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Venture capital, private equity looking up locally
As has happened in all capital markets, private equity and venture capital firms have faced some difficult times over the past two years, both locally and nationwide. The local market appears to be slowly gaining steam amid renewed investor confidence, and there are new developments under way that could increase access to venture capital for local entrepreneurs — long a concern of local economic development professionals.
“Generally speaking, the last few years have been very, very difficult for anyone trying to deploy private equity or venture capital for younger businesses,” said John Meilner, managing director of Bridge Street Capital Partners, a Grand Rapids-based private equity firm focused on growing Midwest companies with revenues of $5 million to $50 million. “A lot of investors, ourselves included, have turned inward to make sure that the companies in their portfolios have all the resources they needed to whether the storm.”
The seven companies in the Bridge Street portfolio all survived the recession, Meilner is happy to report, with some of its investments showing significant growth. The fund did not make any new investments during this period, and it is uncertain whether it will make any investments in the near future.
“Everyone has taken their eye off of the newer investment opportunities,” Meilner said. “Merger and acquisition activity is picking up this year, and there are always going to be good companies that people will perceive as a really good bargain. But I think you’ll find that most of the activity is from strategic buyers and not financial buyers.”
Investment underwriting across the board has become more difficult over the past two years, Meilner said. Banks are being more careful, and rightfully so. Many private equity investors do have funds available but have not been in a hurry to deploy those funds. Investors have been uncharacteristically patient and will likely continue to be so for the foreseeable future. With rare exceptions, there are no bidding wars, with strategic investors exhibiting a slight advantage due to their tendency to rapidly reduce costs in the acquired company.
West Michigan has never had much of a private equity market or venture capital base. There are only a handful of investment groups active in West Michigan, with most of the activity trending toward strategic acquisitions and angel investing. As Meilner indicated, on the equity side, firms have been looking inward. Ada-based DaVinci Capital is no longer taking on new clients. CODI LLC in Grand Rapids was forced to shutter the flagship company in its portfolio, Grand-Craft, a Holland-based manufacturer of mahogany boats.
For venture capital and angel investors, which prefer early stage companies and start-ups, the local industry is much more optimistic and geared for growth, partially due to its small base.
“The market for venture capital is thawing out, largely due to the impatience of investors, but no one is going to be diving in head first,” said Dale Grogan, vice president, business and transaction management with The Charter Group and managing director of the Michigan Accelerator Fund I. “The market is getting better, but I don’t think West Michigan has a very good history in venture capital, so there isn’t a lot of embedded knowledge. No one has seen enough here to know what to expect next, so there is a little bit of nervousness.”
Compared to mature venture capital communities such as Boston, Austin or Palo Alto, Calif., West Michigan has virtually no existing investment community. Its per capita venture capital expenditures are a small fraction of the more established markets.
“That’s not to say there aren’t investors here, or good deals,” said Grogan. “The problem is efficiently connecting investors to deals. The entrepreneurs are saying there is no money for investment, and the investors are saying there are no good deals.”
West Michigan has a great deal of wealth available for investment, Grogan noted, but most of that wealth has been generated through business, not investment. Unlike Ann Arbor, for instance, which has roughly a dozen venture capital groups, venture capital is somewhat of a foreign concept in the region. There are angel investors, with angel investment network Grand Angels arguably the most active and sophisticated group of its kind in the Midwest, but none of the “serial investors” common in more established markets.
The Charter Group has launched the $10 million Michigan Accelerator Fund I through a partnership of Grand Valley State University, Van Andel Research Institute, Hope River Ventures, West Michigan Science & Technology Initiative, Grand Angels, Michigan State University Foundation, The Right Place Inc. and Lakeshore Advantage.
The new fund is made possible through a $6 million award from Michigan's 21st Century Jobs Fund, a program of the Michigan Economic Development Corp. focused on jump-starting new investments in high-growth industries around the state. Additional investments by regional partners will bring its total holdings to $10 million by early 2011. Investment activity is expected to begin at that time.
Grogan said the fund was developed to leverage the hundreds of millions of dollars already invested in West Michigan's science and research infrastructure by filling the region's early stage funding gap. It will focus on health care and life sciences investments but reserve a portion of its funding for other important Michigan industries such as advanced manufacturing, alternative energy and homeland security.
“We’re hoping to start the beginning of the venture capital process on this side of the state,” said Grogan. “What we’re trying to do is push investors through an entire venture capital cycle, meaning someone invests in a company, it becomes successful and spawns a hundred more investors. That is what created Boston, Austin and Menlo Park. Think of all the people who got rich from Dell or Google. If we have just one company hit it big though venture capital we’ll be on the map.”
One of the keys to accomplishing that in West Michigan, Grogan said, is the availability of support services and mentorships through programs such as Grand Valley’s Center for Entrepreneurship and the WMSTI.
“So much of it is going to revolve around entrepreneurs’ ability to articulate their story in a way that will resonate with investors,” Grogan said. “Without that you won’t have a prayer of getting funding, even if you’re the next Google.”