The Michigan startup scene is growing and venture capitalists see several key areas of opportunities. What follows is a survey of some of the top VCs in the state and how they see COVID-19 affecting the growth of Detroit, Ann Arbor and all of Michigan’s startup ecosystem. According to the Michigan Venture Capital Association (MVCA), there are 144 venture-backed startup companies in Michigan, which is an increase of 12% over the last five years.
The amount of capital available in the state hit a four-year high in 2019 after shrinking from record levels in 2015. The MVCA says the total amount of VC funds under management in Michigan is $4.3 billion. Out of that, 71% of the capital has been invested into companies and the MVCA states its members estimate an additional $1.2 billion of venture capital is needed to “adequately fund the growth of Michigan’s 144 startup companies in the next two years.”
As the VCs say below, life sciences is a large part of the Michigan ecosystem, attracting 38% of all investments made in the state. Information technology comes in second, receiving 34% of the total capital invested, with 85% going to those focused on software. Mobility, often thought as Michigan’s mainstay, only received 7% of the capital in 2019. Here’s who we spoke to:
- Chris Stallman, partner, Fontinalis Partners
- Patricia Glaza, EVP and managing director, ID Ventures
- Chris Rizik, CEO and fund manager, Renaissance Venture Capital
- Tim Streit, partner, Grand Ventures
- Turner Novak, general partner, Gelt VC
VCs remain bullish on Michigan’s life science startups
Michigan has long been a hub for life science startups and the venture capitalists polled expect that to continue. Chris Stallman of Fontinalis Partners points to Michigan’s long-standing reputation in this field and expects this to continue.
Tim Streit of Grand Ventures agrees and sees the pandemic as accelerating the sector’s growth. In recent weeks he says his firm has seen a “number of promising digital therapeutics deals based in or near Michigan … and the timing couldn’t be more perfect for these kinds of companies to succeed.”
Chris Rizik of Renaissance Venture Capital notes that drug development will continue to drive growth around the country and is a strength of the Michigan ecosystem. He also points to Jeff Williams, CEO of NeuMoDx, as a leader in the life science community and who has led a number of Michigan’s most successful startups.
The notable exception to this are startups directly serving hospitals, according to Patricia Glaza of ID Ventures. She sees this as a challenging market in the era of COVID-19, saying “Hospitals are bleeding cash without elective surgeries and hard to prioritize nonessential technologies.”
Ann Arbor is becoming a hub for security companies
Duo Security’s impressive exit to Cisco in 2018 is still resonating in the scene. As such, many venture capitalists are seeing Ann Arbor becoming a home for security startups.
Stallman of Fontinalis states, “I think the cybersecurity realm will be a bright spot as some of those spillover effects from the 2018 acquisition of Duo Security by Cisco take hold (this is still in its early days — employees will reach the end of their employment agreements and will start new companies, etc.).” Rizik of Renaissance Venture Capital said something similar: “The success of Duo Security highlighted Michigan’s growing reputation as a cybersecurity hub. The University of Michigan has always been strong in this area, and we now see a number of interesting startups in this field popping up around Ann Arbor.”
When asked about leaders in the Michigan startup scene, nearly all of the VCs listed Duo Security founders Dug Song and Jon Oberheide as key players. Perhaps Rizik said it best: “Dug Song is a great leader, who not only created a monster success for the region with Duo Security, but also has devoted much of his time to strategically working to help Michigan move forward as a responsible, startup-friendly community.”
Michigan is well-suited to benefit from remote work
Of course Michigan-based venture capitalists would be bullish on their own state, but nearly all of the VCs share the same reasons on why Michigan is a good place. They list low cost of living, amazing STEM-focused schools and a community of founders, VCs and business leaders eager to help each other.
Few VCs mention mobility as a bright spot for Michigan startups
Surprisingly, few of the VCs in the survey mention mobility or automotive as a highlight of the Michigan startup scene, which runs counter to the national narrative. Stallman sums up the situation this way: “The mobility space will see both headwinds and tailwinds. Companies vying for automotive customers may find that the industry’s challenges have resulted in a shorter ‘priority list’ for many automakers and suppliers; on the other side, companies helping to remove enterprise risk through innovation in supply chain, automation, workforce efficiency, etc. will have arguably more opportunity going forward.”
Chris Stallman, partner, Fontinalis Partners
How much is local investing a focus for you now? If you are investing remotely in general now, are you filtering for local founders?
We have always been a thematically focused investor rather than a geographically focused investor; prior to COVID-19, we had invested 99% of our capital outside of Michigan. With that said, we’d love to invest more in Michigan and support more local founders.
What do you expect to happen to the startup climate in Detroit/Ann Arbor/Michigan longer term, with the shift to more remote work, possibly from more remote areas. Will it stay a tech hub?
Southeast Michigan has always been a story of two different startup worlds: health/life sciences and hardware/software tech. On the life sciences side, this region has a long-standing reputation of innovation and university research, and I expect that to remain largely the same going forward. It would seem to me that life sciences companies may not have as easy of a time adapting to new remote-work environments since much of the innovation work remains lab/clinic/facility-based.
For the world of other technology, I think there will certainly be more embracing of remote work and distributed teams — this area has always had some degree of that since it’s not uncommon to see companies with another office elsewhere or a few remote employees that come from very specific backgrounds that are hard to recruit for locally. Since this area has always had some of that, I could see a case that this new paradigm will be an easier adjustment for this region. However, the flip side of that is that so much of tech innovation and developing an ecosystem is about density and serendipitous collisions — for an area that was still on the come-up, losing what ground had been gained in recent years will no doubt make the spillover benefits of this aspect harder to come by. I worry a bit that angel and seed activity will slow locally (and hopefully that the growth in seed funds nationally will offset that).
Are there particular industry sectors that you expect to do uniquely well or poorly, locally?
I think a larger theme that is arising out of this COVID-19 situation is that people have a heightened sense of health, safety and security. Life sciences will remain resilient so long as there’s funding for continued research, and I think the cybersecurity realm will be a bright spot as some of those spillover effects from the 2018 acquisition of Duo Security by Cisco take hold (this is still in its early days — employees will reach the end of their employment agreements and will start new companies, etc.).
The mobility space will see both headwinds and tailwinds. Companies vying for automotive customers may find that the industry’s challenges have resulted in a shorter “priority list” for many automakers and suppliers; on the other side, companies helping to remove enterprise risk through innovation in supply chain, automation, workforce efficiency, etc. will have arguably more opportunity going forward.
In the short term, what challenges are facing Michigan’s startup scene?
Detroit has not yet hit a full critical mass from a startup ecosystem standpoint, and that is most evident in the more limited amount of angel and seed capital available to companies here; and, to a lesser extent, a more shallow pool of mentors and advisors for founders than what you would find in SF, LA, NYC, Boston, etc.
Who are some founders (who you’ve invested in or otherwise) that are leaders in the community?
Here are some of the prominent ones (note that we have invested in any): Dug Song and Jon Oberheide (Duo Security), Mina Sooch (has founded and led several prominent biotech companies), Amanda Lewan (Bamboo Detroit), Kyle Hoff (Floyd), Josh Luber and Greg Schwartz (StockX).
A lot of Bay Area founders and developers are looking to relocate. Why Michigan?
Quality research institutions, access to talent locally and ability to pull from Toronto/Ohio/etc., significant industry (automotive, logistics, manufacturing and financial services) in its footprint, supportive state programs for startups, cost of living, international airport with easy access (when the world moves again, that is), etc.
Patricia Glaza, EVP and managing director, ID Ventures
How much is local investing a focus for you now? If you are investing remotely in general now, are you filtering for local founders?
Local (Michigan) has always been our focus, so has not changed.
What do you expect to happen to the startup climate in Detroit/Ann Arbor/Michigan longer term, with the shift to more remote work, possibly from more remote areas. Will it stay a tech hub?
I believe region will remain a tech hub for founders. Most companies need support communities early in their life cycle. What I expect to see is that talent will be sourced more nationally (would envision globally in next few years) — and less pressure for teams to all be co-located. This will likely balance out — Michigan talent working for startups in other regions, and talent from other regions working for Michigan-based companies.
Are there particular industry sectors that you expect to do uniquely well or poorly, locally?
Poor: Startups that are serving the hospitals, restaurants, brick-and-mortar retail. Hospitals are bleeding cash without elective surgeries and hard to prioritize nonessential technologies. Margins are slim in food/retail and unless there is an extremely strong cost-savings justification, it will be hard to get time/attention. Many of these businesses will not make it over next year.
Well: Those that can help organizations shift to remote workforces more efficiently — CRMs, communications, planning, workforce engagement. Life/hobby startups that fill the time void people have now that they aren’t commuting — e.g., Peloton, gaming, etc. Wellness/mental health — more attention is going to how to keep workers/communities functioning in isolation.
In the short term, what challenges are facing Michigan’s startup scene?
Demonstrating enough growth trajectory to raise the next round of funding at higher valuations. While companies are seeing their sales come back, it is at a slower pace than original forecasts.
Having to balance how much cash is in the bank with investing in growth. There are opportunities for startups to invest in going faster — adding to development and sales teams to execute on product features that their market is looking for. However it is a delicate balance of how much and how fast versus when a company will be able to raise the next financing round.
Who are some founders (who you’ve invested in or otherwise) that are leaders in the community?
- Deepak Ravindra — Micro-LAM
- Peter Falzon — Ripple Science
- Lisa McLaughlin — Workit Health
- Kim Gamez — Mi Padrino
- Mina Sooch — Ocuphire
A lot of Bay Area-founders and developers are looking to relocate. Why Michigan?
- Raise families #1: safe, good schools, cost of living.
- Talent: cheaper, more stable workforce (less turnover).
- Community: small, but strong startup community that is collaborative. I don’t know how many times I’ve heard entrepreneurs say how helpful everyone is in making introductions, identifying resources, etc. for founders looking to locate here.
Any other thoughts you want to share with TechCrunch readers?
COVID has changed the world. While COVID has posed definite short-term challenges for the startup community, this is an industry of innovators. I can’t wait to see the wave of new startups that emerge over the next 12-24 months across all sectors that help us adapt to the new reality.
Chris Rizik, CEO and fund manager, Renaissance Venture Capital
How much is local investing a focus for you now? If you are investing remotely in general now, are you filtering for local founders?
We are a fund of funds, so we invest in venture capital funds. But central to our thesis is that we only invest in funds that agree to actively look at Michigan startup companies, so we have an outsized impact on Michigan by engaging out-of-state venture capitalists and connecting them with Michigan startups.
A few years ago, we created the Renaissance Hotlist. Working with universities, accelerators, angel funds, etc., we identify 50-60 high-potential Michigan startups, and then send rich information about those startups to our network of around 1,000 venture capitalists. We make the hotlist “live” once a year when we hold our UnDemo Day, where we curate hundreds of one-on-one meetings between venture capitalists and Michigan startups. Our UnDemo Day last October led, so far, to 10 local companies receiving venture capital investments. The Hotlist has continued during the pandemic, and we will hold an UnDemo Day on a virtual basis in September.
We’ve made three investments around the U.S. since the pandemic struck. All are in venture capital funds that are excited to look at investing in Michigan startup companies. One of the funds has already made two major investments in Michigan companies as a result of past UnDemo Day events.
Long term, do you expect to be more or less locally focused?
Our focus will stay the same, but we believe the impact will grow, as it has every year. Our national network has gotten larger and we’ve used that to highlight what is going on in Michigan. In addition, our fund is being replicated in other parts of the country (so far, in Cincinnati and Houston), which also strengthens the network.
What do you expect to happen to the startup climate in Detroit/Ann Arbor/Michigan longer term, with the shift to more remote work, possibly from more remote areas. Will it stay a tech hub?
The changes in Michigan’s startup scene over the two decades that I’ve been in venture capital have been pretty impressive. We’ve always had strong technology development, but the biggest positive changes have been in our people and our culture. At the turn of the century, we were still the quintessential “big company town,” dominated by a handful of international companies, with a culture that didn’t favor startups. That has certainly changed, and now we see high-potential startups virtually everywhere in the region.
The other major change is the talent we’ve developed. Leading fast-growing, high-potential companies is tough, and, while Michigan has long been known for great technologists, 20 years ago we didn’t have executives who were experienced in leading those types of companies. But successes early in the century like Arbor Networks and the first Esperion helped us develop experienced leadership, and those leaders spidered out into dozens of companies, creating a much larger generation of great companies like Duo Security, LLamasoft, the second Esperion and many more.
So now, Michigan has both the technology funnel and the people for continued success and growth. 2019 was the biggest year for venture capital investment in Michigan by a fair bit. I can tell you that we see more investors from around the country wanting to visit Michigan, because it has a “buzz” about it. We’ll get past this pandemic and Michigan’s star should continue to rise.
Are there particular industry sectors that you expect to do uniquely well or poorly, locally?
The success of Duo Security highlighted Michigan’s growing reputation as a cybersecurity hub. The University of Michigan has always been strong in this area, and we now see a number of interesting startups in this field popping up around Ann Arbor.
Mobility is, of course, another strength of the region, even as both the definition of “mobility” and the areas of focus are changing. There will continue to be a strong focus on getting people and goods from one place to another over the next few years, and Michigan should be in the middle of all that.
Finally, drug development continues to drive much of the growth in the startup community around the country, and it is a particular strength here in Michigan.
In the short term, what challenges are facing Michigan’s startup scene?
Michigan startups are facing the same challenges as startups all over the country. COVID-19 has unfortunately created winners and losers among startups, and for many that counted on 2020 as a growth year, the lack of in-person connection and the disruption of normal engagement with customers has been a tremendous burden. The headwinds have been just as strong for startups that planned to raise capital this year, as March brought almost a complete shutdown of new, early-stage investment, and venture capitalists and startups are only now adjusting to a new world of remote fundraising and investing. There is some speculation that this situation may actually “level the playing field” for Midwest startups versus startups on the coast — since everyone now is pitching via Zoom rather than in person — but it is not yet clear that that is the case.
Who are some founders (who you’ve invested in or otherwise) that are leaders in the community?
One would have to mention Jeff Williams, who is the CEO of NeuMoDx. He has been a leader for the life science community for twenty years and has led a number of our region’s most successful startups.
Of course, Dug Song is a great leader, who not only created a monster success for the region with Duo Security, but also has devoted much of his time to strategically working to help Michigan move forward as a responsible, startup-friendly community.
Justin Mast of Bloomscape is a rising star. He has created a great young company and also planted the flag in Detroit, showing a community commitment that is as strong as his corporate commitment.
A lot of Bay Area founders and developers are looking to relocate. Why Michigan?
First and foremost, it is the current talent and the access to future talent coming out of our universities. We sometimes take for granted what we have in our Michigan university systems, but they are the X-factor for future success of the region. Talent is the most important driver of success for startups, and there aren’t many locations that provide as much access to engineers and computer scientists as Michigan. An added benefit is that you can run a company here at a fraction of the cost that it would take on the coasts.
Another benefit is that Michigan’s major corporations have shown a dramatically increased desire to engage with the startup community here: to give market validation, to become customers, even to serve as strategic partners. The growth of the innovation teams at the major corporations has been a tremendous development over the past decade, and their active engagement can be the difference between success or failure for a startup company.
Any other thoughts you want to share with TechCrunch readers?
Long term, there is a lot to be excited about with the growth of the startup community in Michigan. It has come so far, and it now has had enough successes that it is clearly seen nationally as a “hub,” with both strong technology and an emerging group of experienced leaders. What’s also encouraging is that now major Michigan companies are getting more connected with the startup community than ever. They are investing, advising, and, most importantly, partnering with startups, accelerating the development of new products that should help major companies innovate and help startup companies grow quickly. The importance of that connectivity is really encouraging.
Tim Streit, partner, Grand Ventures
How much is local investing a focus for you now? If you are investing remotely in general now, are you filtering for local founders?
We’re always excited to review local deals, but given the current climate, our priority has definitely shifted to identifying promising companies in sectors that are well-positioned to weather the economic fallout from the pandemic.
Long term, do you expect to be more or less locally focused?
We don’t anticipate any significant changes to our current geographic focus. While we prefer to invest in companies based in the central U.S. (including our home state of Michigan), location has never and likely will never become a rigid criterion for the fund. We will remain open to reviewing companies based across the U.S. and Canada.
From that, what do you expect to happen to the startup climate in Michigan longer term, with the shift to more remote work, possibly from more remote areas. Will it stay a tech hub? (Will there be tech hubs? What is a tech hub now?)
We’ve long believed that San Francisco will soon come up against major competition for its status as the country’s primary tech hub. We’ve seen extremely promising companies and teams pop up all over the country. Michigan is a great example of an emerging tech epicenter; the University of Michigan incubates unparalleled talent, and many alumni have gone on to establish themselves as some of the foremost entrepreneurs in the country. Our state has seen its fair share of hugely impressive, multibillion dollar exits in recent years, and there will certainly be more to come.
We anticipate remote work will become an increasingly standard fixture in the office environment, particularly for agile tech companies that possess the capabilities to execute most of their operational activities outside the office. Toronto’s tech scene will likely experience this trend as well.
Are there particular industry sectors that you expect to do uniquely well or poorly, locally?
Recently, we’ve seen a lot of impressive innovation in the digital therapeutics and healthcare IT space. We believe that the pandemic has accelerated the sector’s growth; since in-person medical appointments are no longer feasible for many people, remote monitoring and treatment will become an essential part of many patients’ care plan. We’ve seen a number of promising digital therapeutics deals based in or near Michigan in recent weeks, and the timing couldn’t be more perfect for these kinds of companies to succeed.
Another local company, Sportsman Tracker offers app for hunting and fishing enthusiasts and in light of COVID, these categories are experiencing record growth. Consumers have returned to the outdoors in unprecedented numbers and HuntWise is the premier app for planning these activities, sharing with friends and family, and engaging in the community of over 2 million active enthusiasts.
In the short term, what challenges are facing Michigan’s startup scene?
Some Michigan startups will face the same challenges as in other regions, largely related to sector focus and stage. Companies selling in to sectors negatively impacted by COVID may face slower sales that impact their ability to scale and raise additional capital. Likewise, later stage companies at higher valuations and burn rates, may find it difficult to raise capital as many growth stage funds are prioritizing existing portfolio. Additionally, in light of travel restrictions, it may be harder for CEOs to establish new VC fund relationships if they don’t already exist. Seed-stage companies with lower valuations and burns continue to be fairly resilient and well-positioned.
Who are some founders (who you’ve invested in or otherwise) that are leaders in the community?
In Grand Ventures:
- Jeff Courter, Sportsman Tracker in Grand Rapids
- Larry Freed, Give and Take in Ann Arbor
From my first fund, Huron River Ventures:
- Danny Ellis, SkySpecs
- Kurt Skifstad, ArborMetrix
- Jesse Vollmar, FarmLogs
A lot of Bay Area founders and developers are looking to relocate. Why Michigan?
Ann Arbor, Grand Rapids, Detroit and other parts of Michigan are all great places for founders and developers to relocate/co-locate. These are thriving midsized cities with access to a diverse and talented workforce drawing from top STEM universities like the University of Michigan. The cost of living is also 25%-50% less than coastal cities meaning employees can live much more comfortably and companies can save significantly on real estate and other infrastructure. We are also centrally located in the middle of the Midwest in close proximity to Chicago, Indianapolis, Columbus and other thriving Midwest cities providing access to Fortune 500 customers and other partners.
Turner Novak, general partner, Gelt VC
How much is local investing a focus for you now? If you are investing remotely in general now, are you filtering for local founders?
Not a focus at all, but open to chatting with folks.
Long term, do you expect to be more or less locally focused?
Expect to be the same, completely geographically agnostic. I don’t think it’s good to constrain yourself to such a small geography as an investor, best returns are being able to source the best opportunities globally.
What do you expect to happen to the startup climate in Detroit/Ann Arbor/Michigan longer term, with the shift to more remote work, possibly from more remote areas. Will it stay a tech hub?
Was already on the upswing, expect it to continue gaining steam. The University of Michigan is a top university and will continue to anchor the A2/Detroit scene.
Are there particular industry sectors that you expect to do uniquely well or poorly, locally?
Cybersecurity, auto.
A lot of Bay Area founders and developers are looking to relocate. Why Michigan?
Relocating to Michigan could make sense for folks that want a low cost of living, access to auto and cybersecurity talent, or possibly moving back home to be close to family.
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