Venture capital investors say work over more than a decade to spur greater innovation and build a better entrepreneurial climate in Michigan has provided them with better investment prospects.
Michigan startups pitching to venture capital firms these days generally come more prepared and are better positioned when they seek a capital investment compared to companies from years ago, according to investors.
“The quality of the pitches I get are a lot higher,” said Tim Streit, a partner in the Grand Rapids office for Ann Arbor-based Huron River Ventures, who hears more than 100 pitches annually from startups seeking capital. “Entrepreneurs have gotten a lot better educated about what VCs are looking for … and they’re getting better.”
Streit and others credit that shift to a buildup of the so-called entrepreneurial “ecosystem” in Michigan in recent years. The ecosystem better enables startups and entrepreneurs to access support through business incubators and accelerators, sources said.
In part, their preparedness could also stem from universities doing a lot more to teach entrepreneurism, support startups and spin out new companies built around research innovations.
Innovation is on the rise, as well. The 2017 Grand Valley State University Health Check report notes the average number of medical patents issued annually to West Michigan inventors doubled from 1990 to 2015 and represents a “high potential catalyst for entrepreneurship and emerging businesses in the area.”
As innovation and the support for entrepreneurism grew in Michigan over the last 10 to 15 years, deal flow has improved accordingly, said Tony Grover, managing director of RPM Ventures in Ann Arbor and chairman of the Michigan Venture Capital Association.
“In Michigan and nationally, deal flow and the companies that I see are of a higher quality, and there’s more opportunities coming to us than ever before,” Grover said. “There’s a lot of positive momentum and we continue to build on that.”
Grover in particular sees more startups today that are run by entrepreneurs who once or twice previously formed a startup company, secured capital investors, grew the business and ultimately sold it and achieved a return on investment.
Michigan’s venture capital industry has expanded steadily for several years.
Last year in the state, venture capitalists invested $252.6 million in 75 deals, according to the National Venture Capital Association and Pitchbook. There were 14 deals alone in the fourth quarter totaling $33.2 million.
While the VC activity represents a marked decline from 2015 in both the volume of deals and the amount invested, the trade association in Michigan notes that the report from the NVCA, at the time it’s issued, does not reflect all of the deals that occur in the state.
The NVCA/Pitchbook report is based on voluntary surveys of venture capital firms, not all of which report their deals. As a result, the NVCA numbers change throughout the year as more information becomes available.
“I’d guess a big part of the ‘sharp decline’ (in 2016) is due to not having all the data in yet since the year just ended,” Emily Heintz, associate director of the Ann Arbor-based Michigan Venture Capital Association, wrote in an email to MiBiz.
A year ago, the NVCA’s quarterly MoneyTree report prepared by PricewaterhouseCoopers using data from Thomson Reuters listed 55 deals in Michigan in 2015 for $223.7 million. The latest NVCA report, now prepared by Pitchbook, lists 123 deals in Michigan in 2015 totaling $499.6 million.
A deeper look at venture capital in Michigan will come in late March or early April when the Michigan Venture Capital Association issues its annual research report, which typically has a 100-percent response rate from members reporting data.
‘RETURNING TO A NORMAL’
Venture capital investments in Michigan during the fourth quarter of 2016 included $8.6 million in October for Grand Rapids-based software developer Blue Medora LLC and $7.28 million for Tetra Discovery Partners LLC, a pharmaceutical research firm with operations in Grand Rapids and Kalamazoo.
Nationally, venture capital investing in the fourth quarter totaled $12.7 billion through 1,736 deals.
During all of 2016, venture capital firms invested $69.1 billion into 7,751 deals, the second-highest investment value in 11 years, according to the quarterly Venture Monitor report from the NVCA and Pitchbook. The 2016 totals compare to 10,468 deals in 2015 for $79.3 billion.
The NVCA and Pitchbook describe the year-over-year decline as a “return to normal” for venture capital investing in the U.S. after two strong years.
“After a couple years of frenzied investments and lofty company valuations, the venture capital ecosystem is moving away from a financing peak and returning to a normal, healthy investment climate,” Pitchbook founder and CEO John Gabbert said in a statement.