Investors: New venture capital fund will boost Michigan entrepreneurs despite occasional disappointments
Michigan’s venture capital leaders said this afternoon that growing the pool of dollars available to startup companies would boost the economy in the long run, regardless of the sporadic instances in which a venture-backed company is sold and eventually leaves the state.
“We will not keep 100 percent of the companies that are created,” said Tom Kinnear, chairman of the Venture Michigan Fund.
“We’re not going to keep them all. We’re going to keep enough to grow all sorts of seeds here, because if you follow the tree of who worked for whom, you can follow who was in these companies that were acquired. A lot of them stayed and started other companies.”
Kinnear’s comments came at an event in Ypsilanti, where business leaders are celebrating today's official launch of the second version of the Venture Michigan Fund, which was formed in August 2006 to provide funds to Michigan venture capitalists.
VMF II, as it’s being referred to, has raised $120 million in capital to distribute to venture capital firms that have an office in Michigan or agree to establish one here.
The funds, which don’t come from the state’s budget or the Michigan Economic Development Corp., are being loaned to global investment firm Credit Suisse, which will distribute the funds over a three-year period. In the case of very poor investment returns, the loans have the backstop of state tax vouchers, which would kick in and allow investors to reduce their losses.
The first version of Venture Michigan Fund, or VMF 1, totaled $95 million. Credit Suisse distributed those funds to 11 venture capital firms, which have so far invested more than $38 million in 15 Michigan-based startups.
Supporters say that a growing pool of venture capital dollars creates jobs by injecting life into the state's entrepreneurial sector.
But venture-backed companies are also susceptible to acquisitions by outside corporations such as New Jersey-based Becton, Dickinson and Co., which paid $275 million for University of Michigan startup HandyLab in 2009 only to announce it will shut down the company’s Pittsfield Township office in 2011.
Now that BD is acquiring Accuri Cytometers, which employs more than 60 workers in Scio Township, the business community is watching to see whether Accuri stays or leaves.
Critics say Michigan is opening the door for venture-backed companies to leverage workers and technology developed here to generate profits for deep-pocketed investors from somewhere else. Supporters of the efforts to boost the venture capital industry point to the success of technology hotspots like Silicon Valley and Boston, which are swimming in venture capital and entrepreneurial companies that need it to flourish.
Michigan Treasurer Andy Dillon, who sponsored bipartisan legislation creating VMF in 2006 as a member of the Michigan House of Representatives, said the state must “make sure we are a partner for these great companies.”
“If we provide the infrastructure and a conducive environment, we’ll continue to cultivate our serial entrepreneurs and get them to stay,” Dillon said.
VMF 2 is now accepting applications from venture capitalists who want access to fresh cash to invest. That money does not have to be invested in Michigan companies, but the Venture Michigan Fund hopes that, since a requirement for receiving funds is that the firms open an office in Michigan, many investments will be made in companies here.
Among the Ann Arbor firms that have benefited from VMF in the past is Arboretum Ventures, which reaped big returns on its investments in HandyLab, Accuri Cytometers and HealthMedia, which was sold in 2008 to Arboretum Ventures.
Kelly Williams, managing director and head of Credit Suisse’s Customized Fund Investment Group, said the firms that receive VMF dollars have one legal duty: to make the investments that reap the best possible returns.
“But the reality is the more capital you have focused on the state, the more capital you have focused on multiple stages of the growth of the company, the more likely it is that you’re going to keep the company here in its growth cycle,” she said.
Giving a boost to entrepreneurs and existing Michigan businesses is a key piece of business tax reform Gov. Rick Snyder is expected to unveil Thursday as part of his 2011-12 budget proposal. Dillon declined to offer details on the proposed budget.
“Rest assured you can feel comfortable to know the governor knows what will attract business and investment in this state,” Dillon said.
Nonetheless, Kinnear emphasized that Snyder is not involved in the Venture Michigan Fund, which, unlike the 21st Century Investment Fund and 21st Century Jobs Fund, does not use state dollars.
“This particular program is independent of the governor,” Kinnear said. “To me it’s apolitical.”
Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.
Comments
whatsupwithMI
Wed, Feb 16, 2011 : 3:30 a.m.
@FattyJ: see, that is the point people are making: despite your positive comment, there is much evidence to the contrary-- these efforts are NOT leading to long-term jobs locally, nor retaining knowledge-based workers in a meaningful fashion. How to change that? is the dialog that I just don't see happening about making a _meaningful_ ecology, to use anothers' term. To put it in ecological terms: oak trees periodically produce HUGE bumper crops of acorns, which feed huge numbers of critters. What we seem to have here is: a big net under the oak tree, and that bumper crop gets intercepted before it hits the ground. But we paid often paid for the fertilizer while waiting for the great crop- in terms of tax credits/waivers of some sort, outright tax money gifts in others. But the acorns go someplace else. Sure, some squirrels got fed for a few years, then they were left to starve- it just deferred the starvation a little while. A fun (both business and political) article to see written could be: the history to date, the way the funding and money works (_really_ works, Nathan, see the earlier comment from a 31-year perspective, and learn) and how that could stand some change.
Dcam
Tue, Feb 15, 2011 : 12:23 p.m.
"Supporters of the efforts to boost the venture capital industry point to the success of technology hotspots like Silicon Valley and Boston, which are swimming in venture capital and entrepreneurial companies that need it to flourish." - article Now, let's go back a bit. "Many felt that the key to establishing the state's economy was in attracting and retaining high-skill jobs by diversifying into other industry sector other than automotive production. Looking at the examples provided by the booming high-technology corridors of California's Silicon Valley and Boston's Route 128, many felt that the computer industry offered the best hope of creating new economic diversification." - 1980 justification for creating Industrial Technology Institute, later morphed into Michigan Manufacturing Technology Center. ITI was staffed with the best and brightest minds from academia and had a very close relationship with the University of Michigan. It was supposed to be self-funded within a year or two, but, to this day (31 years later) it is still the biggest recipient of MEDC funding - about one billion dollars of taxpayer money has gone into MMTC, and it's benefit to Michigan is plain to see by anyone driving by closed businesses and looking at the unemployment rolls. Yet, they've built themselves a campus worthy of an empire. (ITI) MMTC's greatest accomplishment is to stifle entrepreneurs by continually changing the rules by which people can enter the game, but, that's what academics who have plenty of spare time do. And the same minds that did that are back to do it again. And it was Governor Milliken who started these monsters.
FattyJ
Tue, Feb 15, 2011 : 6:04 a.m.
People complain about not having a job, ie not enough business, and also complain when people profit big off of investments. When there are resources out there to help someone who doesn't have money start a business, how does that hurt our overall prosperity? More business leads to more jobs, which leads to more prosperity for our people. I believe the root of liberal economic policy is jealousy for those who take risks. If no one is out there borrowing money from banks (or investing their own with the intention of making monetary returns) then our money supply does not have the ability to grow.
whatsupwithMI
Wed, Feb 16, 2011 : 3:36 a.m.
VC firms are NOT banks. They will finance you but they also then put in their own CEO or similar who makes sure that if you are saleable, you get sold. You and especially your employees don't get much. the community gets a few short-term jobs. If you are a small business and looking for e..g 100k to start your clothing line or whatever-- sure, there are "venture capital" firms to help you with the small scale. They just will take 40% of your gross forever. If you have any experience with small business, especially in these times: you might as well just die now, if that is the Shylock you have to pay.
Dcam
Tue, Feb 15, 2011 : 3:24 p.m.
When a person uses their own money or borrows from a bank to start a business, they become a vested interest to see that it survives, profits and grows - if they're skillful and fortunate. Borrowing from a bank for a start up is almost laughable - few, if any banks will lend money to a start up, and definitely not to a start up which is set up as a corporation. No collateral to put up - ideas and dreams aren't collateral. And a well-run enterprise shouldn't be leveraged by creditors, profits should cover the cost of doing business - the main purpose of profits. A venture capitalists becomes interested in a business when there is enough behind a company to be a viable opportunity for its sale to third parties for a profit. And UM start ups already have the cache to interest a venture capitalist, especially when there's very little venture capital money involved - given the state's kitty, UM infrastructure and guarantees of returns for themselves - no matter what happens. And since you're a fan of capitalism, perhaps some words of Adam Smith might interest you. "...landlords, like other men, love to reap where they never sowed." Venture capitalists and shareholders are landlords.
Dcam
Tue, Feb 15, 2011 : 12:13 a.m.
"If we provide the infrastructure and a conducive environment, we'll continue to cultivate our serial entrepreneurs and get them to stay," Dillon said. What exactly is a serial entrepreneur? Is it one who has dozens of ideas and creates companies, using one's own talent, skills, infrastructure - and money? (That is highly unusual because a true entrepreneur typically dedicates oneself to build a company, which takes a lot of effort full-time.) Or, is it just a money-bag (of taxpayer money mostly a gift to them) that uses other people's ideas, talents, infrastructure and happens to have a large list of potential buyers and a circle of friends in government hand-out agencies? Remember, venture capitalists have no regard for sweat equity of those who actually work to create something - only the cash potential to themselves. And they certainly don't care whether the company stays, leaves or has a long-term potential for growth - the quicker the sale, the better they can pocket their large returns for their small monetary investments and move on to the next ripening, low-hanging fruit. The funds floating around Ann Arbor are not here to create great companies, they're here to fleece the taxpayers and disillusion and betray those who truly are entrepreneurs.
runbum03
Tue, Feb 15, 2011 : 2:52 a.m.
Well put, Dcam. Spot on. Thanks for posting.