Success builds upon success, says Tony Grover, managing director of Ann Arbor-based RPM Ventures. So it’s no surprise that the year-over-year success of Michigan’s venture capital and entrepreneurial community has accelerated its growth. Grover expects that expansionary trend will continue in the near future.
“Over the past five years, the number of in-state and out-of-state venture capital firms and investment professionals actively putting capital to work in Michigan has increased significantly,” he explains. “I attribute this expansion to programs set in place by the state, such as the Venture Michigan Fund; the emergence of regionally focused fund-of-funds Renaissance Venture Capital Fund; and tangible start-up successes. Large exits by venture-backed companies, such as Arbor Networks, HandyLab, Esperion Therapeutics, HealthMedia, ForeSee Results and Accuri Cytometers, provide validation to investors that great companies can be built here and that the pool of experienced management talent is available locally, and increasing.”
Grover sees a diverse range of industry sectors, in addition to those represented by the aforementioned venture-backed companies, where Michigan has proven capabilities and offers the ingenuity and experience to foster the design and development of technological innovations. Chemical-engineering expertise emanating from Dow Chemical Co. in Midland, for example, has been applied to the design of advanced battery technology while automotive engineers from Detroit’s Big Three auto makers have leveraged their know-how to develop next-generation engines and automotive components.
Timing is very important in venture investment due to the ebbs and flows of economic cycles, according to Grover. Moreover, the increasing length of time it takes to build a company from start-up to exit can try investors’ patience. “Early stage companies can require a relatively long time to mature,” he explains. “If a venture investor is chasing companies in hot sectors, the reality is that it’s probably too late to find the best companies by the time the sector is recognized as hot.” RPM Ventures held its investment for nearly 10 years in Xtime, a provider of service-scheduling and workflow software to automotive retailers, until the California-based company was bought for $325 million by Cox Automotive in mid-November.
Grover’s advice to Michigan VCs seeking a pathway to success is to:
- Take a long-term view of investment and be patient.
- Invest in sectors where their firm has industry expertise, is able to add value and can be differentiated from other firms.
- Find start-ups with scalable business models and help drive them to rapidly growing revenues and cash flow in order to withstand market cycles.
- Focus on building great companies rather than building for exits.
“When we raise money for our funds, institutional investors look for many of the same attributes we value in start-ups: a team you can trust and believe in, people with previous results and a good track record, and a business that’s unique and differentiated,” Grover says. “At RPM Ventures, we have built a differentiation based on our years of experience, our network of relationships and our unique areas of expertise. This platform enables us to forge stronger relationships with entrepreneurs within a sector, conduct more-thorough due diligence, make better decisions and add more value to start-up companies once we have invested in them.”
On a statewide basis, the Michigan Venture Capital Association reports encouraging progress in the expansion of the VC/entrepreneurial ecosystem in the state. Results from a 2013 research report show that over the past five years:
- The number of active venture-backed companies in Michigan increased 66 percent.
- Michigan-based venture capital firms increased the dollars in capital under management by 45 percent.
- The number of venture capital firms either headquartered or with an office in Michigan rose 50 percent.
- The number of active angel-backed companies increased 137 percent.
“These results indicate we have more entrepreneurs gaining experience, more ‘shots on net’ for successes and a more robust, active VC/start-up community locally,” says Grover, who is chairman-elect and treasurer of the MVCA. “Raising awareness via industry advocacy is a top priority, and the MVCA is working proactively to take a leadership role at the national level.”