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Sunday, 15 February 2015 16:00

Michigan tech firms start to draw more investor capital

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Michigan tech firms start to draw more investor capital SOURCE: MONEYTREE

As the availability of venture capital increases further in Michigan, investors are steering more money and cutting more deals to invest in technology-based sectors.

Software, computers, and information technology services in the last two years all saw increases over prior years in deal activity and the amount of capital invested, a product of growth in each of the sectors and of the heightened allure they hold for venture capital investors.

Startup technology companies tend to have comparatively shorter commercialization processes and require far less capital to get an innovation to market and generate a return on investment than, for instance, firms working in the life sciences, said Mike Morin, chief operating officer at the Grand Rapids venture firm Start Garden LLC.

The rise in tech investments in the state follows a period of more than a decade when health care and health care-related companies ranked as the best-performing VC sectors and attracted a majority of the capital in Michigan.

“So you start doing that bio stuff and it’s great, but it’s so big dollar and so long haul. You can get them started, but to really stay with them through their life, from an investment perspective and to protect your position in those companies, it takes a significant amount of dollars and a significant amount of time,” Morin said. “Tech companies, with a relatively small amount of money and a small amount of time, can validate their market, validate their business and get to a certain point.

“Whether they survive or not, they can get to that conclusion in a much faster and a much more cash-efficient manner, so it allows you to build a larger portfolio of investments.”

In 2014, software accounted for the largest number of deals and was the second-largest sector for investment dollars in the state.

The software sector alone last year generated 12 venture capital deals for a collective $40.9 million, according to data from the quarterly MoneyTree report produced by the National Venture Capital Association and PricewaterhouseCoopers. In the three-year period from 2012 to 2014, software firms in Michigan accounted for 46 deals totaling $105.4 million.

In the prior three years combined, from 2009 to 2011, the software sector had just 15 deals in Michigan for $49.6 million.

“The cost of starting a software business just continues to drop and the proliferation of those technology innovations just continues to be more and more expansive,” said Tom Streit, co-founder of Ann Arbor-based Huron River Ventures LLC.

Huron River Ventures invests in early-stage agriculture, energy and transportation companies and most recently led a $950,000 investment in Grand Rapids-based Sportsman Tracker, a developer of a mobile application that forecasts the best time and location for hunters and anglers as well as their probability of success. Joining Huron River Venture in the deal were Start Garden, Muskegon Angels, Detroit Innovate and Karis Capital Partners.

Streit cites Sportsman Tracker as an example of a software platform that’s scalable and can extend into other uses, and where the company made “tremendous progress” on prior funding of just $100,000 to $125,000.

“That’s happening all over the country and that’s why you’re seeing so many deals and so many companies get started and raise some capital,” Streit said.

Nationally, the software industry continued as the largest investment sector in 2014, drawing $19.8 billion, an increase of 77 percent from 2013. Software deals numbered 1,799, up 10 percent from the previous year, according to the MoneyTree report that uses data from Thomson Reuters.

Michigan-based information technology service companies drew three investments in 2014 for $2.1 million. In the last three years, software firms in Michigan had 10 deals for $4.05 million, which compares to zero deals in the prior three-year period, according to MoneyTree data.

VC investments in what the NVCA labels computers and “peripherals” attracted $21.4 million through four deals in 2014, compared to one deal for $1.9 million in 2013 and nothing in 2012.

As the technology sectors grow and entrepreneurs seek to bring innovations to market, the venture capital available in Michigan also tends to fit well with their smaller capital needs and shorter commercialization process, Morin said.

Add to that what Morin calls a “very robust” design community in the state that understands the applications in innovations and “you are starting to see kind of core enterprise stuff be sexy again.”

“(Technology) does better suit the amount of capital that we have, but it’s also just some of the things that we know well here around product design, integration of technology into the built environment, and core business processes like supply chain, logistics, human resources and all of those things that we know well and our investors know well,” he said.

In the decade-plus that Michigan has actively sought to grow the venture capital industry to support startup businesses, much of the investment activity has been targeted toward life sciences following the downsizings at Pfizer Inc. in Kalamazoo and Ann Arbor, said Paula Sorrell, vice president of entrepreneurship, innovation and venture capital for the Michigan Economic Development Corp.

As more outside venture firms began to set up shop in Michigan in recent years, they were looking to invest in other sectors, most notably manufacturing, material sciences and information technology, Sorrell said.

As that occurred, technology sectors began to emerge as a larger force in Michigan’s post-recession economy, she said. MEDC research indicates that entrepreneurs last year started nearly 250 tech companies in Michigan. The state averaged 200 tech startups annually over the last three years, according to the MEDC, and each of those tech startups requires capital of some form.

“It kind of shows that there is a machine there and, of course, the machine needs to be fed with capital,” Sorrell said. “If you looked at, hypothetically, a pie chart that showed where the venture deals are being placed, I think you’re going to see a more diverse pie chart going forward — and we already are, for the types of companies (getting funded).”

Another driver of increased VC investment in tech sectors that Streit sees is the emergence of smartphones, which didn’t even exist a decade ago. As smartphones became mainstream in the last five years, technology entrepreneurs have followed along with the development of new applications, Streit said.

One indicator of the rise of the tech sector in Michigan and the increased VC activity around it is in the improved quality of the investment prospects Huron River Ventures looks at, he said.

“The overall market is strong,” Streit said. “We’re starting to see more successful, breakout companies. The quality just keeps going up and up.”

Read 3066 times Last modified on Sunday, 15 February 2015 16:46

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