Blair Garrou, the managing director of Mercury Fund, a Houston-based seed-stage venture-capital firm, is spending a lot of time in Michigan and the Midwest these days. The firm is raising capital for its third fund and has closed on more than $100 million in commitments from venture investors and investment pools, including the state of Michigan’s Renaissance Venture Capital Fund and Venture Michigan Fund.
“We expect to deploy 50 percent of our capital in the Midwest and half of that amount, roughly 20 percent to 25 percent, in Michigan,” Garrou says. “In our second fund, we put 27 percent of the capital we raised to work in Michigan, and we anticipate maintaining that same level with our third fund.” Mercury Fund is currently in the process of identifying another investment professional who will be based in Michigan and open the firm’s new Midwest office sometime this summer.
“We’re very excited to become even more active in Michigan, bring other venture investors into our rounds and help capitalize the next great wave of Michigan entrepreneurs,” Garrou says. Mercury Fund takes a different approach to venture investing than VCs on the east and west coasts. “We like to invest in capital-efficient software and science deals,” he explains. “We make small bets on early-stage technology companies, work closely with the entrepreneurs to drive value creation and then put more capital into the company down the road. This requires a lot of work, but we are able to find the winners without putting a great deal of capital at risk.” Michigan entrepreneurs fit well into this model because they tend to be very capital efficient and willing to bootstrap emerging companies up the point where they can raise venture capital on a modest basis, he adds.
Garrou says several Mercury Fund investment themes are playing out well in Michigan. The first is commercialization of the industrial Internet. “Workers who are accustomed to using social, mobile and cloud computing want to integrate those types of products and applications within their businesses,” he says. “Manufacturing, utility and energy companies have been slow to adopt these advanced Internet technologies, but we see a sea change coming.”
The trend toward re-shoring manufacturing operations back to American soil from foreign countries is another factor driving increased manufacturing and industrial sector activity in and around Michigan. “Many VCs are narrowly focused on 3D printing, but we see a lot of areas in manufacturing, including robotics, next-gen design and CAD systems and other software applications, that need to be improved when new U.S. facilities are built,” Garrou notes. “Michigan and the Midwest have great strength in these areas.”
A third thematic investment area favored by Mercury Fund revolves around technological breakthroughs in the life sciences and physical sciences coming out of the University of Michigan and other universities. “The core technologies being created at U-M and Michigan State University are world-class, and we don’t see many investment groups, other than a few Michigan funds, focused on these,” Garrou reports. Mercury Fund’s early venture investment in Ambiq Micro, which was spun out of U-M, is poised to pay off. The company is developing a portfolio of ultra-low power semiconductor products that improve battery usage in smart devices. With the proliferation of wearable computing, he predicts it will “make a huge splash” in that area.
At the upcoming Michigan Growth Capital Symposium in June, Garrou will moderate a panel discussion on VC trends in the Midwest. The three participants on the panel will include venture investors who are first-timers at the symposium and have an interest in doing more deals in Michigan. “The goal for all of us is to drive Michigan’s entrepreneurial companies to get a little bigger and gain a little more traction, so they will be able to attract VCs from the coasts and bring additional capital resources to the state,” he says.