Taking the long view; VC veteran and professor discuss how to get Michigan back to its place as a hotbed of entrepreneurism
BYLINE: Tom Henderson
In 1974 David Brophy wrote a book titled Finance, Entrepreneurship and Economic Development, in which he wrote about the need to diversify Michigan's economy away from reliance on the auto industry and to develop small, technology-based companies.
Then, Honda was known for cute motorbikes, Detroit was the undisputed car capital of the world and venture capital was a term barely known outside Boston or San Francisco.
Crain's reporter Tom Henderson talked to Brophy, director of the University of Michigan's Center for Venture Capital and Private Equity and an associate professor of finance, and Tom Kinnear, professor of marketing at UM and executive director of the business school's Zell Lurie Institute, about the past, and future, of entrepreneurism in the state.
Kinnear is also managing director of the Wolverine Venture Fund, the school's student-run venture-capital fund, and chairman and president of the state's Venture Michigan Fund.
David, you've been preaching the need to diversify the economy for more than 30 years. You've been trying to hook up local entrepreneurs with investors since 1979. Is there finally a light at the end of the tunnel?
Brophy: The realization is here that we need new sources of economic growth. The resources we have in the state are fairly vibrant, including private-sector technology and university technology. But the number of experienced entrepreneurs is still not at critical mass.
Why has this diversification taken so long?
Kinnear: I've been asked whose fault all of this is, and the answer is: The world happened.
Brophy: Traditionally, our biggest enemy was a good year in the auto industry. We had a long history of having it too good in the auto industry, but it's come home to roost.
Kinnear: Success had its own cost. The cost was malaise.
Brophy: We've had pockets of entrepreneurial activity, in Ann Arbor, in Oakland County, in Grand Rapids, in Kalamazoo. What we don't have, yet, is a pan-Michigan mission. We have to have that.
We do have the two state funds, the 21st Century Investment Fund and the Venture Michigan Fund, which have a total of $204 million to invest in venture capital companies.
Kinnear: That's a small fund in California ... it's a start.
Brophy: But it doesn't feed the bulldog ... I got a call from a Lansing paper asking what effect the Venture Michigan Fund has had. I said, ``Call me back in seven years.'' It's long-term. We need critical mass. We've got to turn the Queen Mary, and we're doing it with a canoe paddle.
We've got to catch up with what the rest of the bloody world is doing. In San Jose, you see a headline ``The Chinese Are Coming,'' that's good news. You see it here, it's bad news. We've got to get to the point where we're thinking like San Jose.
Kinnear: Michigan auto jobs didn't go to China or Japan. They went to Tennessee and Kentucky and Ohio and Mississippi. They went to right-to-work states.
David's book talks about the critical role Michigan's banks played in taking a chance on the fledgling auto industry, and about how risk-averse they became compared to banks on the East and West coasts.
Kinnear: Michigan used to be the entrepreneurial state. Before autos there was the logging industry.
Brophy: Even back to fur trading. The supreme irony is what made us what we were was entrepreneurial financing when that didn't exist in other states. Now we have just the opposite. We've got a lot of technology companies in Ann Arbor who have to go to the Silicon Valley Bank to get financing.
Kinnear: When the Venture Michigan Fund went out to borrow $200 million, they did it through a German bank. No bank in Michigan would dream of it. If you want to find venture banking, you have to leave the state.
What was the genesis for the book?
Brophy: The question was, how could we start so many companies in Michigan, then plateau and never do anything? So I spent a year on the East Coast and the West Coast. Why couldn't we do it here? What were they doing differently? Michigan had always been ahead of those places. People forget, now, but those places had fallen on hard times. (Stanford University provost Fred) Terman used to complain about the brain drain to the Midwest ... There's a lot of sweet irony in all this.
Kinnear: Or not so sweet.
So, what happened?
Brophy: For one thing, Stanford gave free rent to anyone who'd stay and start a business. That's how Hewlett-Packard got started (in the 1930s). That predates Shockley's going to the West Coast. He'd taken his idea to Bell Labs in New Jersey and they let him walk. He went to California and that was the beginning of Silicon Valley.
(In 1956, William Shockley, who was convinced there was a business in manufacturing semiconductor devices, opened Shockley Semiconductor Laboratory in Palo Alto.)
In Massachusetts, all the textile mills had closed. Because of right-to-work laws, all the labor went south and overnight there were empty plants. In the late 1940s, there were a lot of cost-plus-5 percent grants coming out of Washington. If you were a research professor and you wanted to build a new device, you put a post-doc into an empty factory building.
Kinnear: And that became Route 128.
Rick Snyder (an Ann Arbor venture capitalist) tells the story about Michigan being happy to kiss the aviation industry goodbye.
Brophy: Every opportunity we took to reject things, we did. We had the aircraft industry here. We built all the Liberator bombers in World War II. But we couldn't wait to get rid of them and get back to making cars.
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A long-running look at Michigan VC
In 1979, without sponsorship or funding from his employer, the University of Michigan, David Brophy put on the first Michigan Growth Capital Symposium, inviting the venture capitalists he could identify around the country to come to Michigan to meet with would-be entrepreneurs and hear their pitches for funding. About 150 attended.
Brophy, today the director of UM's Center for Venture Capital and Private Equity and an associate professor of finance, says now that he thought he'd put on the symposium for three or four years ``and by then everyone would have gotten the point.''
On May 16-17, the 26th Growth Capital Symposium will be held at the Marriott Resort at Eagle Crest in Ypsilanti. About 450 are expected to attend, including representatives from more than 65 North American investment firms, about three-fourths of them from out of state. They will hear 35 panelists on a variety of topics and pitches from 40 young Midwest firms, 30 from Michigan, in the areas of life sciences, alternative energy and information technology who are seeking funding.
Panels will include how institutional investors can best select small and emerging VC funds; how Michigan and the biopharmaceutical industry can capitalize on the departure of Pfizer Inc. from Ann Arbor; emerging market trends for new tech-based startups; investing in alternative energy; and the changing landscape of venture capital.
For information, send an e-mail to Mary Nickson at mnickson@umich. edu, or call her at (734) 615-4424.
- Tom Henderson
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Middle of the pack
According to the National Venture Capital Association, Michigan improved its ranking among the 50 states and Puerto Rico for the amount of venture-capital dollars it received in 2006, although it is still in the middle of the pack. Nos. 1, 2 and 3 from 2004-2006 were California, Massachusetts and Texas.
Michigan's rankings for the past three years:
2004: No. 20
2005: No. 26
2006: No. 22
Iowa and South Dakota ranked 50th and 51st in 2006, while Puerto Rico claimed the last spot the two previous years.
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Money from outside Michigan
Out-of-state venture-capital investors that made deals in Michigan in 2006:
Perseus L.L.C., Washington, 1 deal, $10 million
Pharos Capital Group L.L.C., Dallas, 1 deal, $9 million
River Cities Capital Funds, Cincinnati, 2 deals, $7.3 million
Hopewell Ventures, Chicago, 1 deal, $5.5 million
Pfizer Strategic Investments Group, New York City, 1 deal $4 million
Nth Power, San Francisco, 4 deals, $3.8 million
Aviv Venture Capital, Ramat Gan, Israel, 1 deal, $2.5 million
Dunrath Capital Inc., Chicago, 1 deal, $2 million
Concentric Equity Partners, Hinsdale, Ill., 1 deal, $1.25 million
Prism Capital, Cleveland, 1 deal, $340,000
VantagePoint Venture Partners, San Bruno, Calif., 1 deal, $340,000
Nationwide Mutual Capital L.L.C., Columbus, Ohio, 1 deal, $290,000
Odin Capital Group, Omaha, 1 deal, $290,000
SBV Venture Partners, Palo Alto, Calif., 1 deal, $260,000
Apax Partners Worldwide, London, 1 deal, NA
Veronis Suhler Stevenson, New York City, 1 deal, NA