By Nathan Peck | MiBiz
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ANN ARBOR — The opportunities for growth capital in the state have had their shares of ups and downs.

David Brophy, founder of the Michigan Growth Capital Symposium, has seen most of them. In the 30 years that the symposium has been bringing together entrepreneurs and leaders of finance, it has helped grow the venture capital industry from a trickle to more than a $2.6 billion investment.

Today, Brophy sees a great upside for Michigan startups as industry, universities and government start pulling together to attract investment capital to the state. The growth has been substantial: More than $735 million has been invested in more than 120 deals, a 40-percent increase over the first half of the decade. Capital under management in the state has surged more than 200 percent over the last five years, totaling $2.6 billion.

Speaking to MiBiz by phone, Brophy said that while the state is again realizing the value of its strong higher educational system, Michigan must work to help build the infrastructure that connects entrepreneurs with the venture capital and angel investors that can help early-stage companies get off the ground.

The students Brophy sees at the University of Michigan Ross School of Business, where he is director of the Office for the Study of Private Equity Finance, are increasingly interested on striking out on their own and are making connections in life sciences, engineering and outside the university to help found innovative, new companies in industries old and new.

“Many years at the symposium were very lean. It was hard to find companies of value. We had policies that chased people out of the state,” Brophy said. “Companies found it extremely difficult to raise money in the state and would pack up and go to the coasts where it was more hospitable. This gives Michigan startups a portal to the capital markets. It is something that there was a great demand and need for. The response (from investors) has been very strong. We’re not California, we’re not Massachusetts. We are Michigan. We have our own sort of businesses. I advise people to keep an eye on Michigan rather than cockeyed with one eye on California and the other on Massachusetts.”

For most of the 20th century, the best and brightest students in Michigan’s university system were directed into the auto industry. As the size of the industry has declined, so did the number of jobs in it. The state is struggling to find the “next great idea,” and Brophy views higher education as key to helping grow the next generation of companies.

“There is a tremendous value proposition for the state going forwards. We still don’t know what sort of industry will replace what we lost. The curious thing is that we’ve always had a great technology pump in the state of Michigan. A lot of that pump was directed at the large industry in the state — auto manufacturing.”

Innovations created by and for the auto industry were closely guarded as trade secrets. Little was patentable. The Boston and Bay area built a reputation as a center for high-tech research and so capital has flowed there as a result. Within the state, as long as the auto industry was healthy, there was little incentive to diversify and fund startups. Thus, the region had been neglected by investors.

“The biggest issue over the last 30 years is we have been competing with the auto industry for resources. If you had a bright engineering student, the first and best opportunity was in auto,” he said.

To understand how Michigan fell behind in the innovation race, one needs to look at the history of the West Coast versus the Midwest. California’s biggest problem was a brain drain in the 1930s, Brophy argued, as top talent headed toward the industrial centers of the Midwest. California embraced a new technology, the semiconductor, that would eventually lead to the digital revolution, and developed a reputation for innovation.

“They were fortunate to be in at the start of a huge large technological innovation — first radio, then computers. The whole West Coast is built around the semiconductor. That single technology has been the taproot of the industry. We don’t have that. We had it in the auto companies at the beginning of the 20th century. We were users and not initiators of this technology. Replacing that now is a function of pure research.”

The auto industry matured in the middle of the last century, and financial centers supporting the industry in the state moved out to Chicago and New York. Creating the infrastructure around supporting startups never gained traction in the state, so the expertise in handling these deals had remained largely on the coasts.

“We never followed the new small firm model. Even though stunning inventions were being done here, they never created a cluster of new companies around them,” he said. “It is purely a question of volume. A number of law firms and accounting firms got excited in the 1980s about what was going on here, but when the normal cycles in this business occurred, they couldn’t maintain it. It has been a tough industry to grab onto. So we end up with very few specialists in the state, and other service providers that do a deal or two.”

The symposium has been a means to bring venture capital, angel investors and entrepreneurs to the table to focus exclusively on the opportunities in the state. The private sector in the state has not been willing or able to support young companies, he argued, so the state has stepped in with investments such as the 21st Century Jobs Fund.

“The mantra is that if you have a good idea, money will find you. We have to be very tough and tough-minded about the companies that we build,” Brophy said. Venture capital looks to the “quality of deals. That is the mantra there. The answer then is to create the quality of deals here. Look at Plymouth Ventures, Biostar (in Petoskey) has had seven exits in a row, EDF — they are all taking money, guiding young companies and helping them grow. There is no shortcut. A lot of it is having the guts to create, fund and grow companies here in Michigan.”