Fluke or Trend? One Investor Reflects on HealthMedia Acquisition —Sees Promise, but Not Critical Mass, in Michigan Innovation Ecosystem

3/8/11Follow @xconomy

One exit does not a trend make.

In 2005, Chrysalis Ventures led a $2 million investment in HealthMedia, based in Ann Arbor, MI. Three years later, Johnson & Johnson bought HealthMedia.

Terms of the deal weren’t disclosed but Chrysalis says it ultimately earned 18 times its initial investment. Not too bad.

Despite its success with HealthMedia, though, Chrysalis, a Kentucky venture firm that focuses exclusively on the Midwest, has not exactly been bankrolling Michigan’s startup community. In fact, Chrysalis’ current portfolio only includes one local startup: Asterand Management in Detroit, which provides tissue samples to biotech researchers.

“We find Michigan to be a good place to start a business,” says managing director Koleman Karleski “The state has plenty of great assets. There is a relatively vibrant ecosystem community in Ann Arbor.”

But like most Midwest states, Michigan’s innovation ecosystem is largely fragmented, Karleski says. That’s true even in Ann Arbor, where the University of Michigan is developing a wide swath of intellectual property in medical devices, software, IT, and clean energy.

Placing bets on several technologies sounds like a good thing, but does a lack of critical mass in any one high tech industry hurt Michigan’s ability to attract a consistent flow of venture capital dollars?

“That’s a good question,” Karleski says.

Silicon Valley, after all, initiatially established its reptuation in software, web development, and IT while Boston boasts a strong biotech community. Other than automobiles, what do investors see when they think of Michigan?

“VCs like to focus on different things,” Karleski says. “Capital tends to find good companies no matter where they’re built. Silicon Valley venture capital is arguably more efficient, but also far more competitive.”

“We look at [Michigan] opportunistically,” he continued. “But right now, we don’t see a lot of activity that merits a lot of financing.”

In other words, I believe, outside venture firms look for individual deals, not particular technologies in Michigan. By definition, an innovation ecosystem requires mass and Michigan currently lacks it.

So while exits like HealthMedia are encouraging, they’re more isolated events and less the product of a well developed innovation ecosystem.

The X-factor in venture financing seems to be people. Investors, enterpreneurs, and buyers who work well together one deal are likely to collaborate on another deal, Karleski says.

Case in point: HandyLabs and Accuri Cytometers. Becton, Dickinson & Company recently bought both companies, the products of the same university, same CEO, and same groups of investors.

Now that’s an innovation ecosystem!

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