Michigan’s Greatest Challenge is to Build, Finance and Retain Innovative Companies, Says UM’s Brophy

Shannon Beeman
June 3, 2014

This year’s record number of initial public offerings and the lofty valuations assigned to a handful of high-profile technology start-ups in Silicon Valley have created a stir in the entrepreneurial and venture-capital communities. “When we look at the markets, the explosion of IT and social-networking IPOs and valuations is remarkable,” says David Brophy, professor of finance and director of the University of Michigan Center for Venture Capital and Private Equity Finance, or CVP. “I don’t think we’ll reach those levels here in the Michigan market in the immediate future, but we do look forward to seeing the value of our companies increase over time.”

Brophy’s optimism is based on what he sees as several promising trends. The first is the emergence of an IT sector that can drive new synergies with the state’s well-established medical device and pharmaceutical industry. “The marriage between IT and health care has taken a while to develop, but it is progressing and creating opportunities for entrepreneurial companies in our local market,” Brophy observes. “The combined efforts of medical schools and hospitals, universities with technology-transfer programs and the entrepreneurial community will be needed to continue this progress.”

A second trend revolves around the distribution of early stage finance. “I see a lot of high net worth individuals entering the angel market, providing funding for the venture-fund market and taking part in the direct formation of companies,” Brophy says. “After last year’s lull, I think we will see quite a substantial investment in these areas in 2014.”

Michigan’s reputation for capital efficiency, e.g., reasonable valuations and lower costs of doing business, also works in its favor. “Investors look for great companies with attractive valuations,” Brophy explains. “VCs from either coast are coming to Michigan because they see excellent science and technology, and want to combine those assets with strong entrepreneurial managers and good companies they can buy at better valuations. In many instances, reasonable valuations improve the likelihood that any given project or start-up will be financially attractive to an investor, either locally or at a distance.”

On the flip side, low valuations work against entrepreneurs who must offer a bigger piece of the pie in exchange for angel or venture capital ─ e.g., pay out more shares of stock in their companies for the investment dollars needed to fund growth. “One of the most important things an entrepreneur can do is to maximize the company’s pre-money value, which is gauged by the brain power, resources and tools he or she can assemble and put into play,” Brophy says. “These building blocks include human resources, intellectual property, an impressive management team, prototypes and identified end users who want the product or service. The higher the company’s pre-money value, the better positioned it is to raise investment dollars and keep a bigger piece of the pie for the founders and employees.”

Michigan’s greatest challenge is to build solid science and technology companies and provide the financing that enables them to grow in place, according to Brophy. “Our research institutions and universities need to be proactive in encouraging the development of cutting-edge applications based on pure research, and entrepreneurs need to become involved in launching companies that commercialize advanced manufacturing processes, electronic tools and energy-saving devices,” he says. “We are making great strides both in accomplishing this as well as putting in place programs to attract capital from local sources and other markets. If we continue to build our community of successful innovators, those investors will participate.”