The number of angel investors expanded again, the average size of Michigan-based venture capital funds increased, and even if you exclude major deals as one-time outliers, the amount invested last year still grew.
Those details in an annual report from the Michigan Venture Capital Association are signs that Tim Streit considers indicative of a maturing venture capital industry in Michigan, especially when coupled with Ann Arbor-based Arboretum Ventures’ $250 million new fund last year.
“I’d say the conditions are very good. It’s not without challenges, and there are always challenges, but the tune and tide and energy around the Michigan venture capital ecosystem is very strong,” said Streit, co-founder and a partner at Grand Rapids-based Grand Ventures that in 2019 raised $28 million for a new fund.
In 2019, venture capital firms invested a record amount into Michigan-based companies, led by a Plymouth-based automotive technology company that accounted for three-quarters of the total.
The $1.55 billion investment in Rivian LLC lifted total venture capital investments in Michigan to $2.06 billion across 71 deals for 2019, according to an annual research report issued by the Michigan Venture Capital Association.
Minus the Rivian deal, venture capital investments across the state totaled $514 million through 70 deals, which is still a record amount and more than 150 percent higher than five years earlier. Last year’s total also included a $110 million investment in Detroit-based StockX LLC, an online marketplace and clothing reseller, primarily for sneakers.
The Rivian and StockX investments, plus $58 million in Series C funding for Ann Arbor-based life sciences company HistoSonics Inc., “are numbers that we have not seen before,” said Dale Grogan, managing director of Grand Rapids-based Michigan Accelerator Fund I, which invests in early-stage companies.
A decade ago, such larger, later-stage capital rounds “never” occurred in Michigan.
“That is a tremendous trend that really bodes well for the venture industry. It also shows our industry is starting to drift a little bit later on the venture side,” Grogan said, referring to later-stage capital rounds. “It certainly signals a maturity of the venture industry within Michigan, no doubt about that.”
Whether the venture capital industry can continue momentum through 2020 remains uncertain. The COVID-19 crisis will surely affect deal flow and the amount invested, “hopefully not horribly severe, but we’ll see,” said Ara Topouzian, executive director of the Ann Arbor-based MVCA.
Despite the economic pain now occurring, Topouzian sees venture capital deal flow and investment continuing as firms focus on helping their portfolio companies navigate the crisis, although probably on a limited basis.
“The end result is going to be (based) on how long this crisis lasts. If we come out of this crisis in a shorter term, I think (the) impact overall will hopefully not be as great,” Topouzian said.
Recent reports from the National Venture Capital Association and PitchBook show the cumulative value of deals across the U.S. held up during the first quarter, at $34.2 billion this year versus $35 billion a year earlier. However, the number of venture capital deals nationwide declined 27 percent to 2,298.
In Michigan, venture capital investing in the first quarter was off significantly with 17 deals for $43.8 million, down from 43 deals for $219.2 million in the same period in 2019, according to PitchBook and NVCA data.
Venture capital activity in the last two economic downturns contracted 30 percent to 50 percent and post-recession returns have improved, Streit said. He believes the Michigan venture capital market will “be more resilient than most” across the U.S. during the economic recession brought on by the COVID-19 pandemic.
“The pendulum swings, but I think that Michigan will be OK,” Streit said. “I’m sure we’ll see a little more of a reset, but I’m confident in the longer term outlook.”
Grand Ventures has been active in the market, recently signing two term sheets and writing a third, Streit said. One of the fund’s portfolio companies also signed a term sheet for follow-on financing, he said.
In time, the COVID-19 pandemic and economic fallout will create new opportunities for venture capital investors, Streit said. New technologies could emerge that better accommodate health care and telemedicine, remote work and education, logistics and delivery services, or other areas that play into consumer and business behavior stemming from the pandemic, he said.
One of Grand Ventures’ latest investments was in a company with a technology to more effectively use videoconferencing platforms like Zoom, Streit said. Another portfolio company, TimeDoc, a telehealth platform for chronic care patients, is “booming right now,” and Grand Ventures is actively looking at other telehealth providers and applications, he said.
“There are sectors that are really going to thrive on the other side of coronavirus and that are thriving right now during the outbreak,” Streit said. “What we’re investing into and researching heavily is what are the sectors that really stand to benefit and to thrive post coronavirus. We’re exploring a lot of these trends to see what they mean for the economy and our fund.”
Grogan cites the rise in the use of telemedicine during the pandemic as epitomizing how “doing things we once thought were only available in person are proving to be false” as consumers are forced to change behavior. That creates opportunity for innovators and investors, he said.
The MVCA’s annual research report offers a detailed look at the state of the venture capital industry in Michigan.
The report shows that in addition to a record amount invested in deals, the total amount of capital under management grew last year for the first time since 2015. Venture capital firms based in Michigan and from out of state collectively had $4.26 billion in capital under management at the end of 2019, an increase of 14.2 percent from 2018 and up 52 percent from five years earlier.
Capital under management by Michigan-based firms grew nearly 21 percent last year to $2.66 billion from the $2.2 billion at the end of 2018, according to the MVCA report. That’s the largest amount of capital under management for Michigan-based firms since the MVCA began issuing an annual research report in 2005. The increase also reversed a two-year decline, and the amount surpassed the prior record of $2.4 billion in 2016 for Michigan-based venture capital firms.
The average amount of capital under management per firm increased to $133 million from $110 million.
Likewise, the average size of a Michigan-based venture capital fund was $60 million at the end of 2019, up from an average of $48 million in 2018.
“Any way you slice through it, Michigan has been doing very well,” said Jeff Rinvelt, a principal at Renaissance Venture Capital, an Ann Arbor-based fund-to-funds who sees the economic downturn from the pandemic temporarily pausing progress for venture capital in Michigan.
“It’s how do we continue that momentum in 2020? I think it’s going to be down. It’s how far does it go down and what can we do to sort of do a V-shaped recovery or a Nike swoop recovery?” Rinvelt said.
Many venture capital funds right now are primarily focused on supporting their portfolio companies and “making sure they’re well stocked to weather the storm,” he said. An inability to travel and meet face-to-face with investment prospects will result in a reduction of deal flow, although deals that “are already in the hopper” should go forward, Rinvelt said.
Among the 2019 data Rinvelt points out in the annual research report is that for every $1 invested by firms based in the state, another $45.71 came from out-of-state investors who over the years have increasingly been targeting deals in Michigan and the Midwest.
“That means we’re growing great startups and attracting them, and that’s really the thing you want to do in the long term,” Rinvelt said.
The MVCA report also details the persistent gap between the amount of funds venture capital firms have set aside for follow-on investments in portfolio companies and what’s needed to support the companies’ continued development and growth. Venture capital firms at the end of 2019 had $396 million available for follow-on investments, a third of the $1.2 billion that’s presently needed.
At the end of 2019, Michigan was home to 144 companies backed by venture capital. There were 26 venture capital firms active in Michigan last year, 20 of which are based in the state. The others are based elsewhere but have an office in Michigan.
Venture capital based in Michigan and with a presence here raised $623 million last year for new funds, or 86 percent of the $722 million they collectively targeted.
Streit at Grand Ventures expects that firms planning to raise capital for new funds in 2020 may have to wait.
“I think fundraising plans in general will just get delayed. If I were thinking about 2021 for fundraising, I’m probably now looking more at 2022,” he said.
Streit and Rinvelt believe the pandemic and resulting greater volatility in the stock market could benefit venture capital. The volatility and economic downtown may drive some high net worth individuals to direct more money to alternative investments.
“A lot of these investors are still looking for returns that outpace the public markets and private equity and venture capital are one of the only places to get that,” Rinvelt said.
As activity by venture capital firms grew in 2019, angel investors also put more money into more deals than ever before.
Angel investors put $73.6 million into 106 startup companies last year, which compares to $52 million invested in 84 startups in 2018, according to the MVCA report.
The number of angel investors in Michigan, either through one of 13 groups such as Grand Rapids-based Grand Angels and its affiliates across the state or as individuals, grew more than 50 percent to 1,322 in last year, up from 859 in 2018.
More than half of the angel money invested last year went to startups involved in I.T.