Bucking national trends, venture capital on the rise in Michigan

Venture Capital in Michigan Once upon a time, venture capital in Michigan was small and inconsequential. Today it's powering the Great Lakes State's new economy, growing at a time when the industry has shrunk.
It wasn't so long ago that Chris Rizik's venture capital firm was one of only a handful of options for Michigan startups. In 1999, Rizik ran Avalon Investments (then Michigan's largest venture capital firm) with now-Gov. Rick Snyder. Local startups could pitch Avalon Investments or two other VCs.

"If none of us invested, that was it," Rizik says.

That seems like a distant memory now. Today, according to the Michigan Venture Capital Association's 2014-15 annual report, there are 37 venture capital firms operating in Michigan, including 26 that are headquartered here. They employ 130 investment professionals with $4.8 billion under management. Last year they invested $204 million in 51 startups based in Michigan.

Chris Rizik, Renaissance Venture Capital Fund

Ann Arbor-based Arboretum Ventures recently closed on a $220 million investment fund, the largest in Michigan's history. Delphinus Medical Technologies, a Plymouth-based bio-tech startup, recently scored $39.5 million in a Series C round, setting another Michigan VC record. There is so much investment today that the Michigan Venture Capital Association recently launched an interactive map detailing the VC activity and resources, which can be found here.

"Now those young companies can see 10-15 venture capital firms," Rizik says. "Often a startup can go to a single building and talk to more VCs than they would have been able to speak to in the entire state of Michigan."

Those startups have become Michigan's most promising job creators. The top 5 fastest-growing, Ann Arbor-based based gazelles tracked by Model D's partner site Concentrate since 2012 are all venture-backed startups. On average those firms have created 100 new jobs each. Those gazelles include Duo Security, which has attracted investment locally (Resonant Venture Partners) and from some of the biggest names in VC, like Benchmark Capital and Google Ventures. Duo Security's Series C topped out at $30 million earlier this year.

A Growing Venture Capital Community

Rizik is currently the CEO of the Renaissance Venture Capital Fund, an investment fund so large it's known as a fund of funds because it invests in smaller venture capital firms so they can invest in more startups. It's one of two funds of funds in Michigan, including the state-sponsored Venture Michigan Fund. Both were launched about a decade ago and have focused on building up Michigan's new economy, its venture capital community, and attracting more VC funds to the Great Lakes State.

That work has proven fruitful.

According to the Michigan Venture Capital Association's 2014-15 annual report, the number of venture capital firms based in Michigan has increased 48 percent in the last five years. There are currently 129 venture-backed companies in Michigan, 70 percent more than in 2010. A full 65 percent of all venture capital invested in Michigan companies last year came from venture firms based outside of Michigan. In many cases those firms were brought in by Michigan venture firms.

Maureen Miller Brosnan, Michigan Venture Capital Association

"Venture capital firms in Michigan are maturing," says Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association. "They have been around a while and they are getting to the point they can have more people."

The most promising statistic from that report is the growing number of venture capital professionals who live, work and invest in
Michigan. The number has nearly tripled in the last eight years. Michigan had 40 venture capitalists in 2007. Last year it hit 115.

"The idea is that we are able to retain talent in Michigan, and in some cases bring talent back to Michigan," Brosnan says.

Venture Capital Attracts New, Returning Talent

Josh Lin is one of those Michagains, a term used to describe a talented local college graduate who took a job elsewhere and then came back to the Great Lakes State.

In 2008, Lin co-founded Nexecon Consulting Group, a consultancy that assists promising local businesses in the Ann Arbor area. He graduated with a BBA from the University of Michigan's Ross School of Business in 2010, took a mergers and acquisitions job with IBM, and came back to Ann Arbor in 2013 to take an entry-level job in venture capital.

"The opportunity to come back to Ann Arbor and be involved in the local entrepreneurial community was exactly what I was looking for," Lin says.

At IBM, Lin worked with a lot of mature processes and complicated bureaucracies to make deals work. The experience made him realize how much he missed helping build startups in a tight-knit entrepreneurial community like Ann Arbor.

Josh Lin, Nexecon Consulting Group

"I was looking for that enthusiasm and agility again," Lin says.

To find it, he became a member of the Michigan Venture Capital Association's Venture Fellows Program, a two-year program that pairs promising young talent with local venture capitalists. Since it launched in 2011, the program has introduced a dozen fellows to Michigan's venture capital industry.

Lin took a job as an associate with RPM Ventures, helping the Ann Arbor-based firm find deals and buildup startups. Lin refers to the Venture Fellows Program as the best accelerator around for getting involved in venture capital.

"Venture capital is an apprenticeship industry," Lin says. "There is no training or curriculum. You just go and do it."

A Precarious Comeback -- But With Potential For Growth

Michigan venture capital community has scored all of these wins over the last decade while the industry as a whole has shrunk. The number of venture capital firms nationally has dipped 6 percent over the last five years while the number of VCs in Michigan has spiked 37 percent, according to the Michigan Venture Capital Association's 2014-15 annual report. Total capital under management is up 45 percent in Michigan and down 15 percent nationally. The number of investment professionals in Michigan is up 92 percent and down 10 percent nationally.

There are several reasons for this. One is that Michigan is a target-rich environment for investment professionals. It ranks seventh in the number of science/engineering PhDs and sixth in the number of patents issued. The numbers show that despite Michigan's recent VC growth, it is one of the most underserved states when it comes to capitalizing on its innovations.

"These investors are looking for ideas to invest in and Michigan is an idea-rich state," Brosnan says. "We also have a great pool of local investors to be co-investors."

It also helps that the state of Michigan has backed the local venture community in a big way -- and consistently -- for more than a decade. The Michigan Department of Treasury helped establish local VC infrastructure, such as the Venture Michigan Fund, by providing investors with up to $450 million of tax-voucher certificates.

That brought a deep pool of capital to the local entrepreneurial ecosystem -- and helped it take root in the wake of the Great Recession and auto industry bankruptcies. The local venture capital community is grateful for the helping hand but still has a sizable contingent that prefers less government in business regardless. With that said, there are still many local VCs who keep recent wins in perspective.

"Things are better but we are not out of the woods yet," Rizik says. "We have had a good run but the growth is still precarious. It's going to take everyone working together to show that this is not just a blip.

Jon Zemke is a news editor at Model D and managing editor of SEMichiganStartup.
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Lauren Bigelow, Accelerate Michigan
Lauren Bigelow, Accelerate Michigan
Lauren Bigelow is the CEO of Growth Capital Network, and executive director of the Accelerate Michigan Innovation Competition, the premier startup competition in Michigan.

I heard an interesting story about SkySpecs, a Michigan-based drone tech startup, turning some heads when it brought back Accelerate Michigan’s top prize of $500,000 with it to TechStars in New York last year. Any truth to that?
Yes! Danny, Tom and the SkySpecs team began their tenure at TechStars in New York just a couple of weeks before the 2014 Accelerate Michigan. When they informed the TechStars folks that the two of them were leaving the rest of the team for a week to head back to Michigan, they got a lot of grief. It was during a mentor matchup time in their program and people really didn’t understand why they were going back for a "little Midwest conference." So when they were successful and showed back up the following Monday with $500,000 and a stack of venture investor business cards, the other teams and parts of the New York ecosystem were startled and impressed – asking about the competition, the conference and intrigued by the volume of opportunity in Michigan.

The Michigan Venture Capital Association's annual report shows a tripling of investment professionals in Michigan since 2007, and a 48 percent increase in VC firms over the last five years. Have you noticed this growth?
Definitely. Ten years ago you could stand at Main and Washington in Ann Arbor and be within a mile of 90 percent of the venture capital in the state. Now, there are offices across Michigan from Detroit to Grand Rapids and up through Traverse City. And not only am I seeing increased capital flow from Michigan investors into our companies, I’m seeing investors from outside of the state (and the country) more comfortable with Michigan and co-investing with our Michigan VC.

Established VCs love to say that Michigan is significantly underserved when it comes to early stage investment. Is the local VC scene anywhere near a saturation point?
We're not even close. When clean tech got hot as an investment category, I watched valuations skyrocket for the best tech companies. We haven't gotten to that point where there are investors chasing technology companies and good venture firms getting pushed out of deals.

The state has backed the local venture capital industry in a big way for the last 10-15 years. Are local VCs strong enough that they don’t need to lean on state support as much?
I'm optimistic that the returns for other Michigan firms will speak for themselves, but I think that it’s too early to tell. The success of the venture industry support has been quite evident. Arboretum started with a $300,000 grant in 2002 and now has $450 million in assets under management. Most of its portfolio is in Michigan, and that’s a significant return on that original investment.