alibaba Group Holding Ltd. demonstrates the growing scope and impact of cross-border transactions. “There is a lot of capital available in our system, but the global market is terrifically competitive now,” Brophy says. “The challenge we face is attracting that investment money to companies here in Michigan and the Midwest.”