"Leading the cleantech revolution," or "Leveraging the intellectual property of our major research universities" -- such hopeful and visionary statements are just a sampling of various mantras that have echoed the chambers of Midwestern capitals and filled the pages of local newspapers for the past several years. In the face of the recent economic despair that has besieged the regional economy, numerous Midwestern politicians, economic developers and regional venture capitalists have been, somewhat counter-intuitively, touting the notion that Midwest states like Michigan actually present excellent, yet overlooked, venture capital investment opportunities (including yours truly, as I did in "America's Midwest: Cashless Chasm or The Valley of Opportunity?").
Skeptics (which predominantly include frustrated Midwesterners, some business journalists and dismissive coastal venture capitalists) have generally disregarded such optimistic economic proclamations as desperate political hand-waving and hopeful, yet hollow hype to win votes, mollify the economically depressed and justify their own existence. I can understand why one would be doubtful -- it is easy to be negative these days. But today, I write to tell you that the skeptics and defeatists look to be wrong, and we have some early evidence to prove it.
It has been nearly a year and a half since I moved my family from the venture capital scene and beaches of Southern California to pursue what I believed was a greener, relatively untapped entrepreneurial landscape of Michigan and the Great Lakes region. (The decision to do so was laid out in my first HuffPo blog post, "Five One-Way Tickets to Michigan, Please"). For those of you who don't know, the venture capital process is a long-term game -- it often takes 5-7 years to say with certainty whether we have done well with our investments. My firm is roughly two years into the process of investing our $100+ million venture capital fund into companies that are based in or that have operations in Michigan. With a couple of years of hard work under our belts, I feel comfortable sharing some initial data points to demonstrate that the opportunity is indeed real, though it is actually bigger and more diverse across the capital need continuum than we originally thought.
Let me be clear, I am not prematurely rolling out the "Mission Accomplished" banner. As I mentioned, it takes years before a venture capitalist can claim victory for their fund. Think of this more as a peek at the scoreboard in the third inning of a baseball game... Attaining "victory" in our case is generally a three-step process: 1) Find 12-16 promising, fast-growing companies consistent with our investment strategy to invest into; 2) Work with the management of those companies over several years to build them and position them to realize their fullest potential; and 3) Generate a significant financial return for our investors through the realization of profitable "liquidity events" -- the sale of our companies to larger companies or through an IPO. Here is a breakdown on how what we have done to date:
1.Executing the Investment Strategy -- finding and completing investments
Our investment strategy is to invest $2-8 million into mid to later stage companies that need growth capital to expand their products, services or to enter new markets. We are not doing early stage ventures (i.e., two guys and a powerpoint presentation) with this fund -- we felt the need for growth capital was particularly acute for growth-staged Michigan companies given the pronounced shortage of investment capital in the state.
A key assumption driving the aforementioned hopeful hype was that because of its manufacturing legacy and excess capacity, disproportionately high number of mechanical and industrial engineers per capita, existence of some of the largest research universities in the nation, amongst other things, the Midwest possesses many of the key elements for innovation, cost leadership and entrepreneurship to thrive, particularly in cleantech and health care.
To date, we have reviewed over 1,000 opportunities and have invested nearly $50 million into 12 companies (and have reserved another $25 million or so for further capital needs those companies may have). The breakdown by sector in terms of capital invested is roughly: Health Care: 42%; Cleantech: 33%, and IT: 25%. The proportional split of our portfolio indeed suggests the key assumption behind the hype is well-founded.
All 12 of our investments remain in good health and in all instances the core investment thesis (the reason we thought it was a good idea to invest in the first place) is still intact. Again, it is too early to break out the champagne, but we are on the right path and the early indicators give me the confidence to state that there are plenty of high quality opportunities to invest into in Michigan (and we aren't done yet!) -- it is no longer a hypothetical vision touted by a politician.
2.Building the Businesses and Positioning for Success
It is certainly premature to make definitive claims on this point, but I can say that all 12 of our companies have increased their revenues and/or are ahead of their technical milestones after the first year of our investment (some dramatically). Creation of jobs is a major metric of focus and natural benefit of venture capital investment. All 12 companies have significantly increased their workforce (relative to their size) and often times, given that our investment focus is on knowledge-based services or innovative technologies, many of the new hires are higher salaried jobs that contribute welcome increased tax revenue to shrinking state and local budgets. For example a recent investment, ReCellular, hired over 30 people within a couple months of receiving our fund's investment and is continuing to grow its business and its talent pool.
3.Generating Financial Return for Our Investors
To our investors, returns are the ultimate determining factor of success, and at this point it is way too early to tell how things will shake out. Suffice to say, we feel good about where we are at this point but a lot of hard work remains and hopefully we are graced with a little bit of luck along the way before we call it a day.
I have always been a person who takes pride in doing what they say they are going to do. Stating my intentions on a Huffington Post blog post a year and a half ago may have been a bold place to do it, and as such, I felt a sense an obligation to my readers to check in and let you know if we are doing what we set out to do. Indisputably, we have moved beyond the political hand-waving and the hopeful hype - we are finding great companies and putting the capital to work. Now we must continue building market leading businesses that can enable a significant financial return to our investors and to make a positive lasting impact on the communities where our companies operate -- it is then we can proclaim, "Mission Accomplished". So far, so good...