When Paul Doyle moved to Grand Rapids from Chicago in 2001, he faced a bit of a stigma as an entrepreneur looking to launch high-tech startups.
The founder and CEO of Grand Rapids-based Verify Valid LLC, a four-year-old tech company that provides electronic checks via the Internet, Doyle says the atmosphere today in Michigan for entrepreneurs who are raising capital has improved dramatically. Raising capital for a business has never been easy, but the process for Michigan companies is as different as night and day compared to just a few years ago, Doyle said.
The ability to raise capital today, especially in this market, is orders of magnitude more possible and achievable than ever before, said Doyle, who formed five startup companies in the past decade and a half. What the entrepreneurs experience today is so vastly improved than what it was like as recently as five years ago. An entire transition has occurred, in my opinion.
In particular, investors are much more willing to put money into a high-tech company like his, he said.
Doyle so far has raised a little more than $2 million for Verify Valid, $500,000 of which came from Start Garden, the $15 million fund started by Rick DeVos in Grand Rapids. Doyle has also tapped into private individuals and family offices and now seeks to raise another $3 million to $5 million this year for his company.
His experience reflects how capital is more accessible for startups and growing businesses today if a company has a compelling story to tell.
Another year of progress
Evidence of that change comes from an annual report on angel investing and venture capital investing in Michigan, which found the sector grew further in 2013 and continued the progress of the past several years.
There were 23 venture capital firms based in Michigan last year, up from 20 in 2012 and from 16 five years ago, plus another 10 based elsewhere that had a presence in the state, according to an annual research report issued by the Michigan Venture Capital Association.
The Michigan-based firms collectively had $1.65 billion in capital under management last year, up from $1.5 billion in 2012 and $1.0 billion in 2009. The total amount of capital under management in the state, when including out-of-state funds that operate here, reached $4.0 billion in 2013.
Michigan also has significantly more professionals working in the venture capital field, 81 as of 2013 versus 44 in 2009, according to the MVCA annual report that offers a detailed look into the state of venture investing in Michigan.
Michigan has positioned itself as a state of innovation that has created an attractive environment for completing VC deals, states the report. Relative to the national landscape, from 2009-2013, the Michigan VC community has demonstrated strong growth in key metrics, far outpacing the national VC landscape over the same time period.
The average size of venture capital funds based in Michigan was $42 million last year, an increase of 7.6 percent from $39 million in 2009, and the average amount of capital under management by each fund grew 5.5 percent during the same period to $76 million.
Nationally, the average fund size declined 1 percent to $144.9 million.
Venture firms based in Michigan had 103 active portfolio companies in 2013, an increase of 66 percent from 2010.
Eleven of the existing venture firms in Michigan are now involved in fundraising, according to the MVCA report. Seven of them are seeking investors for their first fund and four are raising for their second, third or fourth funds.
Room for Improvement
The growth in the availability of capital at all levels in Michigan has unlocked many opportunities for growing companies and startups, sources told MiBiz.
If you have a company and a good story to tell, you’ll find the money, said Remos Lenio, a managing director at DWH LLC in Grand Rapids who works with companies seeking to raise capital.
Yet even with the growth in VC and angel investing, there remains much more to do, Lenio said.
We are a lot better than we were 10 years ago and better than we were five years ago, but we’re not where we need to be, Lenio said. There is still room for improvement.
MVCA Executive Director Carrie Jones, in fact, noted in the report that the industry cannot let up. The association survey of venture capital investors based in Michigan found that their portfolio companies will need $260 million in additional capital within the next few years and that the firms had only $109 million reserved for follow-on investments.
While all indications point to the long-term vitality of the entrepreneurial ecosystem in Michigan, we still have work to do to ensure that there remains a robust capital continuum for Michigan’s entrepreneurs and their growing companies, Jones wrote in the annual report. We must build on the momentum our member firms have created in fundraising and deal pipeline development in order to keep Michigan a premier Midwest, and indeed national, venture capital center of excellence.
Gov. Rick Snyder, a former venture capitalist from Ann Arbor, also cautions against complacency at a time when VC and angel investing in Michigan are beginning to achieve critical mass that can lead to more growth.
If you go back a decade or so, we were so small in Michigan in terms of venture capital (that) it didn’t have enough critical mass. Now it can become a magnet to help draw in more people, more investors from around the country and around the world, and we have a very strong base to build on, Snyder said. We should be very excited about the progress that we’ve seen, but we shouldn’t be complacent or content about it.
Snyder’s advice for the industry: Stay on the gas and see the trends continuing to get better and better. There’s a lot more opportunity.
Expanding the ecosystem
The greater availability of startup capital is important as the state business and entrepreneurial climate improves. The latest report card from MiQuest an organization formed earlier this year through a merger of the Small Business Foundation of Michigan and Great Lakes Entrepreneur’s Quest that was known for its annual business plan competition ranked the state’s entrepreneurial climate as sixth-best in the nation, up from 41st as recently as 2008.
The report card cited improving access to capital in the startup and early stages as one of the keys to improve the state’s entrepreneurial climate. The report card ranked Michigan 17th in the nation in access to seed and early-stage venture capital, versus 39th in 2002. The state ranked 19th in later-stage and expansion venture capital, up nine places from 11 years earlier.
The improvements in the state’s entrepreneurial climate and access to capital go hand in hand, Snyder said. As both improve, he expects Michigan to draw more outside investors interested in investing in companies in the state.
You need the whole ecosystem to work well, Snyder said in an interview with MiBiz. That’s the draw for capital around the globe, and we’re going to see more and more of that come to Michigan.
Across Michigan last year, venture capitalists funded 40 deals for $120 million, which compares to 33 deals for $242 million in 2012. The number of deals was the highest ever since the MVCA was formed in 2002.
Angel investing in the state dipped in 2013 from the prior year, although there are more high-net worth individuals involved in it than ever before.
The nine angel networks and groups in Michigan put $9.9 million into 36 deals last year, which compares to 40 deals for $12.5 million in 2012. The groups combined had 270 people involved in angel investing, a 12 percent increase from 2012.
The companies that received angel funding last year went on to raise more than five times the amount of capital through other sources, the MVCA report states.
Since 2007, angel investors in Michigan have put about $60 million into startup companies. Angel investments back 116 active companies, a 137 percent increase from five years earlier.
Angel funding is clearly a catalyst to early-stage growth in Michigan, both as a tool for direct investment and as a means to grow a fledgling company’s funding base, the MVCA report states.
More than just a check
Sometimes the greater availability of capital from venture capital and angel investors isn’t just about the money, however.
Silikids Inc., a Traverse City-based company that produces consumer products for children made from silicone, is about to close on a $400,000 investment from Start Garden and two angels groups, Northern Michigan Angels in Traverse City and Midland-based Blue Water Angels.
As the company sought capital, it occasionally found that it didn’t meet a prospective investor’s investment criteria, said founder and CEO Stacey Feeley. Yet in many instances, Feeley would come away from a meeting with contact information for other potential investors or for people who could offer assistance to the company.
Feeley, who moved from Los Angeles to Traverse City a year and a half ago, said she found a receptive audience of investors in Michigan who were at least willing to listen. The state has an environment where entrepreneurs can access a support network to develop a new product or grow their companies, she said.
Even if someone’s not going to invest in the company, they always want to help you. They’d say, I have this good contact maybe they can help you, Feeley said. That happened a lot. They were willing to listen and they absolutely want to see people do well.
Silikids, formed in 2007, sought capital to support the launch and marketing of a new line of products made from silicone rather than plastics and to create a brand identity, she said.
A change in the culture in Michigan, with the emergence of a greater support network for entrepreneurism and the growth in available startup capital, is perhaps the single biggest difference that Verify Valid’s Doyle notices today compared to a decade ago.
He cites the high-tech sector as an example. When Doyle first moved to Grand Rapids 13 years ago, right after the tech bubble burst, “people would have thought it imprudent†to invest in a technology company such as his.
What’s changed the most here is the recognition that investing in early-stage businesses is a reasonable and appropriate thing for people to do, he said. The average investor now looks at investing in high-tech as something that makes sense for them to do, to be aware of, and to find a way to consider participating.
