The managers of Michigan Accelerator Fund I are seeking to raise up to $5 million from investors to provide further financial backing to portfolio companies.
Four of the Grand Rapids-based venture capital fund’s eight existing portfolio companies may need additional capital in the near future, said co-Managing Director Dale Grogan. Capital raised for the new MAF Opportunity Fund LP could go to make follow-on investments in those companies, plus one new investment, Grogan said.
Follow-on investments would go to portfolio companies that have demonstrated progress and “have a clear path to a near-term exit” in two to three years, he said.
As Michigan Accelerator Fund I nears full deployment of its capital, managers want to have a so-called “tack-on” fund in place to provide further support for portfolio companies that need it, Grogan said.
“There are some really good portfolio companies in Michigan Accelerator Fund and these companies have capital needs that we can’t fulfill,” Grogan said. “Our bucket is exhausted. We have hungry children that we can’t feed out of our first fund.”
The Michigan Opportunity Fund initially targeted existing investors in Michigan Accelerator Fund I. The fund opened its solicitation this month to new investors. As of late April, 18 investors had put $1.85 million into the new fund, according to a filing with the U.S. Securities and Exchange Commission.
The portfolio companies in Michigan Accelerator Fund that may need additional funding are:
- Vestaron Corp., a Kalamazoo-based firm developing spider venom-based bio-pesticides.
- Ablative Solutions Inc., which developed a catheter system to treat severe hypertension that’s resistant to medication. The system infuses a therapeutic into the wall of a blood vessel to deactivate nerves around the renal artery.
- Swift Biosciences Inc. in Ann Arbor, which is developing technologies for genomics and personalized medicine.
- Tissue Regeneration Systems Inc., a startup medical device company in Plymouth commercializing a skeletal reconstruction and bone regeneration technology licensed from the University of Michigan and the University of Wisconsin.
Grogan said he remains confident that Michigan Opportunity Fund will raise the $5 million by this summer. Part of the pitch to prospective investors is that the new fund will offer later-stage venture investments to companies with less risk than when they first began.
Each of the companies has long been vetted and their innovation and technology have been validated in prior investment rounds, Grogan said.
“We have the benefit of living with these companies,” he said. “These are companies we have known intimately. They are very hands-on investments for us.”
Grogan and his partner, John Kerschen, formed Michigan Accelerator Fund I in 2010. They hope to eventually create a much larger successor venture fund in the future.
Backing existing portfolio companies all the way to a successful market entry — and then an eventual exit of its investment — can add to Michigan Accelerator Fund’s appeal when soliciting investors for a successor fund.
“When we go out to our next fund, we can demonstrate to new investors that we can deliver meaningful returns,” Grogan said.
The appeal to investors for the Michigan Opportunity Fund continues as an annual research report shows a wide gap in available capital for the 141 existing portfolio companies held by venture capital firms in Michigan.
Portfolio companies at the end of 2015 had an estimated collective demand for $661 million in additional capital, while venture capital funds had $387 million available for follow-on investments, leaving a gap of $274 million, according to the annual research report issued by the Michigan Venture Capital Association.
If the gap remains unfilled by Michigan-based firms, that raises the prospect of companies that need additional capital having to go out of state for their next investment round, said David Brophy, a finance professor and director of the Office for Study of Private Equity Finance at the University of Michigan’s Ross School of Business.
When that happens, there’s the potential for those companies to follow the money, Brophy said.
While the greater flow of out-of-state venture capital firms and investments into Michigan over the last several years “is great, at the same token we don’t want them providing all of the capital,” he said.
“It’s a bit of a virtue and a bit of a vice,” Brophy said. “If your company is being funded by someone from somewhere else, the coasts or wherever it might be, and they say ‘move from Michigan,’ you’ll move.”
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