Out-of-state venture capitalists can reap substantial gains by co-investing alongside local VCs in Michigan-based companies, says David Brophy, professor of finance and director of the University of Michigan Center for Venture Capital and Private Equity Finance, or CVP.
“We now have some pretty strong local venture capital firms that are very good at discovering and nurturing young companies in our community,” he explains. “An out-of-state venture investment firm that has a mandate to invest in one of Michigan’s technologies or market spaces can benefit by partnering with a local VC fund on an investment. First, co-investing is a good way to establish a foothold and get acquainted with the local investment community without having to open an in-state office. Second, it offers VCs from the coasts and elsewhere an opportunity to quietly and economically extend the scope of their investments into a steadily improving, capital-efficient market here in the Midwest.”
Michigan is increasingly being recognized as an attractive place to look for deals. “I think we get more mileage per dollar here than on the coasts,” Brophy says. “Our rents are lower, the supply of keen, sharp labor is better and more economical, and we’re seeing more talent gravitating to the state. We’re on an upward path and in a period of growth.”
One of the state’s most promising growth sectors is information technology. Other major spaces with increasing representation include: mobile, computing, social, investing, cloud technology and big data. “These are the spaces that offer opportunities which flow from our researchers through our entrepreneurs into companies and deals,” Brophy says. He notes that healthcare has been, and continues to be, a strong sector, as well.
The returns on investments made in Michigan venture-backed companies have been good thus far, based upon recent buyout deals. “Our IPO count is not what we’d like it to be, but that market is coming back and we expect the outlook for the year to improve,” Brophy says. “It would be great to see a few of our venture-backed companies that have had several rounds of funding do initial public offerings.” He indicates he favors IPOs over buyouts because IPOs enable companies to remain in Michigan where they can continue to grow, attract more capital and investors, and build up the state’s base of successful companies. Brophy points out, however, that “most recent M&A harvested firms have stayed in Michigan, because their new owners greatly value the talent and market ambience in our state.”
A number of local VC firms, such as Arboretum Ventures, are already developing a strong track record of co-investment deals with out-of-state partners. The Michigan Growth Capital Symposium plays an important role in that process, according to Brophy. “The symposium is the No. 1 draw in the state for anybody who wants to learn about the venture capital and private equity business in Michigan,” he says. “It’s an event where investors come to meet other investors, get acquainted with entrepreneurs and start-up founders and set the wheels of deal-making in motion.”