Michigan’s venture capital industry grew again in 2012 as both the amount of capital under management and what’s available for new investments posted strong gains.
The results contrast the general national trend for venture capital and indicate “that Michigan is a destination where entrepreneurs and those that back them are thriving,” states an annual research report issued today by the Michigan Venture Capital Association.
“Startups and growing companies across Michigan are providing venture capitalists ample opportunities to invest in a promising business. More investors and entrepreneurs are choosing Michigan time and again, creating a solid foundation for economic growth for years to come,” the report states.
Virtually all of the $700 million increase last year in capital under management came from out-of-state firms with a presence in Michigan, as venture investors seek to tap a growing deal flow in the state.
The report shows that capital under management grew to $3.7 billion last year from $3.0 billion in 2011. Of that amount, Michigan-based VC firms held steady with $1.5 billion in capital under management, while out-of-state firms grew to $2.2 billion from $1.5 billion.
The amount of capital available for new investments grew as well, to $456 million last year from $367 million in 2011. Capital available from Michigan-based venture firms surged to $305 million from $209 million, while out-of-state capital available dipped to $151 million from $158 million, according to the MVCA report.
Although still below the pre-recession level of $530 million, the total available capital grew for the second year in a row after the industry bottomed out in 2010 and as Michigan’s economy steadily improves.
The year continued the steady growth of venture capital in Michigan that MVCA Executive Director Carrie Jones sees as sustainable into the future.
“We’re right where we want to be and where we need to be,” Jones said. “We’re growing at a really good pace. That’s how you build an industry on a long-term basis – slow and steady.”
Investors say the industry’s growth in recent years reflects improvements in the state’s business climate and a new era of entrepreneurism in Michigan that’s creating higher quality investment prospects. Those changes have coincided with a public and private push that’s been occurring for more than a decade to build a far larger venture capital industry.
Tim Streit, managing director for the Grand Rapids office of Ann Arbor-based Huron River Ventures, an $11 million firm formed in 2010 with the aid of state seed money, said he’s now seeing improvements in the quality of prospective deals in Michigan.
“The momentum, I think, is tremendous,” Streit said. “We’ve planted all of the right seeds, if you will, and we’ve laid the right foundation.”
Michigan is home to 20 venture capital funds, versus 15 as recently as 2008.
Streit said he’s aware of several more funds that have been formed in Michigan in the last three years. As those investors complete fundraising and begin making deals, he believes the number of active VC funds in Michigan and the deal flow could both perhaps double over the next five years.
“Right now, there’s been a ton of stuff going into the funnel. It just hasn’t made its way to the bottom of the funnel yet,” Streit said. “I think over the next five years, we’re going to see Michigan go from kind of a bottom quartile venture community to a much, much more active community as more of these deals are reported and documented.”
In addition to the funds based here, another nine that are based in other states have an office in Michigan to scout for investment deals. That’s two more with offices in Michigan than in 2011, including Illinois-basedOpen Prairie Ventures that opened a Kalamazoo office last July and now manages the $65 million Southwest Michigan Life Science Venture Fund.
Venture investors in 2012 put $242 million into 33 deals in Michigan, surpassing pre-recession levels and easily exceeding the $84.75 million invested in 36 deals in 2011, according to the MVCA report. The investment total was skewed somewhat by three large deals in southeast Michigan that accounted for about half of that amount and involved later-round investments, which are typically larger.
Thirteen of the investments last year went to startup companies that received venture funding for the first time, according to the MVCA.
The 2012 dealflow compares with 38 investments made in Michigan-based companies in 2011 for $191 million.
The average size of Michigan-based ventures fund grew to $43 million from $41 million.
The health care and life sciences sector continued as the top industry for VC investments, garnering 45 percent of investment dollars. Companies involved in advanced materials and manufacturing received 41 percent of the amount invested, followed by information technology firms at 11 percent.
The gains made in 2012 elevated Michigan to a fourth-tier state in venture capital. The state’s ranking nationally improved to 15th from 25th.
Mark Sanchez, MiBiz.
