Venture Capital Is Growing, Brick By Brick

September 24, 2008
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Ten years ago Mike DeVries decided to start a business and he wanted to do it in Grand Rapids.

“I had a technology that required a fair amount of upfront capital; it was a medical device. There just didn’t exist — certainly in West Michigan, and to some extent, the whole state — funds that would take a look at this thing,” said DeVries. “I ended up moving to California and got the company funded, created a bunch of jobs, sold the company, and then moved back here.”

DeVries is now the managing director at EDF Ventures, an Ann Arbor-based venture capital firm investing in early stage health care firms with an office in Grand Rapids.

“And I have to tell you: Ten years later, the amount of venture that is available in the state, and the number of funds that are here, and the focus that Michigan has decided to take is great progress.”

Progress is the word when it comes to the condition of venture capital in West Michigan and the state in general. While Michigan still does not compete with those states that are known for venture capital funding, DeVries stressed that is changing.

“How do we stack up against California, the Bay Area? We don’t yet, but we’re making great progress,” said DeVries. “Don’t get depressed about this. There are people in the trenches that weren’t there before and we’re going to be successful.”

The State of Michigan Retirement System is investing $300 million to be split into two areas. The first is a growth capital fund aimed at venture capital and expansion-stage companies. The second is a Michigan Opportunities Fund focusing on acquisitions and buyouts.

The pension fund investment, known as Invest Michigan!, has been operational since the end of July, but is still too young to be able to determine what kind of financial and employment impact it will have on the state.

The investment is not the first the state has made to improve the condition of venture capital and it’s definitely not the final solution — especially for West Michigan.

“There are a number of us in the area that are working with some of the pension fund money to see how we can connect into that whole venture capital system to assist high-tech entrepreneurs to commercialize their product,” said Birgit Klohs, president and CEO of The Right Place Inc. “The pension fund money is a huge crucial piece, but it’s not just that money. We also need to have our own venture fund here. So it’s not an ‘either-or’ proposition; this is an ‘and’ proposition.”

Klohs said it is important for West Michigan to start its own venture capital fund to help attract other venture capital investors.

“The fact of the matter is, we don’t have — with the exception of Mike DeVries who manages a fund out of Ann Arbor — any official venture capital in the area, although there are people that are stepping into the space, particularly the Grand Angels. It is a very, very critical ingredient in the whole process of innovation and commercialization,” said Klohs.

“We need to start our own fund. There is a lot of capital in this region that comes from existing folks. There are resources here that could start a fund. We don’t have to go to Chicago to attract one. And there are people like the angel investors who are putting their money up. Once you have that kind of local infrastructure being built, you attract other money.”

Universities and colleges are attractive assets to venture capital investors as sources for ideas and research. Tom Schwarz, director of the Center for Entrepreneurship at the Grand Valley State University’s Seidman College of Business, said there is a local effort to create “information markets.”

“One thing that universities and others are attempting to do is create an information market and a place to come together and create one more deal at a time, and each deal that is done is like another brick in the wall,” said Schwarz.

“We are, at Grand Valley, engaged in conversations to be able to integrate the entrepreneurial community together on a regular basis to share the activities and challenges that these entrepreneurs are facing, and to bring solution providers, the lawyers, the venture capitalists (and) the angels also there, and allow everybody to see what opportunities exist. Some of it is information and idea exchange.”

Schwarz believes building such a community will help keep the state and region competitive nationally and attract venture capital investors.

“What is the attraction? Oftentimes for West Michigan, it is the quality of living, but that doesn’t necessarily help (a company) execute its business model here,” said Schwarz. “It’s very competitive out there nationally, with other places like Indianapolis or North Carolina, and communities that also have lots to offer.”

Ned Stabler, director of Capital Markets Development at the MEDC, said the state has been trying to improve the condition of venture capital for more than 20 years, but has intensified its efforts in the past five years.

“We’ve been very successful in growing the amount of capital in Michigan: from five years ago, six years ago (when there was) a handful of funds here, to now (when) there are probably a dozen,” said Stabler. “We’ve added seven or eight real venture funds. …By any measure, we’re having a great deal of success.”

Stabler quoted a report from the Michigan Venture Capital Association stating that in 2001 there were seven venture firms, and in 2008 there are 15. Capital under management has grown from $520 million in 2001 to $900 million in 2007, and the amount of available capital is up to $400 million.

“We’re talking real money and real venture capital. …We’re talking about some of the top tier companies from around the country (that) are starting to come here and make investments,” said Stabler.

He said major state universities such as University of Michigan, Wayne State University and others have always been attractive to investors, with close to $1.5 billion dollars of federal research, making it one of the largest research consortiums in the country, according to Stabler.

“From a venture capitalist’s perspective, in the past they’ve said, ‘OK, I see a great idea there. Come move your company to California, because there’s nobody here in Michigan who can help you with that. I’ve got the money. I’m not moving to Michigan.’ Well now, in part because of the Venture Michigan Fund, the 21st Century Investment Fund, some of the Michigan life sciences corridor and Tech Tri-Corridor investments that we were making five, six, seven years ago — there are now 14 or 15 venture funds here in Michigan. So if I’m one of the big venture funds, I can say, ‘Oh, you’re a start-up technology company out of the University of Michigan here in Ann Arbor. I don’t need you to come to San Francisco so I can take care of you, because there are four or five venture funds in Ann Arbor that I can partner with.’”

Stabler said the added funding like that of Invest Michigan! helps other investors know the state is serious about growing its venture capital infrastructure to make growth happen organically.

Schwarz said that due to the large challenge of creating a venture capital-friendly region, progress has been slow.

“It’s a challenge. It’s like rebuilding a community.”

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