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Michigan universities capitalize on growth of state venture capital industry

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October 18-20, 2023 / Tucson, AZ
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The Story

When EDF Ventures launched in Ann Arbor in 1987 to invest in university-based technologies, the University of Michigan had one person working part time on technology transfer.

And at the time, the only other local venture capitalist in Southeast Michigan was Ian Bund.

“We were considered an oddity,” said EDF co-founder Mary Campbell. ” ‘You’re going to fund a professor? Why would you do that?’ ”

Today, the tech transfer office at UM employs 28 and has a variety of entrepreneurial support services, including incubator space at the school’s north campus for some of its licensed startups.

Growth of UM’s tech transfer is mirrored by growth of Michigan’s venture capital industry. Funds that Campbell and Bund were associated with, less than $10 million, are quaint by today’s standards.

Being an early adopter has been good to EDF. It has made a lot of money for its limited partners over the years through the sale or public offerings of such university-licensed portfolio companies as IntraLase, HandyLab Inc. and HealthMedia Inc. — deals that sold for $808 million, $275 million and $200 million respectively.

Since its first investment in BioQuant Inc.,a UM spin-off, in 1988, EDF has invested in companies spun off from Michigan State University, Wayne State University, Purdue University and the University of Wisconsin.

Universities have taken notice.

Universities around the state, even those not generally considered research universities, now employ vice presidents of research, most of them scientists with a history of creating companies and jobs, and tech transfer is considered an integral university function.

Wayne State University is a prime example.

When M. Roy Wilson, an ophthalmologist and researcher who had been an executive at the National Institutes of Health, became president of Wayne State in August 2013, he immediately began focusing on improving the school’s tech-transfer operations.

In May, John Shallman, who had more than 24 years of experience in technology commercialization, the last six as director of commercialization at Beaumont Health System, was named the department’s senior director of licensing. Kenneth Massey, who had 28 years combined of biomedical research and business experience in academic, pharmaceutical and biotech, was named senior director of venture development.

In June, Stephen Lanier, who had been associate provost for research and a professor of cell and molecular pharmacology and experimental therapeutics at the Medical University of South Carolina in Charleston, S.C., joined WSU as vice president of research.

The growth of tech transfer at institutions from Ann Arbor in Southeast Michigan to Michigan Tech University in the far reaches of the Upper Peninsula has been intertwined with the growth of the state’s venture capital industry.

“It’s been a spectacular change,” said Bund. “There’s a much greater acceptance that building young technology-based companies fits well with our economy in Michigan.”

VC helps fuel growth

VCs have become more commonplace than in the late “80s, as have funds of $100 million or more. And what was once a fly-over state for venture capitalists heading east or west is anything but. According to the annual report in May by the Ann Arbor-based Michigan Venture Capital Association, there are 33 VC firms with offices in the state, 11 of them headquartered out of state. And 94 out-of-state firms currently have investments here.

The most recent out-of-state firm to open an office in Michigan, in the Kerrytown district of Ann Arbor, is the Houston-based Mercury Fund, which announced the opening in November and recruited Adrian Fortino, formerly a vice president at Invest Detroit, to run it.

Blair Garrou, a partner and co-founder of the firm, said that Mercury is about to close on a new fund of more than $100 million and plans to invest a fourth of it — or more — in Michigan, and plans to move other Midwest companies it invests in here.

“Ten years ago, something like that absolutely never would have happened,” said Ken Nisbet, associate vice president for research and director of technology transfer at UM.

Another new arrival in the state, Chicago-based Baird Capital, opened an Ann Arbor office in March, run by David Gregorka, a co-founder in 1998, along with now-Gov. Rick Snyder and UM professor Vic Strecher, of HealthMedia Inc., which was sold to Johnson & Johnson in 2008.

In November, Baird finished raising its fourth and largest fund of $185 million. In April, that fund, Pfizer Venture Investments of New York and Ann Arbor-based Arboretum Ventures LLC raised a $21 million round of capital for NeuMoDx Molecular Inc., a medical device company based in Ann Arbor.

Both Gregorka and NeuMoDx are examples of the serial entrepreneurship the area can now claim. The company was founded by Sundaresh Brahmasandra, one of the founders of HandyLab Inc., and by Jeff Williams, HandyLab’s CEO when the medical device company was sold in 2009 to New Jersey-based Becton, Dickinson and Co. for $275 million.

Based on that successful exit, the two had no trouble raising money for their new company.

UM was an accelerant

Campbell and other local venture capitalists credit the arrival of Nisbet at UM’s tech transfer office in 1996 and the naming of Mary Sue Coleman, a biochemist by training, as school president in 2002 for changing the entrepreneurial culture at UM, traditionally one of the highest funded public research universities in the world.

Arboretum was founded with a fund of $24 million in 2002. Its third and largest fund, of $140 million, was raised in 2011, a fund that was oversubscribed in part because of the successful sale of such portfolio companies as HandyLab, HealthMedia and Accuri Cytometers Inc.

Arboretum co-founder Tim Petersen recalls an article in the late 1990s in the Chronicle of Higher Education that asked why the second-best funded public research university in the U.S. was so bad at tech transfer.

“After that, the university made some policy changes that incentivized faculty to participate in tech transfer, and the school built up its tech-transfer office,” he said. “They brought in Ken, who recruited a lot of good people.”

It’s now easier to retain spin-off companies in Michigan as well.

In the past, it was common practice for out-of-state VC firms to invest in Michigan companies and then insist they move to the east or west coasts. IntraLase, a maker of laser surgery devices that was spun out from UM, moved to California by its investors and then bought for $808 million in 2007.

Now, the subject of moving a portfolio company often isn’t even discussed, now, said Petersen.

“Tangent is a good example of that,” said Petersen, referring to Ann Arbor-based Tangent Medical Technologies Inc.,a maker of intravenous catheters and related products. “It came out of UM, and we set up an investment round with Flagship Ventures out of Boston. When Harry Wilcox of Flagship joined the round, there was never any talk about moving the company to Boston.”

Nisbet credited Snyder with jumpstarting the state’s VC community in 1997, when he returned to Michigan from Gateway, the California-based computer company where he had been president and COO and launched a $100 million VC fund with his firm, Avalon Investments.

“It was a crazy amount of money at the time,” said Chris Rizik, Snyder’s former partner and currently CEO and fund manager at Ann Arbor-based Renaissance Venture Capital Fund, a fund-of-funds.

“When we first started, there was a strong feeling at universities that commercializing technology compromised the university instead of enhancing it.

Snyder was an early investor trying to pry technologies loose from universities.

“At the time, 1997, there was only EDF and Ian Bund, and when Rick came to town, it had a big impact. He had a lot of money and was very aggressive in getting things going,” said Nisbet.

Snyder was an early investor in numerous UM spin-offs and is credited with writing personal checks to keep the lights on at HealthMedia during its toughest times.

Federal, state changes helped

The path to translating university research to off-campus profits and jobs was laid out by the federal Bayh-Dole Act of 1980, which allowed universities and their researchers to profit from inventions funded by federal grants.

Until then, inventions using federal funding had to be assigned to the U.S. government.

While this would eventually create a sea change, universities were reluctant to change.

“Bayh-Dole got everything rolling, but it took probably 15 years for Midwest universities to really start thinking about spin-offs. People at universities were afraid to spin things off. It was better to not do anything,” said Jim Adox, the chairman of the Michigan Venture Capital Association who runs the Ann Arbor office of Madison, Wis.-based Venture Investors LLC.

Slowly, though, eyeing fortunes being made by founders of companies in Silicon Valley, academics who once looked down their noses at profit-driven research began to listen to investors wanting to license their work.

Venture Investors was one of them. It was a pioneer in translating university research into jobs and profits, having been founded in 1982 with a $7 million fund. It now has more than $200 million under management.

Since 1993, the firm has invested in 31 university spin-outs from nine institutions, and currently has 14 spin-offs in its portfolio, including three from UM — HistoSonics Inc., a medical device company; NanoBio Corp., a maker of topical anti-infective products and vaccines; NeuMoDx; and Tissue Regeneration Systems,which makes devices to aid bone and soft-tissue regeneration.

Nisbet said that the Michigan Economic Development Corp. deserves a lot of credit for the healthier entrepreneur ecosystem because of investment programs it put in place to fund venture capital firms willing to do business here, including the $120 million 21st Century Investment Fund, the $95 million Venture Michigan Fund I and the $120 Venture Michigan Fund II.

“That provided incentives to get out-of-state venture capitalists to look at deals here. It got good people here to help pull technologies out of the university. We ended up with more venture capital companies, a bigger supply of portfolio companies and a better supply of talent to run companies.”

“What has set Michigan up for continued growth has been the culture change at the universities, the investment participation by the state (retirement funds) and by foundations and, through Renaissance, the participation of the corporate community, both as investors and as strategic partners in portfolio companies,” said Rizik.

Night and day

Adox was with EDF in 1997 when it spun off some UM technology as a company called XTera Communications.

“It was such a challenging process to spin it out. It took us over a year, and then it was hard to hire a management team because there weren’t many local veteran entrepreneurs,” he said. “Now, you can do a spin off in three months and put a team together quickly.”

Contrast that with the current approach by Mercury Fund’s Fortino.

In May, while still with Invest Detroit, after meetings with researchers at WSU’s College of Engineering, Fortino invested $250,000 from the Detroit Innovate Fund to launch a new company, Detroit Materials Inc., to make cast-steel parts for the military, mining and off-road markets.

The company will use that money, and $150,000 awarded though a phase-one Small Business Innovative Research grant from the National Science Foundation, to do small-scale prototyping and validation testing at Michigan Tech University. The SBIR grant came with a matching grant of $25,000 from the state’s Emerging Technology Fund.

With that ease of deal flow, Fortino is currently looking at a list of 75 different technologies from UM right now for potential investment.

“It’s a fantastic time to be a VC,” said Fortino.

Worries starting to fade

The epicenter of VC investment remains at the coasts, but key players are being courted.

Charlie Moret, for example, was recruited to TechTown in 2012 after spending 13 years in Connecticut, where he ran a $20 million seed fund for startups and founded CTech, an incubator affiliated with Yale University and the University of Connecticut.

“Everyone talks about Silicon Valley or Route 128 in Boston, but for a Midwest state, this is the place to be,” said Moret, who is president and CEO of Invest Michigan, a Detroit organization affiliated with the MEDC that launched in May to run the Michigan Pre-Seed Capital Fund 2.0.

“Wait 10 years and people will be flocking to Michigan.”

There is also criticism by some local entrepreneurs that venture capitalists have grown too cautious, are now leery of investing in pre-revenue companies, and want to see quick exits from their investments.

“I disagree with all of that,” said Lindsay Aspegren, a founding partner of North Coast Technology Investors LP, which is based in Ann Arbor and has an office in Midland. North Coast launched in 1999 and finished raising its first fund of $100 million in 2000.

Aspegren shared an anecdote that he said sums up how far the state has come in recent years from its former status as a flyover state.

“I had someone from the tech transfer office at MIT out to visit us three weeks ago. We met at Café Zola. He wanted us to look at some of their companies,” he said.

Someone from the hotbed of Boston in Ann Arbor looking to get deals done? “Who would ever have thought?” asked Aspegren.

“Venture activity is more sophisticated, now, it’s better funded, it’s better understood than it’s ever been, and everyone benefits.”
Michigan universities capitalize on growth of state venture capital industry | Crain’s Detroit Business.

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