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By Nathan Peck | MiBiz
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GRAND RAPIDS — Looking to fill a gap in early stage venture funding in West Michigan, a group consisting of financiers, academics and economic developers are looking to leverage the intellectual property of West Michigan to draw entrepreneurs to the area.

With $10 million behind them, the group is looking to the Michigan Accelerator Fund 1 (MAF1) to bring life sciences and advanced manufacturing startups to the region. The fund received $6 million in seed money from the state’s 21st Century Jobs Fund, a program of the Michigan Economic Development Corp., with the remaining financing coming from West Michigan investors, research organizations and economic development organizations. The total raise is expected to be complete in early 2011, when fund investment is set to begin.

Admittedly, West Michigan doesn’t leap to mind as a center of venture capital financing, said Dale Grogan, VP of Charter Group LLC. Charter Group has worked in VC financing for three years, which gave it a leg up when applying for the MEDC funding.

“We are centered on collaboration, collaboration, collaboration,” Grogan told MiBiz. “We tried to communicate to the state and the rest of the world that West Michigan has good infrastructure for venture capital funding, but not a good mechanism to match entrepreneurs and investors. This is leveraging the huge investment in the life sciences on Medical Hill.”

The firm is in the process of building up its internal processes and controls and is recruiting members to serve on its advisory, technical and investment review boards. Grogan anticipates making the first of the 10 to 12 investments of $800,000 to $1 million by year’s end or in early 2011.

But when venture capital firms on the West Coast frequently have $300 million or more under management, is $10 million enough to make a dent?

“The short answer is no,” said Sridhar Sundaram, assistant professor and chair of the finance department at the Siedman College of Business at Grand Valley State University. “Still, it is $10 million more than we had before. We still need more capital to move this forward. We need to leverage all the city and state incentives to attract them … (with) a whole package.”

For Birgit Klohs, president and CEO of The Right Place Inc., the fund signals that West Michigan is ready to play in the early-stage funding and venture capital space. MAF1 is just that, a first step. Klohs has long been an advocate for attracting early-stage funding for entrepreneurs. The $10 million, she said, is just the beginning.

“I am extremely thrilled that we have a place to start. We have to plant a small tree to eventually get a lot of shade. We have a lot of entrepreneurial programs in this part of the state — through The Right Place, the universities, (Small Business Technology & Development Center) — but at a certain point, you need the money,” Klohs told MiBiz. “Our role was one of a strong supporter, pushing the application forward and making Lansing aware that some of this money needs to come to this side of the state. Hunting and pecking for it is difficult. We would have loved to have $50 million, but $10 million is a starting point. Finally, we can get some of the startup money out there.”

The fund comes online amid increased statewide attention to the importance of attracting to the state and supporting existing innovative companies. Ten national and Michigan-based foundations have committed $100 million to the New Economy Initiative for Southeast Michigan, an eight-year initiative to accelerate the transition of metro Detroit to an innovation-based economy. Through programs such as the Accelerate Michigan Innovation Competition, the NEI hopes to leverage the Business Accelerator network, comprising four business incubators on the east side of the state: Ann Arbor SPARK, Automation Alley, Macomb-Oakland University INCubator and TechTown.

On average, only 1 of 15 angel investments hits for a “home run,” meaning a successful exit at the end of the funding cycle. The singles and doubles will contribute to the projected 20 to 25 percent returns. For the fund to gain traction, it will need to tie into the existing networks of angel investors and later-stage investors and educate them about VC funding, said Linda Chamberlain, executive director for the Center for Entrepreneurship & Innovation at GVSU. While she would like to see the funds up around $25 million, the MAF1 may help attract additional VC funding to the region.

“Their internal rate of return is targeted at 20 to 25 percent. If you look at each one individually, you can sweat a lot of bullets,” Chamberlain said. “With the (MAF1), there is a great advisory board they’re building. It is a robust venture platform on its own, and it’s a start. However, the average size of VC funds in state is $30 million. Compared to California where the average size is $300 million, our state is not at any sort of median. If you look at the last five years, we have the start. We have a fund, and to me, it is pointing in the right direction.”

It will take a change in local investors’ attitudes about risk — and what a company is, many said. West Michigan is familiar with family companies that are passed on to subsequent generations, but it is much less familiar with exits as prescribed in venture capital investments, said Sundaram.

“If one of 10 or 12 companies make it through to exit, it would be a success. Most investors in the region are not willing to accept that level of risk,” Sundaram said. “Most companies here are started with the intent of passing it on to subsequent generations. These startups are looking to take an idea, build a company around it, sell the company, then reinvest. One isn’t better than the other, it’s just different.”

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TAGS:

• birgit klohs
• center for entrepreneurship & innovation
• charter group
• dale grogan
• economic development
• grand rapids
• grand valley state university
• higher education
• linda chamberlain
• maf1