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Sunday, 13 October 2013 11:42

After a robust year, Michigan venture capital funding takes a breather (sort of)

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John Kerschen John Kerschen

The following story appeared in our special supplement the New Michigan Deal, a joint effort with Crain's Detroit Business. CLICK HERE to access all of the section's content.

After accelerating to nearly a quarter-billion dollars in 2012 activity, the pace of venture capital funding for Michigan companies has slowed significantly in 2013.

Michigan companies netted just $20.7 million in VC funds through the first six months of this year, down from $80.6 million in last year's first half, according to the PWC MoneyTree Report.

The second quarter was especially paltry, with just $3 million going to Michigan companies, the lowest quarterly total since 1995, according to MoneyTree statistics.

While the pace may have slowed, consider it a breather rather than a grinding halt, local experts say.

"It is more of an anomaly than anything," said John Kerschen, who helps raise capital for companies and VC funds, including the Grand Rapids-based Michigan Accelerator Fund I, which he co-manages.

Growth in the number of venture funds that have set up shop in Michigan over the past five years, increased activity among high net-worth investors and the state's overall economic recovery have set the stage for a new burst of activity.

Plus, "we haven't stopped producing new technology or medical devices or entrepreneurs who need capital," Kerschen said.

There is a growing class of professional investors with whom entrepreneurs can connect.

The number of venture capital professionals grew to 62 last year, up from 43 in 2008, according to the Ann Arbor-based Michigan Venture Capital Association. The number of VC firms headquartered in Michigan grew from 15 to 20, and nine out-of-state firms opened offices here during the same time frame.

Last year alone, the amount of money under management by VC firms in the state grew 23 percent to $3.7 billion. The fundraising momentum has carried over into this year on several fronts.

Last month, Venture Investors LLC, a Madison, Wis., fund with an active office in Ann Arbor, completed an $80 million raise for its Early Stage Fund V Limited Partnership.

Detroit Venture Partners LLC — the venture firm started by Quicken Loans Inc. founder Dan Gilbert, ePrize founder Josh Linkner and private equity investor Brian Hermelin — closed on a first round of nearly $21 million earlier this year.

Kerschen's Grand Rapids-based consulting firm, The Charter Group, has been retained to help raise $20 million for a new biotechnology fund in Southwest Michigan.

Raising capital is a challenge, he said, due to the lack of exits among newer Michigan funds and because pension funds and other institutional investors are more fully allocated in the alternative investment class than in years past.

With institutional purse strings tightening, a burgeoning number of Michigan executives and business owners have jumped into the early-stage funding game this year with limited partnerships and new angel activity around the state.

Former Chrysler Group LLC CEO Tom LaSorda connected with 14 investors, including Penske Corp. CEO Roger Penske and Canadian Tire Corp. CEO Wayne Sales, to launch the limited partnership VC fund IncWell LP. The Birmingham-based fund plans to invest $50,000 to $250,000 in startups in medical devices, health care, clean energy and the automotive business.

Ken Barnett, the CEO of Southfield-based Mars Advertising Inc., launched a venture capital firm to invest in new technologies for the niche his ad agency serves: shopper marketing.

Chicago-based Griffon Ventures plans to invest up to $100,000 per deal, and Mars executives will get equity in the companies in exchange for mentoring and helping entrepreneurs connect with the firm's clients, which include Hallmark Cards Inc., Campbell Soup Co. and Wal-Mart Stores Inc.

Michigan is also seeing record levels of investment and a growing number of angel investors, according to the MVCA. In 2012, pre-seed and angel investing in Michigan grew 31.5 percent to $12.5 million and the number of angels grew to 242 high net-worth individuals.

"More and more people are recognizing this is an asset class to put some money in," said Jody Vanderwel, president of Holland-based Grand Angels and a director at the Michigan Venture Capital Association. "People talk to people, and the word spreads."

The activity appears to be spreading, too, as new Michigan angel groups launched or made initial investments in 2013.

In West Michigan, a group of 22 individual investors committed $2.75 million over five years to launch the Muskegon Angels earlier this year. The group, which hasn't announced its first investment yet, intends to put $100,000 to $200,000 in local companies in advanced manufacturing, technology, food processing and "water-related innovations and businesses" that will drive growth in the lakeshore community.

Ann Arbor Spark, long a catalyst in Michigan's startup arena, helped put together the Michigan Angel Fund last year. The 70-member angel group, which focuses on early-stage tech companies, made its first investment in July, investing an undisclosed amount in Biophotonic Solutions Inc., an East Lansing-based maker of ultrafast lasers.

In Southeast Michigan, the Grosse Pointe Farms-based Belle Michigan Fund LP launched with 17 investors and $1.5 million to invest in women-owned tech companies based in Michigan.

All of the investors in the Belle Michigan Fund are women, and the group hopes to raise up to $10 million so it can make investments of $100,000 to $1 million in early-stage companies.

The group made its first investment in January, funding Ann Arbor-based wind energy firm Accio Energy Inc., led by CEO Jennifer Baird, former CEO of Accuri Cytometers Inc.

So even if money flowing into Michigan companies is down at the moment, activity among angels and VCs is continuing, and that bodes well for the state's future, according to Chris Rizik, CEO and fund manager for the Ann Arbor-based Renaissance Venture Capital Fund, a creation of Business Leaders for Michigan.

"If you look at Michigan over the next few years, you'll see Detroit and Grand Rapids both becoming epicenters of venture capital," Rizik said in a previous Crain's interview. "You're seeing the seeds of that now."

Mark Sanchez provided additional reporting on this story.

Read 5847 times Last modified on Wednesday, 23 October 2013 09:51
Brian Edwards

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