Venture capital investors put more money into a similar numbers of deals in 2017 compared to the prior year, a sign that target companies are maturing and securing larger capital rounds.
Funds invested $339 million in 80 deals in Michigan last year, according to the quarterly Venture Monitor report from Pitchbook.com and the National Venture Capital Association. That compares to $288.1 million invested in 82 deals in 2016.
The Pitchbook report for 2017 shows more VC-backed companies in the state are at a later stage and require larger investments as they react to the market and grow.
“I do see an overall maturing of the market in Michigan, and a lot of the companies that started five, 10 years ago are raising larger rounds,” said Emily Heintz, associate director of the Michigan Venture Capital Association. “That’s something we believe is really important at the MVCA, just because it shows the opportunity for Michigan to grow the tech economy and that it can be a major contributor to the overall economy and diversifying the economy in Michigan.”
One example is Grand Rapids-based Blue Medora LLC, a decade-old enterprise software developer that closed in the fourth quarter on an $8 million Series B1 capital round to support further growth.
The Blue Medora investment — which was led by Chicago-based First Analysis and included Grand Rapids-based Wakestream Ventures LLC, St. Louis, Mo.-based Lewis and Clark Ventures and Ann Arbor-based eLab Ventures — was one of 22 deals in Michigan for $46.4 million that Pitchbook counted in the fourth quarter.
The Pitchbook data could change as venture capital firms report more deals. A much deeper look at the venture capital industry in Michigan comes in April, when the MVCA releases its annual research report.
For now, Heintz sees the Pitchbook data as showing that the VC industry in Michigan continues to make steady progress.
“The startup and entrepreneurial community continues to grow and we continue to see bigger and bigger successes,” she said. “I feel really positive about the way things are going and the way things will be going in the future.”
Venture capital firms reported 14 exits of VC-backed companies in Michigan in 2017, up from seven exits in 2016, according to Pitchbook.
Players in venture capital in Michigan have long said more exits are needed to draw in additional investors and get them to see the market as a place to put their money and generate a return.
Amid the comparatively higher number of exits in 2017, prospective strategic buyers in the life sciences and technology fields are waiting longer before making acquisitions, said Dale Grogan, a managing director at Grand Rapids-based Michigan Accelerator Fund 1, a venture capital fund that invests in those sectors.
Prospective buyers want acquisition targets to progress further than they did previously, which delays exits in Michigan’s life science and tech sector, Grogan said.
“They’re willing to pay more for less risk, and less risk means that the target companies have to get further down the road, whether that’s into commercialization, whether that’s into regulatory approval or revenues,” said Grogan, noting the average length of time a VC firm holds a portfolio company has grown from five years to seven years in the last decade.
“Whatever the particular metrics that the buyers are looking at, they’re simply waiting a little bit longer and they’re happy to pay the dollars,” he said. “This year I think was characterized by companies just sort of plugging along and getting to whatever those relevant benchmarks are.”
That has also slowed the refilling of the pipeline from serial entrepreneurs who use the proceeds from their latest sales to form their next startups, said Grogan, who overall views 2017 as “just sort of a plodding, make-progress year” for VC in Michigan.
‘PRETTY SPARSE’ CAPITAL
Fundraising by venture capital funds in Michigan was limited in 2017 from the prior two years.
Pitchbook counted just two funds that raised $50.5 million during the year. In 2016, five funds raised a combined $407.5 million, and five funds raised $308.3 million in 2015, according to Pitchbook.
Grogan describes the fundraising level in Michigan as “pretty sparse,” an indication that “the market and the investors like venture capital, but there’s still a lot of money on the sidelines.”
However, that could change if the number of exits keep rising for investors, he added.
“So accessing that money and putting it to work, we’re going to see which way that knife falls in the next year,” Grogan said.
Michigan still fared better last year than three other Great Lakes states. Pitchbook did not record any VC firms closing on fundraising in Indiana in 2017, and lists two funds in Wisconsin that raised $63 million, and one in Ohio for $25.5 million. Illinois was much higher than its Great Lakes neighbors, with seven funds that raised $345.7 million.