EAST LANSING — A new venture capital firm formed by Michigan State University’s research foundation targets a critical need for early-stage capital for startups in the state.
The MSU Foundation created Red Cedar Ventures and its two funds to make pre-seed and follow-on investments in startups and technologies spun out of university labs. Red Cedar Ventures follows the MSU Foundation’s investment in the last four years of $2 million in pre-seed funding for more than 20 companies.
Red Cedar Ventures will seek “to move many of the great ideas created by our faculty and students in the laboratories out into the real world to help make an impact or make a difference in people’s lives,” said David Washburn, executive director of the MSU Foundation.
“At a very high level, it’s about taking these research ideas and getting them out of the university and closer to the market where they can have an impact,” Washburn said. “We’ve actually been at this for a couple of years and just wanted to get more aggressive with some of our efforts and some of our programs to bring more of these ideas to fruition and meet that critical funding gap of first money.”
Red Cedar Venture’s follow-on funding for existing portfolio companies will come through its $5 million Opportunity Fund. Investments from the Opportunity Fund could go as high as $500,000 per deal in a Series A or Series B round, Washburn said.
Small pre-seed investments would go from as small as $1,000 to up to $25,000 per investment. The fund would predicate investments on the ability of a startup to match the pre-seed funding with other capital or grant sources.
“We have been working hard to put together a campus-wide ecosystem for entrepreneurs that embraces all of the creative talents across the university,” MSU President Lou Anna Simon said in a statement. “Through Red Cedar Ventures, we can make sure the groundbreaking ideas created by Spartans reach those who need them most.”
The Opportunity Fund plans to make investments in partnership with other venture capital firms who would serve as the lead investors on deals, help to vet investment prospects, perform due diligence, and have “the skills and expertise to help the company move forward.”
“We have resources and can participate in the future, but we don’t want to get in the business of taking board seats. We don’t want to get in the business of setting the terms and driving the deal,” Washburn said. “There are plenty of venture firms in the state and in the Midwest who are very good at that. So what we need to do with the Opportunity Fund is be an ongoing investor or an ongoing participant.
“We’re pretty plugged in on the coasts and in Chicago. We think that provided we can create some attractive-looking companies, we should be able to attract venture firms to look at our deal flow.”
BRIDGING A GAP
In making pre-seed and early-stage investments, Red Cedar Ventures targets an area identified as a critical need, despite the strong growth in the state’s venture capital industry over the last decade.
A report issued this past summer examining the effectiveness of the 21st Century Jobs Fund recommended the state provide further public support for additional pre-seed and seed funds that can prepare and position startups for larger financing rounds.
The report to the Michigan Economic Development Corp., prepared by Columbus, Ohio-based TEConomy Partners LLC, found that many states have developed programs to increase access to early-stage capital. In some instances, universities and foundations “are investing a portion of their endowments in seed and pre-seed funding.”
“Having dedicated, locally managed, indigenous pre-seed/seed funds is absolutely essential for building the ‘farm club’ of firms, which, as they gain experience and need additional funds to expand, become candidates for ‘major league’ funding from larger, more diversified venture funds both in the region and outside the region,” according to the TEConomy Partners report. “The presence of strong indigenous investment funds is needed to attract outside regional and national funds to invest in Michigan.”
The MEDC also has sought to address the early-stage funding gap with the formation of two separate but similar funds of $1 million and $2 million each to offer grants to university researchers and entrepreneurs seeking to validate innovations and prove out their concepts.
FLOW OF IDEAS
At Michigan State, the MSU Foundation plans to create an advisory board for Red Cedar Ventures consisting of venture capitalists and student venture capital analysts from MSU’s Broad College of Business.
Washburn expects Red Cedar Ventures will have no lack of ideas brought forward by faculty and students to examine for investments. MSU researchers in the 2015 fiscal year had about 170 invention disclosures, a number he expects will grow.
Red Cedar Ventures will look at ideas from across all areas of university research, from agriculture and technology to life sciences, engineering and its two medical schools.
“Whatever MSU is good at, that’s our source of ideas,” Washburn said.
He expects Red Cedar Ventures to take three to five years to deploy its available capital. If the venture capital arm turns out to be successful, the foundation likely will look to form a successor fund, Washburn said.
“I hope there is a fund two and I hope there would be a fund three 10 to 20 years from now,” he said.