SMF Venture Fund Finds 'Unique' Success
KALAMAZOO — The $50 million Southwest Michigan First Life Science Venture Fund has made another investment in a life science startup. The investment is the ninth the fund has made since it was established three years ago as a means of wooing young life science companies to the Kalamazoo area.
The venture fund is a one-of-a-kind in the country, said Ron Kitchens, CEO of Southwest Michigan First. It marks the first time a nonprofit economic development organization has managed a for-profit, community-based venture fund.
“We haven’t told a lot of the national media the story about how unique our proposition is,” Kitchens said. “There isn’t a single community-based venture fund in the country, and even most of the state-based venture funds aren’t as large as this one.”
Southwest Michigan First raised money for the fund from private investors in the Kalamazoo area. It’s a traditional venture fund — “a pure equity investor” — that Southwest Michigan First has a stake in. The fund invests only in very early stage biotech and life science companies. To qualify, a firm has to be located in Kalamazoo or else relocate to Kalamazoo. As Kitchens explained, it’s easier for a company to relocate when it’s in its early stage of growth because once a company has an established infrastructure, it’s very difficult to pull up roots and relocate.
“Our model is really to go after companies that can be relocated,” Kitchens explained. “They have to move to the region, and it has to be a significant move into the region, not just one person in a sales office.”
A five-member scientific advisory board oversees the venture fund. The chairman of the board lives in Sweden, one member lives in Washington, D.C., one lives in New York City, and two reside in Kalamazoo. They meet quarterly, and it typically takes about six months for a project to work through the system and receive funding, Kitchens said.
“Our discovery process is very robust,” he added. “If it can’t pass the science muster, it doesn’t matter how much we like the entrepreneurial team or the upside of the project — it’s just not something we can invest in.”
The first of the investments actually began two years ago, and the most recent one was in Tolera Therapeutics Inc., a company formerly based in Cleveland. Tolera, a spin-off of the Cleveland Clinic, is developing safer immune-suppressing therapies for transplant patients. SMF Life Science Venture Fund, Hopen Therapeutics Inc. in Grand Rapids and Triathlon Medical Ventures in Cincinnati comprised the investment group that raised more than $8 million in first-round investment for the company. Life science startups that move to Kalamazoo typically get $1 million to $3 million in funding from city’s venture fund, Kitchens noted, but he said he’s currently looking at the possibility of a $6 million investment.
The nine companies that have received funding include medical device, drug discovery and contract research startups. Two of them were existing Kalamazoo companies and the other seven were from outside the region, Kitchens said, most of them from outside of Michigan and two from Canada.
Kitchens said a third of the funds are already committed. The expectation is that investors will see a return on their investment of five to eight times, which is the typical venture fund ROI, Kitchens said
In talking with “hundreds of scientists,” Kitchens said, Southwest Michigan First has found that many Midwest scientists don’t want to leave the Midwest: They don’t want to move to either of the coasts if there is any way to stay here.
“The truth of the matter is that a scientist who gets transferred from Kalamazoo, Grand Rapids or Ann Arbor to New Jersey gets paid the same amount of money, but his cost of living goes up exponentially,” Kitchens observed. “When we talk about quality of life, having enough money to enjoy your life is pretty important.”
There is also greater ease in the ability to do business here, Kitchens added. He is working with a young West Coast company that’s looking for place to manufacture its medical devices. If the company stays on the coast, its employees will have a two-hour commute to affordable housing.
“There’s a quality of life in the Midwest that I think a lot of us Midwesterners often fail to appreciate,” Kitchens remarked.