Annual Growth Capital Symposium Sparks Optimism for Michigan
The 2010 Michigan Growth Capital Symposium reflects a bright future for the state.
ANN ARBOR, Mich. — The rebounding U.S. economy, rising stock markets, and recovering investment sector fueled renewed optimism and confidence among venture capitalists, angel investors, and entrepreneurs attending the 2010 Michigan Growth Capital Symposium on May 11-12.
"Increasingly, we have better news to report," said David Brophy, director and founder of the symposium and professor of finance at the Ross School. "The economic crisis hit us first [in Michigan] and we started to do something about it earlier."
The severity of the automotive downturn in Michigan and the state's massive job losses over the past 18 months have galvanized efforts by economic-development leaders, the venture-capital industry, and major research universities to accelerate the creation and growth of entrepreneurial companies in the life sciences, clean technology, alternative energy, and other areas of innovation.
This strategic alignment and connectivity of pro-entrepreneurial, pro-venture investing forces has generated a collective sense of energy, purpose, and recovery.
"Michigan has a huge innovation culture, its talent has not left, and the state has invested in diversifying since 2000," said Mina Sooch, chairman of the Michigan Venture Capital Association, who presented 10 reasons why Michigan will succeed.
She reported the state has experienced steady growth in the number of venture-capital firms, investment professionals, and venture-capital raised and managed. "Michigan has the deal flow, pipeline, and infrastructure," Sooch said. "We feel it has the potential to be a top-10 state, and we should strive to be there."
In 2009, Michigan ranked 19th in venture-capital investment and 18th in deals compared to other states. Last year, $131 million in venture capital was invested across 25 investments in Michigan.
The realities of the "new normal" — an environment where venture-capital firms are struggling to raise new pools of money, venture funding is being doled out more sparingly to entrepreneurs, and "doing more with less" has become the industry's mantra — still present challenges to startups and early- and late-stage companies.
"We need to continue to take innovative steps," said Greg Main, president and CEO of the Michigan Economic Development Corporation. He reported that since 2006 the state has expended $500 million to stimulate venture capital and private equity activity through initiatives, such as the 21st Century Investment Fund, the Venture Michigan Fund and Invest Michigan. "We have a long way to go, but we are making progress," Main added.
The annual Michigan Growth Capital Symposium, now in its 29th year, drew 375 participants — including investors from across the country, executives of early-stage and emerging-growth companies, and related stakeholders — to the Marriott Eagle Crest Conference Center in Ypsilanti, Mich. The event was presented by the Center for Venture Capital and Private Equity Finance of the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies (ZLI) at Ross.
Seven panels of industry experts discussed entrepreneurial opportunities in healthcare, life sciences, and electric/hybrid vehicles, as well as trends in venture capital and research funding. Keynote addresses by Kate Mitchell, chairman-elect of the national Venture Capital Association, and Dr. David J. Brailer, chairman of Health Evolution Partners, examined new developments in venture investing and healthcare information technology.
Founders and representatives from 32 emerging and growth companies operating in Michigan and other states showcased their innovative products in energy, life sciences, information technology, and advanced technology.
"The symposium provided excellent exposure to the investment community and an opportunity to have face-to-face discussions with potential investors," said Robert Fulk, the president of Michigan-based Inventure Enterprises Inc., which has developed a new product that automates the background-checking processes for state and federal homeland-security agencies.
Keynote Address by Kate Mitchell
Kate Mitchell, a co-founder of Scale Venture Partners and chairman-elect of the National Venture Capital Association, took a look at the downsizing that has occurred in the venture-capital industry and what it means for fund managers, portfolio companies, and entrepreneurs. She conceded that the fundraising climate is still challenging and that shrinking fund sizes are compelling investors and portfolio companies to do more with less. However, she predicted that returns, which are still paltry compared pre-recession levels, will improve.
"Overall, we are optimistic," Mitchell said. "It's a good time to be investing."
Her top sectors for investment include clean technology, next-generation social-networking and mobile, and cost-saving medical innovations. "Venture investing is all about creative destruction and going on to the next thing," she remarked.
Mitchell reported that the industry is seeing a trend toward investing smaller amounts of capital in smaller companies at an earlier stage.
"I think seed and angel investing is extremely important," she said, adding that the expertise and time angels bring to new ventures can be critical to their ultimate success.
Generally, venture funds are holding portfolio companies much longer. In 2009, the average time from startup to IPO or acquisition was 10.3 years compared to 4.5 years in 1998.
Keynote Remarks by Dr. David J. Brailer
"The love of innovation is really part of the American tradition," said Dr. David J. Brailer, MD, PhD, and chairman of Health Evolution Partners. "The question I deal with now as an investor is whether that innovation machine is going to continue into the future and under what conditions will it be successful."
Drilling down in the information-technology industry, Dr. Brailer distinguished between transformative IT companies, such as Google, which quickly and dramatically altered the IT landscape forever, and in-the-trenches IT companies, such as Microsoft and Intel, which took much longer to evolve.
"I think one of the real challenges we have is trying to find the Google when most of life's innovations are the Intels, Ciscos, Microsofts, and Apples," he said.
Dr. Brailer cited the writings of University of Chicago economist David Galenson, who distinguished between conceptual innovation, characterized as a rare flash of genius, and experimental innovation, marked by a grind-it-out mentality and dogged perseverance.
"There's no better place to see that [distinction] than in healthcare," Dr. Brailer said. "I think there have been sparingly few conceptual innovations. The same thing is true with energy, partially because [these industries] are highly regulated and dominated by a very risk-averse culture."
He said insulin was a conceptual innovation in 1921. Penicillin, by contrast, had the longest stretch from lab to clinical use. It was discovered in 1926 but not used for medical treatment until 1942.
Dr. Brailer predicted that health information-technology has the greatest potential to fundamentally change the calculus of how people work in healthcare. "Health IT is the fastest-growing line item in the federal government," said the physician, who was appointed in 2004 by then-President George W. Bush as the first National Coordinator for Health Information Technology. In that role, he developed and led the nation's strategy for ushering healthcare into the digital era.
"We have a simple challenge, which is to persevere," Dr. Brailer concluded. "When the world starts to get difficult, there are opportunities. This battle is worth it. There is no industry on earth where the result of innovation is longer life expectancy."
The Convergence of Healthcare and Technology
The innovative intersection of the life and physical sciences with computerization and engineering technology is transforming university research and opening up new opportunities for entrepreneurs and venture investors. At the same time, convergence is raising concerns about intellectual-property rights and the regulatory-approval process, said a panel comprising professionals working in the healthcare research, investment, and entrepreneurial sectors.
"Twenty-five years ago, the research coming out of universities was 'raw,'" said John Neis, managing director of Venture Investors. "This has changed, and it is now more collaborative."
Laura Heisler, the director of programming at the Wisconsin Alumni Research Foundation, noted that interdisciplinary research and public-private partnering are now becoming the norm. "We're beginning to put things together and use outside expertise as a catalyst," she said.
The growing complexity of new convergence products, coupled with the U.S. Food and Drug Administration's regulatory tightening on medical devices, has presented additional challenges. "We're now inventing technological approaches to healthcare where there are no predicate devices," said Erica Rogers, president and CEO of Cereve Inc. "You have to educate the FDA and expect lengthy clinical trials."
She also observed that the intellectual-property landscape is much broader for technology-enabled medical devices, because they frequently overlap several sectors. "There is a minefield of IP for entrepreneurs forming companies," Rogers added.
Immanual Thangaraj, managing director of Essex Woodlands Health Ventures, remarked that entrepreneurs need to seek out nontraditional venture investors who understand, and are comfortable with, convergence and are willing to take advantage of its novelty.
University of Michigan Passes $1 Billion in Research: What This Means for Startups
Last year, U-M hit the $1 billion mark in research spending and purchased a former Pfizer pharmaceutical-research facility, which is now being redeveloped as the North Campus Research Complex. The 1.3 million square feet of research space will expand the University's research capacity by 10 percent and create an estimated 2,000 jobs over the next 10 years. With momentum building on campus, a panel of U-M administrators and faculty members outlined ambitious plans for unleashing the University's research potential to empower student and faculty entrepreneurship, translate research for human health, and transform the state's economy.
"We need to take bench-to-bedside research to the next level;" said Ora Hirsch Pescovitz, executive vice president for medical affairs and CEO of the University of Michigan Health System. "Now there will be an opportunity for technology users to work side by side with technology inventors on commercialization ventures. New "adjacencies" linking the private and public sector and the government and University will "lead to an acceleration of discovery and creativity," she added. "We hope to get economic gains as well."
Students hold the key to the future, and the education they receive is being reengineered to spark entrepreneurial curiosity and collaboration.
"In the past, a diploma was a passport to success," said U-M Professor Thomas Zurbuchen, associate dean for entrepreneurial programs at the College of Engineering. "Today, it is a single-entry visa to a career. We want to educate people who will drive discovery and go out in the world and create."
Timothy Faley, managing director of ZLI, added: "We want our University to be known as the hotbed of people you want to hire. We're working hard to bring down the walls, reduce the silos, and build an entrepreneurial ecosystem."
To encourage the formation of new partnerships with the private sector, the U-M has made it easier for entrepreneurs and companies to identify and utilize campus talent and resources, said Stephen Forrest, professor and vice president for research. "We have an open door," he said. "Through the Business Engagement Center and other initiatives, we have created a new mechanism for partnering."
While U-M still has a way to go to create a vibrant environment for entrepreneurs, Forrest noted, "We are moving very rapidly in the right direction. We have started to move the needle."
Charging Forward: VCs, ECs, and Other Next-Generation Vehicles
Achieving President Obama's goal of putting one million electric or plug-in hybrid vehicles on the road by 2015 is a daunting challenge for auto makers, who are pressing for more government subsidies and tax breaks. A panel representing innovators, manufacturers and investors in the automotive sector laid out a roadmap that they hope will lead the U.S. to greater oil independence.
John Schaaf, vice president of market development at Johnson Controls, said his company has initially targeted the commercial fleet market, which accounts for more than 70 percent of miles driven in the U.S.
"The fleet market, representing five to 10 percent of the overall market, is a good entry point because it has predictable driving patterns," he observed. "Also, it is easier to deal with just one fleet manager [rather than many individual consumers]."
Schaaf predicted hybrids and plug-in hybrids will be introduced first, as opposed to fully electric vehicles. "Over the long term, as the infrastructure is build out and people become accustomed to certain driving constraints, fleets will eventually change over to all-electric vehicles," he added.
"In the fleet market, we've found a preference for hybrid vehicles that run on compressed natural gas," said John Thomas, the co-founder and CEO of ALTe. "We're being encouraged to align with natural gas as the 'new oil.' While we ultimately see electric as the destination, fuels are still a necessary evil during the transition."
Converting the consumer market to next-generation vehicles presents a greater challenge, the panelists agreed. Although advances in the development of smaller, lighter, more long-lasting batteries have been promising, the high cost of the initial battery purchase and the scarcity of recharging stations are hurdles the automotive industry will have to overcome before consumers can be persuaded to open their wallets.
"The pipeline will just have to flow out, unless we can find an economical way to convert consumer vehicles as well as fleets," Schaaf said. "By 2040, we hope to get to a deep enough market penetration to achieve a reduction in oil consumption."
Trends in the Life Sciences
Nearly half of Michigan's venture-capital funds are now targeting the healthcare sector and most view the passage of healthcare reform, which is drawing more insured individuals into the system, as a net positive for the industry, a panel of venture investors reported.
"Michigan is doing very well," said Jan Garfinkle, founder and managing director of Arboretum Ventures. "We've had several successful exits recently, including U-M spinout HandyLab (acquired in November 2009 by Becton, Dickinson, and Co.), and these entrepreneurs are now starting other new companies."
On the other hand, Garfinkle, noted, the U.S. Food and Drug Administration has grown more conservative in recent times. "Now companies have to incubate medical devices and pharmaceutical much longer in order to win FDA approval," she said.
New discoveries continue to spawn investment opportunities in the life sciences. "We like products driven by advances in remote monitoring, which helps to reduce costs and improve patient care," said Guido Neels, managing director of Essex Woodlands Health Ventures.
Dan Lemaitre, president and CEO of White Pine Medical, predicted that the data captured by medical implants and other monitoring devices will become increasingly important. "There's no doubt that the real opportunity in medicine is data, but the challenge is to create a business model around it," he said.
Enabling technologies that make medical procedures cheaper and better, with fewer complications, represent an area where entrepreneurial and venture-investment opportunities are growing, observed Louis Cannon, founder and senior managing director of BioStar Ventures.
To procure venture funding, however, entrepreneurs need to identify the right venture-capital partners to target and demonstrate the capital efficiency of their company. Garfinkle estimated that 70 percent of her recent deals were series A rounds. "There have been a lot of inside rounds of funding because we've had to stay with companies so long," she reported. "We've also seen a downward trend on investments in later rounds. It's a difficult environment."
The Role of State Government in Michigan's Economic Development
The state of Michigan, in partnership with local economic-development agencies and public universities, has mounted a concerted effort to diversify the state's economic base by supporting the creation and growth of entrepreneurial companies focused on alternative energy, defense, life sciences, and medical devices. A panel of government and business leaders presented a snapshot of economic-development initiatives, accomplishments and aspirations.
The Michigan Economic Development Corporation is focused on attracting new investment to the state, retaining existing companies and fostering their expansion, and nurturing the growth of early-stage companies, said Greg Main, MEDC president and CEO.
"We've worked hard to create an entrepreneurial infrastructure by delivering quality commercialization services, making sources of capital accessible for each stage of development, and connecting companies with the technology available at the University," he explained.
The Michigan University Research Corridor, a coalition formed three years ago by the presidents of the U-M, Michigan State University, and Wayne State University, is fueling economic growth on college campuses by supporting the commercialization of research, developing the entrepreneurial talent of students, and engaging companies in commercialization efforts.
"The universities are making tremendous strides," reported Jeff Mason, the Research Corridor's executive director. "They are very proactive in moving technology out of the university and interacting with companies."
He reported that IBM decided to locate a global computer-programming center on the campus of Michigan State University last year.
Other economic-development efforts include The Center for Michigan, a think-and-do tank started by former U-M Regent and newspaper-chain owner Philip Power, and Business Leaders for Michigan led by president and CEO Douglas Rothwell.
"We are not a cohesive state," Rothwell said. "We are not thinking like one Michigan and putting ourselves behind our state. We've got to stop the divides here in Michigan."
He cited political divisions, labor-management tensions, racial conflicts, and lack of regional cooperation as areas where changes are needed if Michigan is to create a competitive business culture.
To improve the Midwest's ability to attract capital, Power suggested marketing the region as the "North Coast" and playing up the similarities among the Great Lakes states, which offer topnotch research universities, highly skilled labor, a solid manufacturing base, and good transportation systems.
What Entrepreneurs Seeking Capital Need to Know: Searching and Sourcing Deals from an Investor's Perspective in Today's Market
The landscape for venture investing has changed dramatically in recent years, and today's entrepreneurs must navigate over rocky terrain to procure funding. Panelists offered tips on how to be successful in a challenging business climate. They stressed the importance of company management, lean processes, market size, and acceptance of a new product.
"Angels like to invest in serial entrepreneurs and look for strong teams with specific domain expertise and management," said Terry Cross, founder of Windward Associates. "Founders should be willing to collaborate with others to save money and to take small tranches against specific milestones."
In addition, he said, most angels now expect lean, creative funding, a low-cost business with a strong plan for rapid growth, an ability to cut costs to the bone, and a quick path to exit. "The new normal is minimum cash and lots of creativity at the angel level," Cross concluded.
Roger Newton, the co-inventor of Lipitor, noted the dramatic decrease in capital availability between 1998 when he launched the original Esperion Therapeutics and 2008 when he restarted the company as an independent enterprise. "Money was flowing the first time, but the second time was different," he explained. "The current company's infrastructure has been reduced. Times have changed." Newton said investors these days are looking for companies with proof of concept and, in the case of a medical device, a prototype that actually works. In addition, entrepreneurs seeking series A funding "need to have their budgets well-honed so that it's clear to investors how the money will be used."
Blair Garrou, managing director of DFJ Mercury, suggested entrepreneurs go to the East or West Coast to look for capital. "For the seed round, we like to see entrepreneurs with lots of 'scar tissue,' and for the series A round, we want to see capital efficiency in the short- and long-term," he said. "We also like to look at billion-dollar markets and exit pathways of other companies that have sold in the same industry."
Pre-money valuation, especially in the early stages, "is more an art than a science," Garrou observes. "We are now funding for 18 months rather than nine to 12 months. It boils down to how much the company needs rather than how much the entrepreneur thinks the company is worth."
As a late-stage investor, Hugh Golden, managing director at GE Capital, said he prefers emerging companies with a game-changing technology, revenues exceeding $10 million and a capable management team. "We also like to see other institutional investors and a good, independent board of directors before we invest in a series B or C round," he added. "On the exit side, we prefer a strategic sale rather than an initial public offering."
Trends in Venture Capital
After the economic devastation of 2008 and 2009, the venture-capital industry has undergone a significant contraction, and the investment pace has slowed. Fewer VC firms are raising new funds, and most are investing less money. A panel of VCs examined the industry's prospects for the future and weighed in with their predictions for recovery.
"I think we're working ourselves out of the 2008-2009 economic downturn, and there's growing tepid optimism in the industry," said Mark Heesen, president of the National Venture Capital Association. "The entrepreneurs who are left standing are solid. If you can invest today, it is a phenomenal time to do so." Raising funds is still difficult, however, and Heesen predicted that the venture-investing environment will remain challenging for several years.
"The clean-tech sector is becoming more important," Heesen reported. "Life science will continue to have a strong presence. Many VCs also see opportunities for entrepreneurs arising from healthcare reform legislation." Given the current weakness in the IPO market, an estimated 98 percent of venture-backed companies opt to "go the acquisition route," which is subject to prevailing economic conditions.
Andrew Schwab, founder and managing partner of 5AM Ventures, said he has seen a dichotomy in the venture-capital market, which now favors early-stage over later-stage investments. "The best series A deals are still getting done with terms similar to those in 2008," Schwab explained. "But later-stage companies are getting crushed."
The overall decline in total assets held by institutional investors has impacted the amount of money allocated to venture-capital investments, observed Koleman Karleski, managing director of Chrysalis Ventures. "As a result," he said, "institutional investors are looking more critically at their venture managers to determine which ones are building great businesses and making money on their behalf."
Karleski spoke favorably about the future direction of Michigan's economy. "I think the momentum here is very positive," he said. "The state has taken great interest in forming pools of capital that incentivize VCs such as Chrysalis to spend more time in Michigan, searching for the next generation of great young companies. The state also has benefitted from the success of venture-backed companies. And the entire entrepreneurial ecosystem has become more sophisticated. A lot of smart people are working together to create more critical mass and to assemble the necessary assets to build great businesses."
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