Top 5 wishes for Michigan's venture capital industry on conference's 30th anniversary
Efforts to nurture Michigan's venture capital industry are starting to pay off.
But, as the industry participates in the 30th annual Michigan Growth Capital Symposium yesterday and today in Ypsilanti, the venture capital industry still has plenty of room to grow. No, the VC community in Michigan will never be as large as it is in Silicon Valley or Boston.
But, after talking with MGCS founder David Brophy, University of Michigan Ross School of Business professor and director of the Center for Venture Capital and Private Equity Finance, I came up with a wish list for the Michigan venture capital community.
Here are five wishes for the Michigan venture capital industry:
1. That U-M would consider investing a small fraction of its $6.6 billion endowment in Michigan-based VC firms.
It's the worst-kept secret in the Ann Arbor venture capital community that investors are dissatisfied with the university's refusal to fund local investors who invest in promising local companies. The university has missed several huge opportunities to reap venture returns on the success of its own startup companies, including firms like HandyLab, HealthMedia, Accuri Cytometers and Arbor Networks.
When a U-M startup is sold, the university's Technology Transfer Office typically gets a small check to pay off its equity stake in the company — funds that are reinvested in faculty research.
Had the university been an investor in, say, Ann Arbor-based Arboretum Ventures — which reaped big returns on its investments in HandyLab, HealthMedia and Accuri — the U-M endowment would big a bit more plump than it already is.
On venture capital and private equity, to be sure, the university endowment is not the leaders and the best. The university is a follower. It puts its money behind the big, established players in the private equity and venture capital world. Nothing leading about that.
In December, for example, the U-M Board of Regents authorized the endowment's decision to commit $20 million to Hong Kong-based Longreach Capital Partners, which is focusing its investment strategy on companies in China, Japan and Hong Kong. (View PDF of the Regents document on the investment.)
Money for local investors is not a priority at U-M.
If local investment firms — which are typically locked out because they aren't big enough or old enough to attract the attention of an institutional investor like U-M — could get just a taste of U-M's endowment, that would make a difference for the economy.
2. That Ann Arbor's student-led startups wouldn't be pressured to leave the area.
Several startup companies led by U-M students or recent grads have been nudged by outside investors to leave the area. In November, a U-M microcontroller startup called Ambiq Micro got some capital and left Ann Arbor for Austin, Texas, for example.
We need to find ways to ensure that companies like this want to stay and that they can find the help they need to grow in this area.
The encouraging sign is that students are enthusiastic about starting companies.
"We've got this great push from the youth," Brophy said. "The students and the young people in town are all over it."
3. Get more locally-based venture capital for software companies.
Companies developing web-based technology dominate the entrepreneurial community in Silicon Valley. But, in the Ann Arbor area, a significant portion of local investors' cash is dedicated toward biotechnology and medical devices companies. And there's nothing wrong with that — we've had a lot of success growing companies in those sectors.
Ann Arbor-based RPM Ventures has its eye on software investment opportunities, but we need more firms that are capable of identifying great web startups. There's no reason why companies like Groupon, whose founders include two U-M grads, couldn't start in Ann Arbor, as long as they can find the capital they need to grow.
More investors in information technology means a more vibrant IT community. Plain and simple.
The barriers to entry in software are at an all-time low, a key reason why student entrepreneurs are quickly capitalizing on opportunities in this sector.
"You can form a company these days with $25,000 and be all-in and be in business, and that's huge," Brophy said. "The act of entrepreneurship can now be done in so many different fields and so many different ways at such low cost that it invites young people that don't have a lot of money in to do it, and they don't need to go to venture capitalists. They can scratch and scramble and boot-strap."
4. Assemble a passionate, self-sustaining group of "angel" investors.
This is a wealthy individual — typically a longtime business person or retired executive with a tolerance for risk — who is willing to personally invest in extremely early-stage technology. Promising Pittsfield Township-based startup Accio Energy recently attracted $1.9 million in capital, most of which came from angel investors. Several efforts are underway to cultivate a community of angel investors and get the wealth off the sidelines and into the tech community.
5. More "syndicate" deals in which local VC firms co-invest in a local company alongside outside VC firms.
These types of deals bring outside money into Michigan companies — and the outside investor usually doesn't push the startup to leave Michigan, because the locally-based VC firm can provide regular oversight. Deals such as this are healthy for the entrepreneurial economy.
"You can no longer say nothing's come out of Michigan," Brophy said.