By Rick Asher
November 14, 2013
There was a time not so long ago when venture-capital firms considered Michigan a flyover state, but the seeds of technology, innovation and entrepreneurialism planted a decade ago have begun to bear fruit that is attracting investors to the Great Lakes State.
Michigan is actually outpacing the national average for venture capital investments in state businesses as investors are being attracted by previously successful venture capital exits and a recent upgrading of the state’s credit rating from three major Wall Street rating agencies.
Investors are emerging from all points, including locally, nationally and from around the world with financing for businesses in Metro Detroit and across the state.
Michigan Venture Capital Association (MVCA) is a non-profit trade organization that plays a key role in bringing together venture capital industry participants in the state. The Association has greatly contributed to promoting the industry; its accomplishments and future aspirations will be chronicled in its 2012 annual report, which is being printed as this article goes to press.
In the 2011 annual report, Michigan Gov. Rick Snyder and Lt. Gov. Brian Calley sang the praises of the association and the potential for venture-capital investments in the state. In every corner of our state, there is a growing confidence that Michigan’s brightest days are still ahead, Snyder and Calley wrote. With the support of the MVCA, we will tap the boundless energy and creativity that are the hallmarks of all Michiganders, and create unlimited opportunities for the next generation.
Although the state’s leaders are optimistic about the future of venture capitalism in Michigan, they are quick to add that much is left to be accomplished. We won’t turn Michigan around overnight. Much work remains to be done so that Michigan’s venture-capital community can thrive and, in turn, spark the entrepreneurial flame that built this great state. Attracting immigrants with advanced academic degrees to Michigan and doing a better job of aligning the state’s talent with the needs of employers are just some of the economic growth initiatives we are pursuing, they wrote.
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Carrie Jones is executive director for the Ann Arbor-based MVCA. The association’s members include more than 200 individuals representing over 70 organizations across the state, including private venture-capital funds, corporate venture-capital funds, private-equity firms, angel investors and entrepreneurial-infrastructure participants.
Jones sees her organization’s role as helping to grow and sustain a vibrant venture capital community in Michigan. We’re working to try and continue to bring new investors into Michigan, Jones said. The more that out of state investors see Michigan as a great place to invest and do business, the greater the testament to the success of and all of the hard work that the venture-capital firms here have been doing.
You’ve come a long way baby
Michigan has come a long way from 2007 when only seven venture capital firms existed in the state, a number that grew to 27 in 2012, a 286 percent increase. Today, there are 29 firms with offices in Michigan.
Jeff Barry, a partner at Ann Arbor-based Plymouth Management Co., remembers the less than orderly early years of Michigan’s venture capitalism industry. He has described it as similar to the Wild West lots of newcomers and not enough organization.
Michigan’s current venture-capital growth is taking place amid an overall national decline. Venture-capital investments in Michigan tripled last year, growing from $84.7 million in 2011 to $232.31 million in 2012, according to the quarterly MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers.
The 2012 investments mark the third best year for Michigan, surpassed only by $365 million invested in 2000 and $253 million in 1999. Nationally, venture capital investments declined to $26.5 billion in 2012, a 10 percent monetary decrease and 6 percent reduction in overall number of investments made from 2011.
Of the 47 venture capital investments made in Michigan last year, eight were for more than $9 million with more than half of the money invested in the three largest deals $72.64 million for Protean Electric in Auburn Hills, a company developing drive systems for electric and hybrid vehicles; $32.5 million to EcoMotors Inc. in Allen Park; and $16.44 million to Ann Arbor medical device company CertoPherx Inc.
Jones attributes a number of factors to the state’s growth. We’ve got the right eco system here to help companies grow, we’ve got talent, we’ve got capital, we’ve got investors who are willing to invest and we’ve got a lot of really great entrepreneurs who are staying here for opportunity after opportunity to help grow the eco system, she said. There’s good investments here and folks are continuing to be drawn to Michigan because we’ve got great investments and we’ve got the right environment for companies to be successful.
Top markets exist across the state
Ann Arbor saw an extremely robust influx of venture capital investments in 2012. In addition to CertoPherx, Tangent Medical Technologies, the developer of the NovaCath Secure IV Catheter System, attracted an $8.6 million round of funding last year and significant investments were also made in modeling software developer LLamasoft, and NanoBio, a biopharmaceutical company.
West Michigan is another hot bed for investments. Major 2012 investments included: $9.2 million from five venture capital firms into Kalamazoo-based Vestaron Corp., a developer of an insecticide using spider venom; $5.41 million from Grand Rapid’s Hopen Life Science Ventures Kalamazoo’s Southwest Michigan Life Science Venture Fund, and Cincinnati’s Triathlon Medical Ventures to Kalamazoo’s Tolera Therapeutics, a drug development company; and $1.6 million from undisclosed investors to Intervention Insights Inc., a Grand Rapids company that provides genetic tests that are designed to match cancer patients with tumor treatment drugs.
Venture capitalism is also alive and well in Detroit. Businesses providing seed money for new technology companies and driving tech-sector growth in Michigan include Quicken founder Dan Gilbert’s Bizdom, a non-profit that provides seed funding and mentorship to Detroit’s technology entrepreneurs, and Compuware founder Peter Karmanos’ Compuware Ventures, which invests in and advises early-stage technology startups.
Gilbert is also a founding partner in private equity group Rockbridge Growth Equity LLC (RBE). The partnership invests in growing businesses in the financial services, internet technology, consumer-direct marketing, and the sports and entertainment industries. RBE has significant investments in North Central University, Protect America, AccountNow, Purchasing Power, Triad Retail Media, One on One Marketing, and Connect America. In addition, Gilbert is a principal of Detroit Venture Partners (DVP), a venture capital firm that funds startup and early-stage technology companies in Detroit. DVP’s portfolio currently includes companies such as time-based discount site Quikly, DJ app Roqbot, mobile app developer Detroit Labs and CAPTCHA replacement company, Are You a Human.
When you look at the city of Detroit and Detroit Venture Partners, they’ve got a number of really significant technology companies that are setting up around them, said Jones.
Health care sector drawing most investments
Health care is by far the leading sector for investment, drawing the most investment with 40 percent of all capital managed in the state. In the life-sciences sector alone, $107.1 million in 2012 venture capital investments were made, compared with $30.8 million in 2011, according to Cleveland-based BioEnterprise, a biomedical accelerator that tracks Midwest biotech and health care venture investing.
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Other major investment sectors include information technology at 36 percent, advanced materials, manufacturing and alternative energy at 18 percent and consumer products at 6 percent.
Venture capital firms are investing a lot more in technology sectors, observed Jones. I think that’s a really big piece to how we’re changing the economy and how we’re growing.
New firms setting up shop in Michigan
Although many local venture-capital companies are making investments in these and other sectors, a number of out-of-state firms have set up shop in Michigan in recent years, including Massachusetts-based Flagship Ventures, one of eight companies with headquarters outside of the state that now have offices in Michigan.
Founded in 2000, Flagship is one of the largest out of state firms investing in Michigan, specializing in early stage company investments. The venture capital company manages more than $900 million in three sectors therapeutics, health technologies and sustainable/clean technologies recently opening an office in Ann Arbor, the base of the state’s venture capital industry. The office is Flagship’s first branch outside of Massachusetts.
Flagship came to Michigan due to the potential for investments in medical devices and alternative energy, combined with the large number of entrepreneurial people and the relatively low cost of doing business in the state.
Jones from the MVCA agrees that cost isn’t the only difference but it is a contributing factor. When you’re an entrepreneur and you want to start a company and you’re looking where you can find the best talent and the most reasonable prices and you have to look at the cost of living and the cost of doing business, Michigan’s very attractive for that reason, she explained. We’ve heard a number of stories about entrepreneurs who are looking to start their companies and they realize they can get the same quality talent that they can on either of the coasts for much less here. Being able to access the talent that they need at a lower price than the coasts is very attractive to people.
Successful exits drawing other investors’ attention
Flagship has been investing in Michigan for more than a decade and was one of the firm’s involved in one of the state’s biggest recent exits the sale of Ann Arbor-based Accuri Cytometers in 2011 for $205 million to New Jersey-based medical device supplier Becton, Dickinson and Co. The Accuri deal is one of three of the most talked about Michigan exits in the venture capital community which have served as a calling card for other investments in the state.
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The other high profile exits included Becton, Dickinson’s purchase of medical device manufacturer HandyLab Inc. in 2009 for $275 million and the sale of HealthMedia Inc. in 2008 for $200 million to Johnson & Johnson. All three deals reaped huge profits for investors.
We’re attracting the attention of venture capital companies from both of the coasts who come in and say there’s a lot of really good things going on here, explained Jones. There are companies that have been sold for huge returns for investors like the Accuri and Handy Lab exits, which are two examples of sales that have had huge returns. People are paying attention to that. They’re seeing that there really is an opportunity to come in and have those kinds of returns they’re looking for.
The future of growth in venture-capital investments in Michigan’s will be dependent on more successful exits according to Michael Kell, a principal with the Credit Suisse Customized Fund Investment Group, which manages the Michigan 21st Century Investment Fund and Venture Michigan Fund.
We need more successful exits, Kell said. We’ve had a few, but we’ve really not yet seen the tree bear fruit. When it does, it creates a lot of overnight young millionaires. Improved credit ratings also contributing to future growth
Economic changes in Michigan, including the state’s passage of right-to-work legislation and a reduction in the state business tax, should also serve as motivation for additional firms to consider investing in Michigan.
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Most recently, an upgrading in the state’s credit ratings from three Wall Street rating agencies should also attract investors. In April, it was announced that Fitch Ratings had upgraded Michigan’s general obligation credit rating to AA, the first time they have rated the state above AA- since January 2007. Fitch said the upgrade reflects the state’s solid economic and fiscal recovery over the past two years.
Also in April, Standard and Poor’s upgraded Michigan’s credit outlook to positive, while affirming its AA- rating and in March Moody’s announced a similar upgrade.
Michigan is the comeback state and our progress is being recognized, Snyder said. We have seen positive movement from all three Wall Street rating agencies. That sends a clear message that Michigan is on the right track and moving forward.
The upgrades were the result of meetings Snyder, State Treasurer Andy Dillon and State Budget Director John Nixon had with representatives of the three major rating agencies to discuss how Michigan’s credit profile had improved significantly over the last two years.
We had a very strong case to present to the rating agencies, the governor said. The state budget is now in structural balance and we have a growing budget stabilization fund. We also have reduced the state’s long-term liabilities. These steps are all positive for our customers the people of Michigan and for the state’s long-term fiscal and economic health. The actions by the rating agencies reflect the solid progress that we’ve made over the past two years.
Fitch agreed, noting, The state has used the economic and revenue momentum of the last two fiscal years to stabilize state finances, with structurally balanced budgets, annual surpluses, higher liquidity and sizable deposits to the budget stabilization fund (BSF). The state’s long-standing prudent fiscal management, combined with the actions taken in recent years, leave it better positioned to address future economic and revenue uncertainty.
In its announcement, Fitch also noted Michigan benefits from low-to-moderate long-term liabilities. Net tax-supported debt has been and is expected to remain in the low-to-moderate range. Obligations for retiree pensions and health care are manageable and the state continues to pursue additional savings.
Although Jones sees the state’s improved financial health as a contributor to continued venture capital investments in Michigan, it certainly is not the only contributing factor.
There’s never one silver bullet that’s going to change everything but certainly the stronger Michigan’s economy gets and the more stable things get, that’s better for all businesses so I think that helps the venture community as well, she said. Even when things were at their darkest there still was a lot of ingenuity and a lot of really great ideas that were attracting people to invest in the state.
The future: Retaining entrepreneurs, innovators and growing funds
Those great ideas have been a tradition in Michigan for the past 100 years and will continue to serve as a foundation for future growth.
Michigan was built by entrepreneurs and innovators, said Jones. That’s our heritage. That’s who we are and the venture capital community is making sure that we can continue that legacy. They’re making sure that the people who have the great ideas don’t have to leave the state in order to put their ideas into practice. If there’s a strong entrepreneurial class and a there’s an ecosystem to support them, that’s really going to help the venture industry thrive and those are things that Michigan has.
Another key for future growth will be an increase in the amount of venture capital funds existing in Michigan.
We’ve got a few funds that have raised over $100 million, but we also have a lot of mid size range funds that are in the $30-60 million range and those are great for us too, said Jones. Our venture industry is still new enough that we’re not going to have a lot of really huge funds because most of our growth has been in the last 10 years, but as these mid-level funds grow, in another 10 years we may have a number of $100 million funds.
