Chris Rizik is the chief executive officer of the Renaissance Venture Capital Fund, a venture capital fund of funds formed in late 2008 by a consortium of several of Michigan's largest corporations, working through Detroit Renaissance. Chris previously served as a co-founder, partner, and board member of nanotechnology holding company Ardesta, LLC, and was a managing director of Avalon Technology Fund, Michigan's largest venture capital fund and the recipient of three consecutive "Deal of the Year" awards by the Michigan Venture Capital Association.
Prior to joining Avalon, Chris was a senior partner with Dickinson Wright PLLC, one of the Midwest's oldest law firms. He also passed the Certified Public Accounting examination and worked at PriceWaterhouse Coopers. He is also the founder of SoulTracks.com, America’s most popular soul music online magazine.
Chris currently serves as Chairman of NextEnergy, the state of Michigan's advanced energy economic development organization and accelerator. He was also the founding chair of the Michigan Microsystem Alliance (now the Michigan Small Tech Association) and is a board member and capital committee chair of the Michigan Venture Capital Association. Chris was a Crain's Detroit Business magazine "40 under 40," honoree, in recognition of outstanding business leaders under the age of 40.
So can we really successfully use venture capital to transform Michigan? As I mentioned in an earlier blog, Michigan has an incredible advantage via the world-class research and development going on here -- more than nearly any other state – and a high concentration of sought-after engineers. But Michigan, like other Midwestern states, has a shortage of experienced entrepreneurs to take the lead. Those who are here (and those former Michiganders who have succeeded elsewhere and are interested in returning) must engage in the process, leading and serving as mentors to the talented young people coming out of our colleges.
The good news is that there are literally thousands of smart young men and women with great ideas and boundless energy, if not a lot of experience. With strong mentorship and the right incentives, in 20 years we could create four new generations of entrepreneurs, increasing geometrically our capabilities to establish and grow innovative, powerful companies in Michigan.
There are seeds of this transformation taking place now, as groups like Automation Alley and Ann Arbor SPARK are creating programs to help retain and recruit successful entrepreneurs. But much, much more must be done to address the "management talent" issue on a statewide basis.
The other major missing ingredient is money. There is a chronic shortage of venture capital in Michigan and it is getting more pronounced. Last year, a record quarter of a billion dollars was invested by venture capitalists in Michigan. But demand by Michigan entrepreneurs for venture capital dollars is more than five times the amount available, and the gap is growing. Using historical data, that current unmet need alone is a lost opportunity for some 50,000 long-term jobs paying an average annual salary of over $70,000. And the capital gap is getting worse.
To the credit of our state government, over the past decade more than $300 million has been pumped into venture capital by the state; but it is politically difficult for term-limited lawmakers to place sufficient emphasis on an industry that will yield its biggest results years after those lawmakers have left office. For venture capital to help our state reach the goals of a diverse economy, good jobs and high standard of living, it is going to take a particularly brave and patient state government, willing to make a sustained commitment to a system that will yield results primarily benefitting our children (or at least our younger siblings).
And it will also take a much greater financial commitment by other organizations that routinely deal with longer time horizons – foundations, university endowments and resident businesses – to help provide the key financial support that will turn our venture capital community into a powerhouse.
Some of these groups have already stepped forward and boldly taken leadership roles investing in our state's fledgling venture capital industry, but others have largely stood on the sidelines. A number of Michigan's most important institutions have used their resources to invest in venture capital, but only outside of the state borders. It will take a more uniform, meaningful commitment to Michigan venture capital by these community leaders if we really want success.
Eight Michigan corporations helped create the Renaissance Venture Capital Fund that I am honored to lead. Our fund is the first of its kind in Michigan; with millions of dollars committed by these leading corporations, we are investing in the state’s best venture capital funds and are attracting great venture capital funds from other parts of the country to set up shop in Michigan. The result is more venture capitalists looking to invest in more young companies in the state, beginning a process that will strengthen us as a state and lead to the types of growth and job opportunities that have eluded us for too long.
What we are doing at the Renaissance Venture Capital Fund is necessary and positive, and it is already being viewed as a model for other parts of the country. But it is not sufficient by itself. To be truly transformative, venture capital in Michigan needs dramatically more engagement by the business, philanthropic, educational and political leadership and the commitment of hundreds of millions to billions more dollars – dollars that can lead to financial returns for these investors and the "double bottom line" of diverse economic growth for our region.
In the end, here is the hard truth: There isn't an easy or short-term fix for our economic problems. But if we have the commitment and patience, venture capital can be a major long-term driver to make our economy one of which we're both excited and proud. If we had started in earnest down this path in 1990 we would look like an entirely different state today.
But we didn't and it doesn't do us much good to look back except to increase our resolve to do the right thing now. We need firm commitment from our regional leadership to work together toward a common goal and to put their resources where their mouths are. We know it will take 15-20 years to get there, but we have to stop delaying. Let's start the clock today.
Venture capital has been proclaimed by many politicians, business writers and economic development organizations as the savior of the U.S. economy, able to deliver economic diversity, high paying jobs, and a "coolness" factor that many regions of the nation are starved to find. And there are some statistics to back up the frothing: Over 10% of the jobs and 18% of the GDP in the United States today are in companies with venture capital origins, and an entire generation of technology companies, from Intel to Google, are trophies of the venture capital community.
At a time when states are throwing literally hundreds of thousands of dollars in incentives for each job created in manufacturing, statistics show that significantly smaller investments in venture capital yield more and higher paying jobs and companies that pay more taxes to states than their "old economy" counterparts, all the while delivering returns to venture capital investors that materially outperform the stock market.
To understand the life cycle of a venture capital-based company, let's use an example of an innovative product company that actually mirrors a few of successes we've had in our region. In the early years, the young company focuses on developing the product technology through a series of stages, from "proof of concept" to an operational, if unfinished, prototype, through several continually improved versions of the prototype, with the ultimate goal of creating a finished product that works better than its competition, meets a market need, can be manufactured with consistent quality, and is profitable when mass produced. With each progression through this development cycle comes increasing employment and positive economic development effect.
In the early years, the company may consist of just a handful of technically-oriented employees, but the maturation of the business leads to general administrative roles (e.g., finance, secretarial, human resources), then to production (manufacturing and assembly) and ultimately to distribution (sales, marketing, logistics). Growth tends not to be "straight line," but rather occurs at an increasing rate over time, particularly as the product moves into the market. The result of this process (which typically can take a decade or more) is a solid company creating an important product for society, providing hundreds or even thousands of great jobs to an energized workforce and paying taxes that support state and local government.
So venture capital is like baseball and apple pie, right? Well, sort of. The results obtainable from venture capital can be game-changing, from the companies and jobs created to the types of talented, professionally flexible employees trained in venture-backed start-ups. But it isn't magic. Venture capital is a logical system that rewards innovation and accepts the failures that come with educated risk-taking, and it has many elements that are a far cry from the approach to business that is typically taken in mature economies like Michigan's.
So for venture capital to take its rightful place in the turnaround of our state, it will require a steady, consistent commitment and a long-term view of success. To use a sports analogy, to create a world class soccer team we must first establish a top notch little league that develops elementary school students. If it is done right, the little league will become a foundation that will lead to strong middle and high school programs and ultimately college and professional leagues that will yield a generation of great players 15-20 years from now.
There really aren't any shortcuts that lead to lasting success, because success is preceded by the long-term creation of a culture and infrastructure that will support success. In the venture capital business it means creating a generation of trained entrepreneurial managers (CEOs, CFOs, marketing staff, etc.), professional service providers (i.e., lawyers, HR professionals and accountants), university technology transfer specialists and investment and banking professionals, all of whom have the relevant experience in creating and quickly growing technology-based companies in a changing world.
But most of all, it means transforming a low-risk culture – a culture that has resulted from two generations of insulation by the unparalleled success of our large, institutional businesses, where innovation and daring decisions are often suppressed or bogged down by bureaucracy. This is all a major challenge that will test our region's real desire for and commitment to change.
TOMORROW: CAN WE REALLY PULL THIS OFF? OUR CHALLENGE
There are many people who claim to know about venture capital and are willing to give their well-formed opinions on its pros and cons; but more often than not the folks talking the loudest about venture capital have the most confusion about what it really is.
"Venture Capital" is defined by the National Venture Capital Association as "money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors." That’s a pretty good definition, but I would define it simply as active private equity investing in promising early stage companies. The key thing to remember is that, in the end, venture capital is about buying stock and later selling it for (hopefully) much more than the original purchase price; and if all goes right, helping a lot of people along the way.
• It is active because, unlike when you or I invest in the stock market, investing by venture capitalists requires regular and intense follow-up. It typically involves significant commitment to assist the investee company with business strategy, financial planning, recruiting talent and even operations. A good venture capital investor will have a solid understanding of best organizational practices, of the challenges in growing a young company, and of the industry in which the company operates.
• It is private equity financing, meaning that the investments are generally in companies that are closely held by a few investors and have stock that is not easily sold (there is no public market for the stock until much later, if at all). So the investment is made with the understanding that it will likely be long term. It is not unusual for a venture capital investment to be held from five to eight years before having some kind of event where the stock can be sold, such as an initial public offering or a sale of the company.
• Venture capital is generally invested in early stage companies, nearly all of which are not yet profitable. A large portion of these companies don't have revenue yet and many have not even created a product, but are still in the prototype or even "proof of concept" stage. Not exactly the type of companies where you and I would want to invest our 401(k)s.
Because of the nature of the investment and the nature of the companies in which it is invested, venture capital investing is high risk, high return investing. It is not unusual for one-third or more of the companies in which a venture capital firm invests to go out of business, yielding nothing to the investors. But venture capital investing is portfolio based, with investors anticipating that their best investments will yield many times the amount invested, more than making up for the "dogs" of the portfolio and yielding, on a total portfolio basis, an attractive rate of return. Historical investment returns have generally supported this thesis, as venture capital has typically outperformed the public stock markets by a significant margin.
Here's the most important takeaway: Despite all of the odd nomenclature and mystique that surrounds venture capital, in the end it is about buying and selling stock, and hopefully making significant gains in the process. The complications come principally due to the lack of marketability of the stock over most of its life, the high risk, high return nature of the investing and the speculative nature of the companies in which a venture capitalist invests.
A surprise to many people is that only rare companies are appropriate for venture capital investing. That is not a judgment that other companies are not good businesses, but is more of a statement about the nature and requirements of venture capital investment – that is, the goal of selling stock at tremendous gains within a specific time horizon. That is why venture capital is often most associated with breakthrough technologies, where risk is high but where, if the technology concept pans out, opportunity is even higher. There are many good – even great – companies that are simply not appropriate for venture capital for any of a number of reasons, such as (a) a rate of growth that is not as steep as venture capital requires, or (b) the lack of a realistic IPO or attractive acquisition of the company in the next 5-8 years.
But where venture capital is appropriate, success can mean great returns to venture capital investors and a plethora of high growth companies to a geographic region, paying high wages to a talented workforce. Venture capital success brings so many positives, it is rightly treated as the kind of economic home run for which every state in the country is shooting.
TOMORROW: THE ROLE OF VENTURE CAPITAL IN ADVANCING MICHIGAN
We all know it's been a tough year to be a news junkie in Michigan. Not because of a dearth of news, but because of the abundance of bad news assaulting us from all sides. I won't go far into what you already know, which is that we are sitting in the most uniquely troubled economic time of our generation, and the effect of this on everyone around us is both palpable and troubling. Michigan has a problem, and our business and political leaders are rightly spending an awful lot of time proposing ideas to get us out of this mess we're in.
Tanya Muzumdar asked me to be this week's blogger because I sit with an unusual view of our region, its current state, and its future due to my three principal business roles. I am the chairman of NextEnergy, the accelerator and economic development organization that was formed by the state of Michigan earlier this decade to help develop Michigan into an international leader in alternative and advanced energy technologies. I am also the founder and publisher of SoulTracks.com, an internationally popular soul music website that serves a special role in connecting emerging singers (themselves small businesses) with potential audiences. But, to me, my most important role is as CEO of the Renaissance Venture Capital Fund, an innovative new venture capital "fund of funds" that was organized late last year by Detroit Renaissance and some of the leading corporations in the region as a way to spur entrepreneurial development in Michigan.
All three of my roles involve non-traditional and (hopefully) innovative ways of addressing business challenges our region faces. And we Michiganders are a pretty traditional lot in many ways, with a century of unparalleled success leading to a certain conservatism, even stodginess, in how we approach change. We've had such prosperity for so long, there was little reason to fix a machine that didn't appear to be broken. But broken it is, and we find ourselves seeking ways to both mend our problems in the automotive sector and, finally in earnest, promote other areas in which to develop and expand our economy. There are a number of tools and approaches we'll need, from tax reform to retraining, in order to accomplish this, but I'll spend my blog time this week talking about one of the most important elements: venture capital.
"Venture Capital" is seen by some as either the panacea for all problems our state faces or as a wolf in sheep's clothing – especially when it is confused with other investment vehicles that have often been associated with quick money, job losses and financial instability. In truth, venture capital is neither an immediate fix for an ailing economy nor a get-rich quick scheme. But true venture capital is an important – even essential – long-term, market-driven economic development vehicle for regions looking to grow, particularly in new technology fields and industries.
Recent studies have shown that companies with venture capital origins are now responsible for 10% of the jobs in the US and 18% of GDP. On average, these companies pay more taxes and create many more jobs (with much higher compensation levels) than their "old economy" counterparts. Not bad for an industry that is less than 40 years old. Companies ranging from Apple to Google to Starbucks were able to achieve their goals, especially during their early years, with the help of far-sighted venture capitalists.
Venture capital has been growing in Michigan over the course of this decade to the point where last year nearly a quarter of a billion dollars was invested by venture capitalists in Michigan-based companies. But even that accounts for less than 1% of the venture capital invested nationwide, and we have a long, long way to go to experience the kind of impact that Boston and Silicon Valley have seen.
Fortunately, we have in Michigan some of the basic tools that could make our state successful in venture capital: Strong research universities that are creating world-class technology, the richest collection of engineers in the world, and a skilled workforce that knows how to manufacture. What we have traditionally lacked is more intangible: an environment that cherishes risk-taking, management that has experience running fast-growing companies, and a nimble, aggressive approach to work. And perhaps more than anything, we lack sufficient venture capital dollars to invest in those ideas that are germinating in our universities and garages.
We formed the Renaissance Venture Capital Fund with the belief that venture capital can be a transformative force in our region, and that by bringing together capital and talent from our existing business, philanthropic, governmental and educational leadership we can accomplish a level of entrepreneurial success that has eluded us for the last half-century.
Our immediate challenge is to try to address our region's weaknesses and increase the amount of venture capital activity quickly, before we lose the incredible talent and educational resources that provide us the distinct advantages described above. In the next few days I hope to first demystify what venture capital is and then lay out a challenge for our region on how to use this important tool to move us toward a more economically prosperous future.
TOMORROW: WHAT IS VENTURE CAPITAL?