Economic climate to attract seed money? Investment in Michigan to grow, experts say

Venture capital firms based in Michigan have about $500 million worth of assets under management and about $63 million to invest, according to the Michigan Venture Capital Association. Venture firms in the state invested close to half their funds in Michigan-based companies, according to LeAnn Auer, MVCA executive director. The remaining 50 percent is divided between Midwest investments and those outside the Midwest. In addition, Michigan's venture capital firms have grown from eight in 2002 to 13 in 2007, Auer said.

The Ann Arbor News on Tuesday hosted a roundtable discussion to talk with a group of Ann Arbor's venture capitalists and others about the state of venture capital in Michigan and its future prospects. Below are highlights from the discussion.

Q. What do you see happening in the future in terms of the amount of venture capital money invested in Michigan companies?

A. Mary Campbell, managing director of EDF Ventures: "I think on average, $60-to-$80 million a year has been invested in Michigan companies. ... I would just toss out on the table, as the current president of the Michigan Venture Capital Association, that our goals over the near term and the longer term are to attract more venture capital to reside here, believing that a fund that resides here will more logically invest here because nobody loves the fact that they fly 2,000 miles to a meeting.

"So the more venture capital that resides here, the more entrepreneurial talent that resides here, the more successful venture-backed companies that reside here, whether they're backed by funds that come from a Michigan venture fund or a California or an Ohio venture fund ... so success, talent and capital, if we could continuously grow those resources in Michigan, I think the opportunities for venture investment would continue to grow.

"I think we're in a good growth ramp in spite of the fact that manufacturing is heading the other direction and in spite of the fact that Pfizer is withdrawing."

Q. Some of the goals we've talked about, such as getting more venture capital and entrepreneurs here, are goals we were talking about 10 years ago. Now we're in a more difficult economic climate. Do you think the cultural climate here has shifted to make you more optimistic?

A. Don Walker, managing director of Arbor Partners: "If you go back 10 years ago, it was hard to get West Coast or East Coast companies to invest or even talk to people here about their money. Today, because of more capital available, because there's more venture experience around and there's been some successful deals out of the Midwest and certainly out of Michigan, today I think there's more willingness on the part of some of the West Coast and East Coast venture firms to put money into deals here without moving them either East or West. ... And I think that trend will encourage more investment in Michigan over the next five years or so."

Q. When a company grows to a certain size, it can be a sign of success, although we've also seen companies grow and then be acquired and sold or moved.

A. Walker: "I'm not convinced that that is a bad thing. ... If companies start here, get successful and move to another location, it puts us on the map as an area that has the ability to start up companies and get them to the level of success where they're acquired by someone, and I think that encourages more investment. And it also creates an environment where people are willing to take more risk."

Ian Bund chairman of Plymouth Management Co.: "And a number of those folks will (stay around and) populate the next round of companies. If you take the success of Mechanical Dynamics, a venture-backed company that went public and was sold four or five years ago, the top six or eight people in that now populate a bunch of other companies."

Q. So it sounds like while some companies with venture capital funding may move elsewhere once they get acquired or grow to a certain level, there's consensus that that's OK because we're going toward having a critical mass of talent here that will do other things.

A. Tim Petersen, managing director of Arboretum Ventures: "You'll see an evolution where some companies will move, and as more assets get under management and the richness of the ecosystem grows, that will happen less and less. ... There will be more (people) here to roll into the next (startup) ... so the companies won't feel as much pressure to do that. In every area where there's been entrepreneurial growth and venture capital growth, I think you've probably seen that type of pattern ... I'm optimistic. It's heading in that direction. The timing of it is not quick. It's a decades-long process, not a couple-of-year-long process. That's just the reality of it."

Q. We've talked about the role that U-M's technology transfer activities can play in fostering startups and that the university has changed its policies to be more open and more friendly to entrepreneurs. What's the potential there?

A. David Brophy, director of the University of Michigan's Center for Venture Capital and Private Equity Finance: "We have barely scratched the surface of the U of M faculty, and I say that fully aware that not every faculty member is an entrepreneur or has innovation. ... In fact, I don't think being an entrepreneur is essential to the role of the faculty. What we want is for them to be not resistant to commercial innovation, let's put it that way. I want them to be Edisonian. I want them to adopt Edison's notion that this invention bloody well better work or I don't get the money to do the next one. If we could get them to learn one thing - the difference between risk capital and a grant - that would go a long way."

Q. Has the status of Michigan's economy affected your investment strategies?

A. Bund: "I think the state has been in transition since at least 1977. ... I published a paper back then called "The Strategic Plan for the State of Michigan," and you could see things had to change. ... One thing that I think is important in the venture community is you make money by figuring out change and backing change. And it may be industry specific - it's never economy specific. ... If you can't sell something in Michigan, this is a big country, you can sell stuff elsewhere. So I don't think the state of the economy deters me or my strategies at all, in fact, it tells me this is a great time to be contrarian and to be looking for the good stuff."

Contact Jenny Rode at jrode@annarbornews.com or 734-994-6843.