Confluence of Positive Factors Stokes Venture Capital Activity in Michigan, Says U-M Finance Professor David Brophy

Shannon Beeman
March 23, 2015

Last year shaped up to be a winning year for Michigan start-ups and venture capital investors. During the first nine months, Michigan’s venture capital community steadily increased its investment in locally based companies, according to the Michigan Venture Capital Association. The results of a third-quarter PwC Moneytree Report prepared by Pricewaterhouse Coopers and the National Venture Capital Association found that 32 companies in Michigan receive a combined $167 million in venture investment in the first three quarters of 2014, ranking the state 18th in the nation for the number of deals done. That investment figure is three times the amount Michigan portfolio companies received during the same time period in 2013.

The confluence of a number of positive factors is stoking the onward and upward trend of venture capital activity in Michigan. “The biggest driver is the continued participation in start-ups and the sustainable growth of young companies,” observes finance professor David Brophy, director of the Center for Venture Capital and Private Equity Finance, or CVP, at the University of Michigan’s Ross School of Business. “We see a lot of entrepreneurs engaging in start-ups ─ not only university students but also graduates who launched new ventures in school and then stayed in the area to carry their companies forward. Now many of these start-ups are realizing their first customers, so they are being sustained by more than just grant money.”

Brophy, who founded the Michigan Growth Capital Symposium, now in its 33rd year, cited other factors that are strengthening the framework of entrepreneurship and venture capital investing in the state. These include:

  • Business competitions with substantial prizes are attracting greater numbers of entrepreneurial companies and raising the standards of competition. The Accelerate Michigan Innovation Competition, now in its fifth year, offers a $500,000 grand prize, which was awarded to drone developer SkySpecs in early November.
  • National venture capital funds, such as Texas-based Mercury Fund, are opening offices in Michigan, and smaller local funds are being established in the state.
  • High-net-worth individuals in Michigan, who previously put their venture capital to work in California or the East Coast, are now beginning to look seriously at investment opportunities in technology-based, high-potential start-ups in their own back yard.
  • The University of Michigan and its sister institutions are ramping up technology transfer activities and launching new business incubators to accelerate the commercialization of research, the spin-out of new science and high-tech companies and the licensing of technology to larger companies.
  • Advanced communications capabilities are enabling entrepreneurs to launch and build successful ventures in Michigan and the Midwest without having to move to Silicon Valley or the East Coast. As a result, smaller markets, including Michigan’s, are beginning to produce very good quality companies and retain them over the long term.
  • After 15 months in court, Detroit emerged from Chapter 9 bankruptcy in early November, and the city is beginning to rebuild its infrastructure, services and financial stability. The “miracle of Detroit” promises to reinvigorate Southeast Michigan by increasing the level of discretionary income, the amount of corporate involvement in tech-based businesses, the market for innovative products developed by young companies and the number of jobs and start-up opportunities open to students and graduates.

“The Michigan Growth Capital Symposium is right in the middle of this upsurge in entrepreneurial activity and venture investing,” Brophy says. “It’s a great meeting place and watering hole, as well as a purveyor of goodwill.”

If there’s one thing on his wish list for 2015, it would be an uptick in institutional co-investment with venture capital funds doing deals in Michigan. “Right now, institutional investors have plenty of other investment opportunities, and Michigan is way down the list,” Brophy explains. “But slowly things are beginning to change. The more harvests we get and the more money we attract from outside the state, the more mature our market will appear to institutional investors. Then we will be able to draw that kind of investment.”