“Right now, from the viewpoint of political and economic stability, North America is the best place to invest in emerging companies, and it’s going to be that way for quite a while. That augurs well for the venture capital business in the U.S. ─ and in Michigan,” remarks David Brophy, finance professor and director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business. “The serious decline in global economic expansion has dampened enthusiasm for international risk capital investment as these markets have run into a series of practical problems that have stunted their rate of growth.”
There are several caveats to Brophy’s optimistic prediction, however. The major unknowns include the policy decisions of central banks and taxing authorities in the U.S. and other developed countries and the political economy issues that face developing nations of the world. Volatility in financial markets, commodities and services will dominate the U.S. and global economic picture in 2015. The ability of the private equity system to thrive in times of uncertainty will be sorely challenged this year.
“While the stock market seems to be bouncing back from the current oil shock, the question is whether it will stay strong or begin to slump once the support of the Federal Reserve System is reduced or removed,” Brophy says. “If the Fed succeeds in orchestrating a smooth transition from full to less-than-full support, I think conditions will prove favorable for venture capital and private equity investments.”
He anticipates Michigan will benefit from a stronger investment climate, because it has a well-trained, knowledgeable workforce. “People in Michigan can produce things and make things happen,” Brophy says. “This is attractive to investors who are looking for innovative companies that can tackle tough problems. When you add the juice of intellectual depth emanating from our universities to the tacit production knowledge of our labor force, you have a great recipe for success. The recovery of Michigan and the improvement in Detroit stand in evidence of this.”
For entrepreneurs seeking funding for new ventures, 2015 will be both challenging and rewarding. “Entrepreneurs are becoming better informed, but so are angel and venture capital investors,” Brophy observes. “Investors still have the edge because they have the money, and time is on their side.” While crowdfunding has gained popularity, its future trajectory is uncertain and held captive by Congress. “The intense due diligence examination that accompanies real funding is costly in terms of time and fees,” he adds. “Doing away with that process is not as easy as people may think.”
The IPO market took center spotlight in 2014 when, for example, Alibaba Group Holdings, China’s biggest online commerce company, claimed the title for the largest global initial public offering in history, raising $25 billion. Not all initial public offerings have stirred the same level of enthusiasm among investors, however. That uneven performance has diminished the notion of the IPO as an automatic money machine, according to Brophy, but that part of the market remains open as an attractive harvest route for entrepreneurial firms.
Still, there’s plenty of VC investment money looking for high-growth companies with disruptive products and clear market opportunities, according to Brophy. “We now have the Internet of Things in which products connect with other products in new ways ─ such as adapting Google Glass for use by surgeons in the operating room,” he says. “These innovations are only as scarce as our inability to think of new applications for technologies and bring them to market. However, our rising problem is the difficulty facing the glut of startups attempting to raise the Series A round of venture funding. Michigan should move quickly to encourage development of investment facilities for providing access to this stage of finance for its entrepreneurial firms.”