MiBiz is now Crain’s Grand Rapids Business. Visit our new site at crainsgrandrapids.com

Published in Finance
Michigan venture capital investment activity falls 25% in first quarter  Credit: Crain’s Detroit Business illustration

Michigan venture capital investment activity falls 25% in first quarter 

BY Mark Sanchez and Nick Manes Thursday, April 13, 2023 05:45am

Venture capital investing declined in Michigan in the first quarter, following along with a steep drop-off in deal flow nationally. 

Michigan recorded 39 venture capital deals in the January-to-March period, a 25-percent decline from the 52 investments in the first quarter of 2022, according to quarterly data that Pitchbook and the National Venture Capital Association released today. 

Year-over-year deal value increased from $388.1 million in 2022 to $504.4 million, although it was boosted heavily by a single $300 million investment that closed Feb. 1 for Novi-based automotive battery startup One Next Energy Inc. 

Among VC investors in Southeast Michigan, sentiments differ slightly on the overall pace of activity, but many are optimistic that “equilibrium” in the capital markets will soon strike. 

Michael Gross, managing director at Farmington Hills-based Beringea, the state’s largest venture capital fund, said the firm expects roughly the same amount of deal flow this year as it experienced last year. The challenge, he said, is a “disconnect” between investors and companies over deal terms, driven largely by the increasing cost of capital because of interest rate hikes.  

“But there’s still a lot of capital looking for deals and still great companies,” Gross said. “I don’t think there’s any fundamental shift in the quality of venture capital companies or the availability of capital.” 

Adrian Fortino, a Southeast Michigan-based managing director at the Mercury Fund VC firm with offices in Chicago, Detroit and Texas, largely agrees with that sentiment, and points to investors’ ample dry powder that needs to be put to work as a reason for optimism this year.  

“The supply and demand will find equilibrium at some point,” said Fortino.  

Ara Topouzian, executive director of the Michigan Venture Capital Association, said the quarterly decline in deals was expected, given all of the factors VC investors face today. 

Topouzian said he hears from association members that a “strong pipeline” of investment prospects persists across the state. 

“Michigan is still a strong state when it comes to entrepreneurship and venture,” he said. “We have no shortage in the pipeline.” 

With regards to the decline in VC deal flow in the first quarter, Fortino pointed to the collapse of Silicon Valley Bank and Signature Bank last month as one culprit, noting that the banking crisis effectively paused dealmaking in the last month of the quarter and further spooked an already cautious investor class.  

But that uncertainty should be short lived, according to both Fortino and Gross, who each said they expect to see an uptick later on this year. 

Fortino said he has yet to experience any significant change to his day-to-day work life, noting that the fund has looked at multiple “fantastic opportunities” in recent weeks. 

“This is why I’m optimistic,” he said. 

Dale Grogan, managing partner of Grand Rapids-based Michigan Capital Network, told MiBiz in a recent interview that venture capital is going through a “major reset” following the collapse of Silicon Valley Bank, which was a major provider of debt financing for venture capital deals. 

“Hopefully, this is as deep as the hole gets,” Grogan said. 

Michigan Capital Network manages four venture capital funds and five angel investor groups across the state. 

The largest investment in West Michigan-based companies in the first quarter was the $42 million in a later-stage Series D round that closed March 6 for Shoulder Innovations Inc. The Grand Rapids-based medical device company developed components for an innovative orthopedic shoulder implant known as the InSet system that simplifies the surgical technique, leading to reduced complications and increased implant longevity. 

Holo Footwear, a sustainability-focused outdoor shoe manufacturer that relocated to Grand Rapids from Portland, Ore., closed in February on a $5 million Series A capital round, according to Pitchbook and NVCA data. 

Nationwide, venture capital investments declined sharply in the first three months of 2023 amid a slowing economy, higher interest rates and fallout from last month’s collapse of Silicon Valley Bank. Pitchbook reported 2,856 deals in the first quarter for a combined $37 billion, which compares with 5,243 deals for $82.4 billion to start 2022. 

The first quarter Venture Monitor report noted that market trends that began in mid 2022 “came into sharper focus in the beginning of 2023” and that “confidence is a scarce commodity right now, and the net present value of prudence is undeniable.” 

“Continued instability abroad, stubborn inflation rates, and several high-profile bank failures contrasted with a bevy of positive macroeconomic indicators spread a plume of anxiety across the markets,” according to the report. “Finance — especially VC — is fundamentally prospective, and when the invisible hand that writes the rules of the market is revising them without warning, investors tend to reduce their activity until they can see at least a rough draft.” 

VC investments declined across all stages and sectors. Angel and seed round activity declined to 34 percent of all investments deals in the first quarter. That stage “usually hovers” around 47 percent of all deals. For the first quarter, it had fallen to 38.4 percent in the fourth quarter of 2022, according to the first quarter Venture Monitor report. 

Angel and seed investments in the first quarter accounted for the “smallest share of venture investment in at least a decade,” Pitchbook said.

Read 1771 times Last modified on Thursday, 13 April 2023 07:40