Out-of-state investor on why Michigan is an attractive bet
Venture capital flow into Michigan has been steadily increasing since 2008, but the state saw a remarkable uptick last year. According to a report released last month by the National Venture Capital Association and PricewaterhouseCoopers, venture capital investment in Michigan nearly doubled, up from $111 million in 2013 to $219 million last year.
As more investment comes into the state from around the country, we wanted to get a sense of just what out-of-state investors like Blair Garrou found so attractive about Michigan’s start-up ecosystem.
Garrou is a partner and co-founder of Mercury Fund, which invests in software and science-based start-up opportunities, focusing on technology innovation that originates from the middle of the country. It first became involved in Michigan in 2006, and last year Mercury Fund opened an office in Ann Arbor.
Garrou says 24 percent of their last fund was spent in Michigan, more than any other state besides their home-base of Texas. He expects that trend to continue with their latest fund, which is more than $100 million.
Garrou explains why Michigan is a good place to look for investment opportunities and what its startup ecosystem still needs.
Answers compiled and condensed from email and an interview on Stateside with Cynthia Canty. You can listen to the entire interview below.
What attracts you to Michigan and to invest in Michigan companies?
Blair Garrou: Michigan has several of the key ingredients that contribute to a vibrant startup community for seed and early-stage investors:
- Michigan has a large commercialization gap, which is the difference between research and development (R&D) dollars spent versus venture capital dollars invested. And if you think of R&D in Michigan, it not only comes from universities and research centers, it comes from industries. And across the U.S., there is no larger commercialization gap than in Michigan, and we think Michigan is still untapped for venture opportunities.
- Multiple strong university ecosystems, so that we can find young talent to hire for our start-ups.
- A highly motivated economic development effort that a lot of state and local governments have put in place.
- An active entrepreneurial community, especially in Ann Arbor and Detroit.
- A growing set of investment partners, including angel investors and angel investment networks. In particular, we are most excited about Michigan’s strengths in information technology, specifically in startups launching the next generation of industrial software, and life sciences, particularly in biosciences and healthcare IT.
What, if anything, gives you pause about investing in more Michigan companies?
BG: The largest risk factor for investing in Michigan is the ability to take a technology company to scale. Specifically, can a tech company hire the right people, at the right time, to make the startup a success? There have been multiple successes in Michigan, but it needs more to build a critical mass of talent.
What could improve Michigan’s investment culture and start-up scene that you don’t see happening?
BG: Many people believe that more venture capital is the answer to bolstering the Michigan startup economy. Those VCs who experience it know that it’s a talent issue – not a capital issue. Areas of the country with more experienced tech talent are the areas that attract the most venture capital, plain and simple. So to improve Michigan’s investment culture, I would first look at the programs that are attracting and retaining talent to the state, and double down.
Finish this sentence: In order to reach its full potential, Michigan’s start-up ecosystem really needs …
BG: I would modify your question to read, “In order to start reaching its full potential…” And I would answer it by saying, Michigan’s start-up ecosystem really needs large, angel and venture-backed exits – “big wins” -- that produce dozens of startup-employee millionaires that will reinvest into the ecosystem with their talent, experience, and capital.
A great example is what Groupon did for Chicago. Say what you will about their success, when they went public, it produced so many millionaires, and there were so many people educated around that type of marketing technology, that dozens and even hundreds of people have now gone off into other start-ups, or they’ve started their own, or they’ve funded their own.
I think Michigan needs some software service wins; it needs some next-gen of industrial manufacturing software wins; it needs more healthcare wins like HandyLab Inc., which was a great exit.
More of these will produce that ecosystem of entrepreneurs and angel funding that then just starts that fly-wheel effect, which is what helped these other regions like Chicago, New York, Boston, L.A. and San Francisco to be such successful tech centers.
You recently opened a satellite office in Ann Arbor. What was your thinking behind that move?
BG: We are one of the most active venture funds in the Midwest, and the only venture fund that focuses exclusively on the entire middle of the U.S. We’ve always had a strong presence in Texas and the Southwest, but we needed to travel constantly in order to “cover” the Midwest. A few years ago we made the decision to hire a partner and open a Midwest office. We looked at Ann Arbor and Chicago as potential locales. We ultimately decided on Ann Arbor because:
- It is centrally located from a Midwestern standpoint;
- It had an airport whose planes were on time more than not (sorry, Chicago);
- It included a major university ecosystem, and;
- Our new employee and office would be partially funded by the investment of the Venture Michigan Fund into Mercury.
Blair Garrou is a partner and co-founder of the Mercury Fund, a start-up venture capital firm based in Houston that opened an Ann Arbor office in 2014.