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January 16, 2009
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Will Michigan's Economy Bounce Back? U-M Biz School Experts Say YES!!!
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(EDITOR'S NOTE: The following article is presented in cooperation with the University of Michigan Ross School of Business. The article has been condensed to fit the MyTriCityNews.com format.)
With Michigan's economy struggling under the cloud of a subprime mortgage and housing foreclosure crisis, coupled with slowing business activity and mounting job losses, the 2008 Michigan Growth Capital Symposium offered an optimistic outlook for the state's eventual recovery.
Tri-city area entrepreneurs and business start-ups have resources in the venture and angel investor field who may take cues from the symposium held last spring in Ann Arbor.
Keynote speakers, Alan G. Walton of Oxford Bioscience Partners and Kenneth R. Pelowski of Pinnacle Ventures, offered their views of biotechnology and venture investing opportunities, respectively, and both received the Leaders and Best Award.
"Per square foot, there is more enthusiasm and positive thinking about Michigan and the Midwest here than anywhere else in 500 square miles," observed Dr. David J. Brophy, director and founder of the symposium and professor of finance at the Stephen M. Ross School of Business at the University of Michigan.
The sequencing of the human and other genomes, and the development of associated technologies, have been the driving force behind the meteoric rise of biotechnology, said Alan G. Walton, the senior general partner in Oxford Bioscience Partners, a life sciences venture capital firm with offices on the East and West coasts.
During his keynote remarks, Walton predicted that biotechnology advancements will bring major changes in four key areas over the next 50 years. "Most major human diseases will be treated, controlled or prevented by biotechology products and methods," Walton said.
From a venture investing perspective, Walton observed there are two key investment strategies in the biotechnology sector. "One is to come up with the newest, latest and best thinking that is enabling technology, or you can head down the public route, although the public isn't interested in technology and doesn't understand it," he said.
Commenting on the most likely commercial successes in the energy side of the biotech equation, Walton dismissed the hydrogen highway as "dreaming" and said, "Unfortunately, we'll have to go to non-corn-based ethanol in the short run and use that until we can build nuclear reactors that will take over, as they have in France and Japan."
Michigan's skilled workforce, plentiful natural resources, strong research community and deep manufacturing expertise in the automotive and chemical industries provide a solid platform for creating a thriving clean tech sector, said a panel of private and public technology investment managers and economic development leaders commenting on "creating a clean tech cluster in Michigan."
"We think there are three or four major sectors that present opportunities," said Ananth Ananthasubramaniam, manager of technology investments for DTE Energy, which has invested $100 million in the alternative energy space.
The "greening of the grid" will stimulate a growing market for renewable energy sources, such as solar, wind and biomass, he said, and increased concern about energy efficiency, management and storage will drive new technologies in those areas.
Alternative fuels also offer great possibilities for innovative companies and forward-thinking venture investors. Through its Centers of Energy Excellence initiative, the Michigan Economic Development Corporation is striving to grow a clean tech industry cluster by attracting high-potential companies to Michigan, connecting them with the right partners and then brokering the deals, explained Douglas Parks, vice president of new market development.
Establishing strong investment partnerships is critical for entrepreneurial companies in the highly competitive life sciences sector, but this can be challenging. "As the CEO, you are going to be raising money all the time," observed Douglas Onsi of HealthCare Ventures. In cases where there is not be a good fit with venture investors, Kjellson suggested exploring alternative funding sources, such as foundations, grant-making nonprofit organizations and government agencies.
Venture capital investments play an important role in the diversification of overall investment portfolios, but fund managers often differ on their selection criteria and allocation strategies. Kevin Fedewa of the State of Michigan Retirement System reported that declining fund sizes have resulted in "a pretty big hit to our exposure to venture." Although most of the venture funds in which he invests are on the East and West coasts, he noted that general partners are starting to fly to Michigan and the Midwest.
In venture capital investing, the top firms tend to produce the majority of industry profits and are able to perpetuate their high-flying success through repeat business, said Kenneth R. Pelowski, the founder and managing partner of Pinnacle Ventures, a Palo Alto, California-based private venture capital fund.
This top-heavy scenario presents an interesting dilemma for companies in Michigan that want to get connected with one of those top 25 firms, Pelowski observed. "It's possible, but it's not easy," he said, noting that some bright spots appear on the horizon. "I believe there is more activity in Michigan than most people are aware of, and certainly there are some well-known exits.
There is starting to be some recognition in Silicon Valley of what we call high quality deals and exits in the state. That's really important, because without it, it's really hard to attract capital."
Pelowski, who grew up in Michigan and received his electrical engineering undergraduate degree and MBA from the University of Michigan, also noted that University research efforts and state initiatives, such as the Michigan 21st Century Investment Fund, are helping to move things in the right direction.
Pelowski said what really matters most is that a company has to make a great product -- not a good product, not a nice feature extension of a product, but a great product. And it has to have a big market -- a billion a year. Below $500 million, it is not going to be ready, and from $500 million to a billion, it's possibly ready." Without these large opportunities, Pelowski said, the venture capital community cannot make the returns it needs.
Looking forward, Pelowski predicted that the trend toward venture investing in the healthcare and energy areas will play out well in Michigan, in part because the University has doubled its research spending in those two areas and the state is known for its core competencies in alternative energy, transportation and healthcare.
Emerging technologies offer a nearly unlimited horizon of entrepreneurial and venture investing opportunities, but tapping into that deep pool of possibilities requires creative thinking, perseverance and the right synergies, said a panel of industry experts.
"We invest in early stage companies with really disruptive technologies," said Annette Finsterbusch of Applied Ventures, who has focused on plays in energy storage, energy conversion and solar and non-solar fuel cells.
With a background in software, business advisor and investor John Lovitt said he looks for products that represent the marriage of different technologies to solve some problem or to capture the "explosion of knowledge."
After 35 years at Johnson Controls, Thomas Dougherty believes many opportunities can be leveraged from the automotive sector where his new startup company, Monolith Engines, is developing specialized batteries and capacitors for use in electric and hybrid cars. Although rising gas prices will likely foster more creativity, Dougherty expressed concern about the long lead times for product development and the "missing conduit" to get new products through tier 1 and 2 suppliers to OEM manufacturers.
Andrew Basile Jr., a West Coast attorney, said that Michigan firms could get more traction by sticking with secondary and tertiary entrepreneurial activities, such as service companies.
Serial entrepreneur Vinay Gupta, who is now on his fifth startup, Janeeva, said the decision often depends on whether a great deal of money is required to bootstrap a new venture and whether the entrepreneur is willing to give up equity in return for venture financing. Venture capitalists are looking for good deals that will pay off for their own investors. "Can your business be sold for $250 million?" asked Jeff Bocan of Beringea. "VCs want to make 10 times their money back, so that's the point where a deal becomes attractive."
Faced with overheated competition in Silicon Valley and other research corridors and triangles, venture capital investors are turning their attention to Michigan and the Midwest, a panel of venture investors said. "We don't want to compete on the basis of term sheets with wonderful firms along Boston's 128 Corridor because deals are too high priced," said Jeanne Sullivan, a general partner of StarVest Partners in New York City. "We want to look for companies in underserved areas where people are looking for investors. We're seeking strong entrepreneurial and operating experience that comes out of the technology area."
For more information, contact: Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu
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