Michigan’s venture capital industry made further progress in 2019 as investors put a record $771.6 million into 115 deals with state-based companies, according to Pitchbook and the National Venture Capital Association. Despite the industry’s growth, David Brophy says a lot more needs to happen to further build venture capital in Michigan to seed and grow more startups and attract more investors, particularly large institutional investors who can put money into Michigan-based funds. Brophy serves as director of the Center for Venture Capital and Private Equity Finance at the University of Michigan and is founder of the annual Midwest Growth Capital Symposium. He spoke with MiBiz about the status of venture capital in Michigan.
How do you assess the state of venture capital in Michigan today?
It’s improving, but we’re still having difficulty getting institutional investments into our funds and therefore we’re still kind of limited on how far our funds go in building companies. That can be a critical point if Michigan loses the company where they have to go somewhere else to get money.
Why are some of the large investors reluctant to put money into Michigan VC funds?
There might be a fear of failure and the political aspects of it. It might be that they don’t trust the quality of what’s here. It might be that we just aren’t attractive enough for them, that they think companies generated and developed in other parts of the country, notably the West Coast and so on, are better and that’s where they put the money. The defense they all have, in being fair about it, in the case of pension funds is they have pensioners, and in the case of endowments they have their own university to worry about.
Are we seeing progress on that front and in drawing in outside capital?
The patterns have been changing over time. In the data, in Silicon Valley the market share (of venture capital deployed nationally) is declining. It just means other parts of the country are not only coming up with money but the requirement to move to the West Coast or to Boston or to New York is not being pressed nearly as much. The economics of starting and running a business in Ann Arbor or Grand Rapids has vastly improved relative to doing it in California, Massachusetts or any other hot spot. That should be an advantage for us.
The companies competing for those funds are not standing still. How is the competition changing?
You’re playing in the big leagues. Every state in the union is trying to do the same thing and the people who are leading the league are not slowing down. But we look around and Ohio’s coming on, and Indiana’s coming on. Everybody else is doing the same thing. We started this a long, long time ago and to a certain extent, we’re losing our lead. That would be a shame if that happened.
What’s something you suggest to further grow access to venture capital in the state?
Better companies, more connectivity between those companies and what’s going on in the rest of the country and the world, and set-aside funds that institutions can (partner with) so they don’t have to necessarily carry the risk on their own balance sheet, but rather dedicate some funds and put it under management.
What does a state like Michigan have going in its favor?
We have great living conditions. California is turning into some kind of a swamp, depending on who you talk to, and Boston is getting jammed and New York is getting jammed, and so on. We have some of the greatest universities. Wayne State, Lawrence Tech, Michigan Tech, Western: These are not trivial educational centers. And, of course, (there’s) the University of Michigan and Michigan State. We’re pumping out smart people and pumping out very, very good technology, important technology. We’re just not capturing it. Graduation sees a race to the border, in most cases, and we should be competing hard for those people and giving them a reason to stay.
Given your long exposure to this industry, what’s something that just simply annoys you about how venture capital operates that you would like to see change?
The biggest thing, and I’m sure this is human nature, is a focus on trying to turn them into rock stars and Hollywood stars, and of course the rock stars and Hollywood stars are showing up as venture capitalists now. It’s developed a cachet and a glamor that is off-putting to a lot of people because you’re supposed to be the financial partner and equity partner to the entrepreneur, and when people in general see that it’s only about money, they get turned off a little bit. It’s always hard to get public opinion on the side of the venture capitalist or the private equity person, so a greater emphasis on what we build — let me call it the rationality that we bring to valuation and venture planning and the like — I would love to see much more of that. I would love to see a little bit of humility in the venture capital community and private equity around the country and around the world.