Author: Joseph R. Morrison, Jr.

Ann Arbor has the Right Stuff

Posted on by Joseph R. Morrison, Jr.

Jason Mendelson (@jasonmendelson) and his partner, Brad Feld (@bfeld), visited Ann Arbor and UofM back in the fall. They made the rounds of TechArb, the University Office of Tech Transfer, and even stopped by a Ross School of Business Class taught by Dr. David Brophy that pairs students with budding companies trying to land Angel or VC funding. I was enrolled in the class and I got to pitch Jason on my company… WHAT a great experience! I was REALLY impressed with both of them and I love their dedication to cultivating a culture of entrepreneurship in Boulder, Ann Arbor, and throughout the US more generally. It is definitely something that helped stoke my entrepreneurial fire. However, the best thing I heard was at a lunch talk at the Law School. Both gentlemen raved about Ann Arbor and, while I am way overdue in sharing, this recent post encouraged me to mention their trip.

I thought I would share this blog entry, written by Brad, since it has a number of good thoughts and links to some of the other posts from their visit. Enjoy!

http://startup-communities.com/2012/02/28/action-in-ann-arbor-mi/

Bad Apples Spoiling the Crate?

Posted on by Joseph R. Morrison, Jr.

The New York Times “Bits Blog” had an article this past Sunday titled “Disruptions: Tech Valuations Defy the Restraints of Reality.” Unfortunately, this short read paints a broad brush of the Venture Capital industry and plays to a few of the oft-discussed and unflattering stereotypes about venture capitalists (…as if there was any need for fuel to be added to the raging fire stoked by Republican presidential candidates.)

The article lays out a number of problematic investment rationales pursued by some within the VC industry. Among the rationales listed are:

• Investing only based on a “herd mentality and a yearning to be a part of a potential next big thing”
• Investing in a company “so they can stick the logo on their Web site”
• So-called “spite investing” when you invest in a company “simply because they were not given the opportunity to invest in the competitor”

Do these practices go on? Clearly they do, which is why the failure rate of venture capital firms can exceed 50% during some periods (per the Harvard Business Review) and so few earn solid returns on investment. However, it would be unfortunate to paint the industry with such a broad brush. The few bad apples with money to spend, but not the sense to invest it wisely, should not pollute the image of an entire industry.

A number of successful (and tenured) VCs have spoken in classes at Michigan, and they have consistently preached the polar opposite of the approaches noted above. Their principles are simple: don’t follow the crowd, be true to your investment analysis methodology, and be steady in how you invest your money. Quite apart from the investing process described in this article, these VCs described the process as akin to “courting a significant other” in order to become personally close with the founders. They also spoke of the industry’s increasing talent. Many VCs have built their own companies or have been executives at Fortune 100 companies.

Will that approach counter the ills described in the Bits blog? It will not. If it did, everyone would be taking the same approach in an industry notorious for breaking the mold. However, those principles will help you avoid turning a venture capital portfolio into a junkyard of failed investments and, apparently, it will also prevent you from running with the rest of the herd (50% of which won’t see its next meal).

In the post dot-com crash and Sarbanes-Oxley world, companies are staying private longer. This allows companies to develop into real revenue-generating businesses without being scrutinized by public markets. The days of “pets.com” are history and also the irrational exuberance that came along with them. VCs that succumb to irrational investments fail, as they should. So, while the article seems to paint the whole lot as a bunch of crack pots, the truth is that the industry is full of extremely successful investors. Otherwise, why would there be so much money entering the market in first place? Success breeds copycats.

NYT article: http://bits.blogs.nytimes.com/2012/01/22/disruptions-the-sloshing-sound-of-tech-valuations/?ref=business&nl=business&emc=dlbka34

HBR article: http://hbr.org/product/risk-and-reward-in-venture-capital/an/811036-PDF-ENG

University of Michigan Adds Venture Capital Fund within Endowment

Posted on by Joseph R. Morrison, Jr.

The University of Michigan Board of Regents has approved a University-housed and managed venture capital fund.

The permanent allocation, part of the $7.8 billion endowment, will be called Michigan Investment in New Technology Startups (MINTS). The $25 million fund will be invested over 10 years and be co-managed by the University’s Office of Tech Transfer, a department that manages and funds technology spin-offs, and the Investment Office, which manages the University’s long-term endowment fund.

The Office of Tech Transfer has spun off a number of prominent venture capital-ready investments, as is recognized by Dr. David Brophy’s “Financing Research Commercialization” course at the Ross School of Business. The creation of this fund is further acknowledgement that the Office of Tech Transfer is going to be a growth engine for the University and that this technology center will be profitable enough to be worthy of the University’s investment attention.

The initial investment may seem small, but this fund will allow the University to make several small-to-mid-sized investments per year, a number that would be about average for a new fund in this area.

One can only hope that the creation of this fund will attract other venture capital firms to increase their focus on Michigan. Additionally, this new fund will provide students in the Zell Lurie program and the Ross School of Business a vehicle through which they can receive early exposure to venture capital investing. What a great development for the University and southeastern Michigan.

http://www.pionline.com/article/20111229/REG/111229904/university-of-michigan-to-start-venture-capital-fund

Venture Capital as Targeted Self-Help?

Posted on by Joseph R. Morrison, Jr.

Many believe there are serious issues with the economy and the trajectory of our two concurrent wars. Unfortunately, these two headline concerns come together to affect veterans more profoundly than the average American; the unemployment rate among young veterans (30%) is just short of double that of comparable non-veterans ages 18-24. How do you counteract this phenomenon and harness the power of disciplined young people who have served their country? Venture Capital seems to be part of the answer.

National Public Radio (NPR) had a story on Morning Edition about a Milwaukee, WI based group called VETransfer that is focused on helping veterans start their own businesses. The VETransfer program utilizes a huge (13,000+) network of volunteer experts to help its start-ups with a variety of services including connecting owners with financing and management assistance. The stated goal is “to teach veterans how to become entrepreneurs and assisting them to accelerate veteran owned innovations.” The group has 15,000 sq ft of space for collaboration, meetings, and organization, and a few small businesses that have been incubated by the program have plans to hire other veterans as part of their company expansion plans. One of the initial grants ($3 million) came from the Department of Veterans Affairs, but there are a number of other private sector supporters as well.

This isn’t “venture capital” solving the problem, but it is the ideas behind venture capital that are helping to attack the root of a problem. The military prepares young men and women for productive lives, but right now they seem stranded once they get home. Now, with some assistance from the government in the form of what looks like a block grant, there is some hope for these veterans and the power of the private sector is taking over. The venture model is serving as the self-help mechanism that the nation needs to attack the problem of veteran unemployment, and it is truly a great thing to see. Hopefully we will see more of it.

The website for the article is: http://www.npr.org/2011/10/25/141092122/a-business-incubator-gives-funding-and-jobs-to-vets
The website for the group is: http://vetransfer.org/

Venture Capital Industry Makes Inroads in Non-Traditional Markets

Posted on by Joseph R. Morrison, Jr.

The New York Times DealBook column is a useful source of interesting information. However, this week a few things struck me as particularly intriguing. Apparently the United States Department of Defense (DoD), the $600B+ entity that runs the largest supply chain operation in the world, has discovered the power of venture capital. The Defense Venture Catalyst Initiative is a collaboration between the DoD and venture capitalists that seeks to “utilize private sector Venture Capital (VC) expertise in discovering and evaluating the merits of emerging technology” in order to solve DoD problems. It is a huge vote of confidence for the VC industry, something most Americans are unfamiliar with and unsure of, to have the DoD explicitly acknowledge that venture capitalists have unique and important skills. While the government might not be broadly popular, the Department of Defense is a completely different entity, and I think their vote of confidence will speak to a large sector of the public.

Once the government acknowledges that venture capitalists can contribute meaningfully to the largest public sector agency, there can’t be much left out there, right? (Insert your “the government is the slowest adopter” joke here.) Actually, the NFL announced this week that it is looking to join the venture capital game too. The league, managed by some of the country’s wealthiest and most successful businesspeople, is looking to start its own $30M+ venture capital fund. The owners might even let the Players Union invest alongside its fund. While the NFL owners are looking to be active in the “angel” space rather than the traditional venture capital arena, you would have to think that the MLB, the NHL, and the NBA can’t be far behind the curve here. This, like the DoD involvement, is a positive step for the VC industry as a whole; if there is anything that can help shape a positive view of venture capital with Main Street America, its good old football.

It’s no secret in the financial industry that venture capitalists are skilled entrepreneurs with a keen eye for trends and good investments. However, having two giants like the NFL and the Department of Defense openly acknowledge that the industry offers a unique skill set is a great thing. It is good for the investors, and it’s good for the profile of the Venture Capital industry as a whole.

The Defense Venture Catalyst Initiative website can be found here: http://devenci.dtic.mil/
The NFL investment reference can be found here: http://www.sportsbusinessdaily.com/Journal/Issues/2011/10/17/Leagues-and-Governing-Bodies/NFL-fund.aspx

Michigan & the Smart Money: What the State Needs Today to Build Tomorrow

Posted on by Joseph R. Morrison, Jr.

The smart money has not been flowing into Michigan in a long time. However, that money is starting to come back to Michigan again. This smart money—investments coming from well-informed and experienced financiers —is the key to a recovery for Michigan, and the state government needs to work hard to accelerate that trend. As Michigan shifts away from the auto-dependent economy that has forced the state into a multi-decade decline, the state government needs to focus its effort on attracting the smart money, and it needs to ramp that effort up now.

In order for the state to diversify away from the auto industry, Michigan should make a concerted effort to attract smart money with as much effort as it expends trying to attract tourists. Central to a recovery will be the smart money that helps grow new businesses. Venture capital companies can provide the money and expertise to help young companies get off the ground at a time when traditional funding routes are not open to start-up businesses. Michigan is ripe for continued growth if it focuses on showcasing what it has in spades: a strong university system that spins off opportunities and talent, an abundance of skilled labor, and low barriers to investment. Not only is there room for more money in Michigan but also the demonstrated venture capital returns are impressive enough that the state should be able to sell itself as an attractive investment locale if it makes the effort.3

Michigan’s CEO, Governor Rick Snyder, and its Board, Michigan’s legislature, need to coalesce around this reality; the path to recovery will come if Michigan focuses on attracting the smart money. Quick hits and fun headlines will not help, but venture capital firms like Detroit Venture Partners will. The venture capital investments can help build a solid foundation for a diverse economy, and they can leverage the work already done, such as Governor Granholm’s focus on attracting new industries by encouraging investment in battery and alternative fuel manufacturers. The blitz should ensure that local companies know where to seek the funds. Michigan should also showcase what the state offers to large venture firms around the country. This won’t be a sexy, short-term investment like film tax credits, but it will help create jobs, and it will build a strong foundation for growth and diversification.

Right after Governor Snyder gets home from his trip to Asia, where he will try to drum up trade deals, he needs to have his Chief of Staff put together a domestic itinerary. If Gov. Snyder puts in some hours promoting Michigan in Silicon Valley and New York City, those cities will be promoting Michigan in the not-too-distant future as the next great American turnaround story