Capital Climate Is Mean In Michigan, VCs Say at Symposium, But We’re Used to Dealing With Bad Weather

5/12/10

Only in Michigan can you take some pretty dismal-sounding numbers and make them sound like a good thing. That’s what’s happening now at the Michigan Growth Capital Symposium taking place in Ypsilanti, MI—the 29th annual meet-up of Michigan entrepreneurs and potential funders. The theme here, broadly speaking, is that, yes, Michigan may be near the bottom in terms of venture capital investment, but that is not necessarily a bad thing, because the state knows how to do more with less.

Sure, California and Massachusetts are swimming in VC dough, comparatively, but then that puts unrealistic burdens on the entrepreneurs there to produce a return on investment all out of proportion with reality, say VC experts here.

Seriously.

Although, at times, it is difficult to tell when Michiganders are being ironic. When we talk about ourselves, among ourselves, there is always an unspoken understanding that, yes, things are bad here, so the gallows humor can come out and we can laugh at it.

But Kate Mitchell is not from Michigan. The chairwoman-elect of the National Venture Capital Association is from California, where the streets are paved with gold. And when she says in her keynote address here that “any good market can be ruined by too much venture capital,” she knows what she’s talking about. So, if that’s true, then Michigan must be doing great.

Anyway, here are the latest numbers for 2009 from the Michigan Venture Capital Association. They’re bad, so let’s get them out of the way all at once.

There are a total of 16 venture capital firms in existence in Michigan. In terms of amounts raised, Michigan is in the fourth tier—out of five—ranked number 19 in the country, just below Indiana and just above Ohio. In 2009, there were 25 venture capital investments in Michigan, worth a total of $131 million. For comparison, there were 1,137 investments in California worth $8.8 billion all told; and 303 investments in Massachusetts worth $1.9 billion.

Total VC investment in Michigan companies during 2009 represents 0.74 percent of the 2009 national total.

These numbers do not bother Mina Sooch, president of the Michigan Venture Capital Association, who gave the gathering a David Letterman-style “Top 10 List” of reasons why Michigan will succeed.

10. There’s no place but up from here.
9. We invent and make really cool stuff.
8. Despite rumors, the talent has not left the state.
7. The state has invested, since 2000, in diversifying (and not just in casinos).
6. We will work for cheap. (Capital efficiency is key to VC returns).
5. Even if the last car company fails, we will always have our lakes.
4. Young venture firms are growing and growing up.
3. We know what we don’t have—capital, capital, capital.
2. Success breeds success (indicating that we will see some exponential improvement).
1. It’s all about the money.  (6X returns on investment in Michigan).

Inside jokes and wisecracks aside, Sooch’s theme remained the same as that of other speakers at this event. The few VCs that decide to invest here get their money’s worth because local entrepreneurs appreciate every penny they can get and, of course, there’s that Midwestern work ethic. Or, as Mitchell put it, “You can make more money if you put in $20 million rather than $200 million.”

“I think that capital efficiency is in the culture and the DNA here, and I think it’s a great asset because people have had to do more on less,” Mitchell says.

That, she says, puts Michigan even ahead of the curve. The next wave of venture capital firms are raising smaller funds and investing more efficiently, she says.

Tomorrow, I’ll write more about what Michigan is doing with its venture cash, and about some of the companies giving their pitches here. Lots of energy, cleantech, and life sciences companies were on hand. There does seem to be some optimism in the air here. Maybe Michiganders do know something about the future that the rest of the country does not. Or, as Sooch says, there’s nowhere to go but up. David Brophy, director of the symposium and of the Office for the Study of Private Equity Finance at U-M’s Ross School of Business, has a simpler explanation: The recession hit us first, he says, and we’re doing something about it first.

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