Growing a venture capital community isn't always best measured by the bottom line of investments made. At least that's the point Kelly Williams, managing director of Credit Suisse's Customized Fund Investment Group, makes.
Credit Suisse is the investment firm that heads up some of Michigan's 21st Century Jobs Fund venture capital programs, such as the Venture Michigan Fund. Williams is one of the key people who helps oversee them, and she spearheads Credit Suisse's 3rd annual Private Equity Conference in Detroit, which drew record attendance.
"The reason we choose Detroit is because Michigan is a very important client to us but also because Michigan has been doing an excellent job supporting small and emerging managers and focusing on in-state investment," Williams says. "For Credit Suisse this is a natural place for us to hold this conference."
Coincidentally, the conference was held just after venture capital results for the first quarter of 2009 in Michigan were released, and they weren't encouraging. But Williams pointed out how quarterly reports weren't an accurate representation of actual venture capital activity (annual reports are a better gauge in her opinion) because they sometimes miss big investments, like the $36 million Ann Arbor-based Lycera recently took in, by a few days.
Williams also pointed out that the number of venture capital managers in the state has doubled, and their track record is growing. That will give bigger venture capital firms in California and Massachusetts more reason to invest in Michigan and fewer reasons to try and pry away some of our most promising start-ups.
Metromode News Editor Jon Zemke recently chatted with Williams about the state of Michigan's venture capital community, how it has grown and what can be done to improve it further.
Michigan has a lot of institutional wealth but remains stuck in the middle of the pack when it comes to venture capital. Why does this exist and what can be done to change it?
I would say that in terms of being stuck in the middle of the pack, I'm not sure that's a fair characterization. I think that often times people focus on the rankings that come out on a quarter by quarter basis in terms of how much venture capital goes into companies. The way that private equity and venture capital are deployed, it really can't be measured that way. It doesn't go in equal installments quarter to quarter, so it does somehow skew it.
Overall why would a state like Michigan have less venture capital deployed than perhaps there is on the coasts? I think there are some natural reasons for that. There is Silicon Valley. There is Boston, which has a high concentration of technology-oriented companies, which really have been the primary industry in those regions, fueling growth for those regions. I would contrast that with Michigan, which has been traditionally more of the leader in manufacturing.
I think that the programs that are in place in Michigan right now have set the stage for Michigan to really attract new technology and technologists and venture capitalists. Look at all of the wonderful raw material Michigan has in terms of technologies coming out of its world-class educational institutions. Coupled with this [is a] long history of outstanding technology development and manufacturing that exists in the state. It's really the main catalyst that has drawn more venture capital dollars to the state.
Do you think the presence of a major new economy firm like Google will help make Southeast Michigan more enticing to some of the larger venture capital firms on the coasts?
I think so, and part of the phenomenon that tends to happen --and this is very much the case in Boston and Silicon Valley-- is that you start to develop a culture of entrepreneurialism. As young people begin their careers at a very entrepreneurial firm like Google --and certainly the generation of kids graduating from school now have grown up in that technologically innovating culture-- they much more willing to spin out with their own new ideas and start their own firms. Look at the young people who started Facebook. It's not unusual idea for them to spin out of a company like Google, which is quite a young company to begin with, and potentially start their own company.
I think having these technology-oriented companies in the state that are founded and really run by those type of people with that kind of culture naturally seeds new business ideas and encourages people to think in a entrepreneurial way. This generation is much less afraid and has much less of a view that it's going to spend its entire career with one company.
What is one thing Michigan could do to encourage more venture capital investment or help grow its own venture capital community organically?
I actually think Michigan is doing it through a variety of programs, like the Venture Michigan Fund, the 21st Century Investment Fund, Invest Michigan. The state has really laid really good ground work for not only developing the existing venture capital base in the state but attracting new managers to the state.
In terms of the Venture Michigan Fund and the 21st Century Investment Fund, which we manage, we have been able to attract a number of venture capitalists and private equity investors from outside of Michigan to come to the state and set up offices.
I think as much of a goal for Michigan should also be the development of its own financial services community and a really high-quality, very sophisticated venture capital/private equity community as well as developing the underlying industries that its trying to target. I think Michigan is already on track to doing that.
But are there funds that could be better spent, laws that could be rewritten here to give us an extra boost?
I don't know that I am qualified to answer that in terms of the legality. I think that question is better put to someone at the MEDC.
The traditional Michigan approach to venture capital has been to be careful, modest and, well, far from bold. This contrasts greatly with California's Darwinian model of investing in lots of companies with the idea that a few will hit big. It'd be hard to argue that our approach has been more successful. So, does the Michigan way of doing things need a reboot? If so, how do you do it?
I would not necessarily agree that there is a Michigan way of doing that contrast with the California-style of venture capitalism. Everyone needs to keep in mind that venture capital is a very risky asset class by its nature. You're investing in start-up companies where the survival rate is a much lower rate than traditional private equity investments. When you're a fiduciary and you're managing money for pension plans and endowments and individuals you have to be very prudent in terms of the risk that you're taking. I think that the venture capitalists in Michigan are very sophisticated. I think that they bring to bear great tools, great investors. I don’t see them backing off at all in terms of the amount of capital they put out. I think they are prudent in the terms of the companies they back and holding those companies to the milestones that they need to achieve. All of those things are geared toward success.
You have probably heard of the venture capital world take what some call a spray-and-pray approach, which puts as much money out into as many little companies and prays that one of them survives. I don’t think anybody who is a sophisticated private equity or venture capital investor would tell you that is the right way to invest.
The MEDC has pinpointed five industries it will support through state investment, such as life sciences, homeland security, alternative energy. Is it a wise approach to limit ourselves to this or should we look at it a different way?
Just to be clear, I think while the MEDC and also the governor have articulated a number of sectors that they particularly want to focus on there has been no limitation at all. Certainly not in terms of the programs we manage in terms of encouraging or supporting new industries within the state. Certainly there is a focus on those and a desire to find top-quality investments in those areas, but there certainly hasn't been any limitations. I don't think the MEDC would ever discourage it if it was in a sector like education or something else that didn't fall squarely into those sectors. That certainly hasn't been my experience.
If you were at another state that isn't as far along in the venture capital game as we are, what would you point to Michigan and say that's what you should be doing?
I think Michigan is at the top of the lead tables in terms of what they're doing to encourage innovation in the state. I think that comes through a number of the programs that have been implemented by the MEDC to identify and encourage companies that are in the state and also encourage companies to relocate in the state. I think the investment programs that have been set up throughout the state to invest both in venture capital managers as well as alongside of them have really made a big difference.
I would say one of the more innovative things that Michigan has done is the establishment of the Invest Michigan program, particularly the growth portion of that program that focuses on putting capital directly into companies alongside managers into the state. I think that is something that can really provide a unique opportunity, not only to support the companies but also to give them capital from the state so they don’t have to go to the coasts necessarily to find additional rounds of financing. That really encourages those companies to stay in the state.
Jon Zemke is the News Editor for metromode who tracks venture capital statistics with the same sort of passion that baseball announcers look up on-base percentages. His last feature for metromode was Preservation vs Demolition.
Photos:
Kelly Williams in a meeting on the campus of Wayne State University
All photographs by Detroit Photographer Marvin Shaouni Marvin Shaouni is the Managing Photographer for Metromode & Model D.