Chris Rizik - Post 3: The Role of Advancing Venture Capital in Michigan
Posted By: Chris Rizik
Posted: 6/29/2009
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