Investing In Michigan

A few weeks ago, we spoke to companies who attended the 26th annual Michigan Growth Capital Symposium (MGCS), seeking "angels" and investment dollars for their businesses. Each year, forty companies make their pitch to the venture capitalists, angels and investors, seeking their first or second rounds of capital, to kick-start or shift the growth of their business.

The unique format of the MGCS was pioneered here in Michigan, and this event continues to be the premier networking event of its kind, especially here in the Midwest. The value of the MGCS clearly comes from the number and quality of venture capitalists and money managers who make it a point to attend this key event each year. The tone set by this event is one of promise and potential, not only for the entrepreneurs and start-ups seeking funding but also the venture capitalists that hope to usher in a new generation of Michigan-based companies and technologies.
 
"The MCGS was the first of its kind," says Ian Bund, Chairman of Plymouth Venture Partners, "and having the longevity they've had, allows them to keep improving their format."  Having attended every MGCS since its inception in 1979, Bund is a true veteran of the process. "David Brophy is unique for the simple reason that he's still doing it and going strong. It's remarkable to have created the idea in the first place. It's even more amazing that the same guy is running it today after all these years."

For many investors it's a game of numbers, reviewing the inventions and innovations of countless companies, all in search of a diamond in the rough. The symposium's rapid-fire presentations provide VC fund managers and investors with a highly efficient introduction to prospective start-ups that allows for follow up later on.  Attendance at this year's symposium reached over 400, providing an investor to company ratio of roughly 4 to 1. On top of that, three quarters of the 65 VC firms in attendance were from out of state.

"Michigan is well known for both its innovation and bright people. What we don't have is capital," Bund explains. "MGCS helps bring in the capital by attracting so many investors in one place." It's this concentration of capital that can launch the next Esperion. A true Michigan success story, Esperion Therapeutics presented at the 1998 symposium and was eventually bought out by Pfizer for $1.3 billion in February 2004. 

As Bund's flawless attendance record shows, his interest goes beyond simple support. Plymouth Venture Partners believes in the innovative companies MGCS attracts. "We've invested in a company every year," he boasts. Not surprisingly, Bund was recognized as the "Leaders & Best" at last year's symposium.

Of course, much of this would be impossible without the talent and research produced by Michigan's Big Three universities. Bund sees the University Of Michigan, in particular, as vital component to MGCS's achievements.

"Being sponsored and supported by the one of the best schools in the country is a key factor to their success. Most similar events are not affiliated with a school." Bund continues, "U of M's Ross School of Business brings the bright people part of the equation, young bright people. Since they are the region's future, and their ideas are untainted by traditional business models, VC investors who come here get to take a first look at entirely new ideas."

One of those business models was Spirit Shop, a web-based custom apparel shop that caters to schools, clubs and teams. CEO Todd Sullivan developed his business plan with classmates while earning his MBA at the Ross School of Business. In 2005 he was named the school's Entrepreneur of the Year. Sullivan sees MGCS as an opportunity to take things to the next level. "Giving my ten minute presentation here doesn't make me nervous," he chuckles, "I've been working on my pitch for a long time now."

Spirit Shop is just one example of a start-up that takes advantage of new technology sectors. When you look over the long list of companies invited to present at MGCS, you immediately notice them segmenting along predictable market lines: Life Sciences, alternative energy and emerging technologies. 

However, when you view the event from the venture capitalist side, you see a somewhat different breakdown: New disclosures from University research, companies seeking their first round of funding and, finally, firms seeking a second round of capital to continue their growth.

"By investing in rounds," founder Brophy explains, "companies can provide VC's and angels with identifiable, measurable successes before asking for much larger amounts of capital in the next round." Companies like these are attractive because they provide investors with a better sense of their risk potential. On the flipside, they have the most to prove. This year's symposium saw 25% of its presenters fall into the second round category.

While the MGCS has a strong Midwest focus, about a third of the attending investors are from outside Michigan. "The local investors are the key," says Brophy. "They know the companies better and have done a lot of research into products and services and management. When other national investors see what local VC's are buying, they take notice."

This level of attention to a company's evolving business cycle demonstrates the maturity of MGCS and its firm understanding of the world of venture capitalism. "We had over 400 attend this year's event, and every one of them was the crème de la crème.  Each person had a good reason to be there, so there is absolutely no waste."  Brophy adds. "We are especially glad to see the media here covering this event. It's important to all of us to see how much innovation, potential and action is taking place here in Michigan. It's good news that has to be reported."

According to Ian Bund, local economic news is typically reported to the public in a skewed or misleading fashion. "The media likes to jump on hot categories like biofuel and life sciences, regardless of their importance to our local economy.  We're competitive in life sciences, for example, but we have much stronger markets that we should be looking at. Tourism is very strong here in Michigan, retirement communities are exploding here, and we have a very diverse agricultural market. But those don't get much attention in the press." 

Bund is especially fond of a company named NeoGen, which he invested in back in the 1980's. Focused on food and animal safety industries, the company has generated net sales of $72 million in 2006 and currently employs more than 400 people. Over the past 15 years, they have recorded 53 consecutive profitable quarters.

Bund looks to the lack of coverage on NeoGen's success and a failure to recognize MSU's role as an example of how local media ignores important economic stories. "NeoGen specializes in agriculture and veterinary medicine. Their Michigan State University connection is important. MSU is a major source of agricultural research in the USA. I have great respect for their work."

It's stories like these that fuel the enthusiasm and energy of those attending MGCS. After hanging out with entrepreneurs and financiers for two days one begins to view Michigan's economic future in more hopeful terms. After all, investment is all about betting on success.

Sometimes it makes sense to cover a portion of that bet, working with other investors to provide the needed capital.  According to Mary Campbell, Managing Director at EDF Ventures in Ann Arbor, syndication is very common.  "VC's will combine their money and their expertise to create stronger partnerships."  She adds, "this is why the MGCS is so important, providing a way for VC's to meet and find new opportunities together".

Pavan Muzumdar, CEO of MV Software in Clawson, attended the symposium just to tap into that entrepreneurial energy, previewing new technologies and getting a sense of the research coming out of our schools. "We need to invest more time on helping our schools and their research. Tech Transfer is a big part of our potential growth, getting ideas out of the school research labs and classrooms and out into the marketplace," Pavan explains. "I believe we need to set up more seminars like this that are purely for tech transfer. We need to get Michigan's three big Universities (MSU, UM and Wayne State) to come together and market their ideas in a big "Great Lakes Tech Transfer Conference". 

Pavan sees Michigan' universities as our next big economic powerbase. "Silicon Valley came out of Stanford. Why not create the next big technology base here, where we already have a strong IT, industrial and engineering legacy?" Pavan insists. "And we don't have to be the next 'Silicon Valley' or the third Boston. We'll be the first Great Lakes!"