David Brophy, a University of Michigan finance professor, remembers getting the call from then-Gov. William Milliken in the late 1970s as Michigan was heading into a deep economic recession.
Detroit’s automakers were struggling to compete with nimble Japanese rivals that were building small, fuel-efficient cars consumers demanded during an era of high gasoline prices.
Iconic Michigan businesses such as the J.L. Hudson department store chain and the Sanders candy company were teetering.
Joblessness was skyrocketing, hitting an annual rate of 15.4% in 1982, a record that stood until this year’s COVID-19 pandemic-induced economic collapse. (Yes, Michigan unemployment was higher in the early 1980s than it was during the Great Recession of the 2000s.)
Milliken asked Brophy for help in getting financing for struggling Michigan businesses.
“He said, ‘What can we do now?’ I told him to gather as many companies as he could find and I’ll invite investors to meet with them,” Brophy told me.
Brophy organized a gathering of investors and businesses looking for funding in 1980, an event he thought would last “two to three years.”
But Brophy’s baby, now known at the Midwest Growth Capital Symposium, celebrated its 40th annual gathering in May. The coronavirus pandemic forced the event, which attracted 61 companies looking for investors and 500 venture capitalists and other participants, to be held virtually.
The symposium and other efforts to nurture startup and growth-oriented businesses might be more important than ever for a state economy likely to suffer thousands of pandemic-related business failures, and see many jobs replaced by artificial intelligence and other technologies.
Brophy, who founded and still heads U of M’s Center for Venture Capital and Private Equity Finance, is fairly bullish about Michigan’s prospects in producing a more sustainable, technology-driven economy.
When I first met Brophy while working as a business reporter at the Ann Arbor News in the mid-1980s, there was just one venture capital company in the state — EDF Ventures in Ann Arbor.
Today there are 26 venture capital firms with headquarters or offices in the state. More than 500 out-of-state venture capital companies have invested in Michigan startups. Young Michigan tech companies received $2 billion in venture capital last year alone, according to the Michigan Venture Capital Association.
That wouldn’t have been possible without the development of an investment-friendly climate, much of which Brophy was involved in creating.
He pushed for a state law, adopted in 1982, that allows for Michigan to invest up to 7% of the state employees’ pension fund in venture capital-type investments. That was needed because private venture capital firms, based mostly on the East and West coast, largely ignored investing in old-line manufacturing states like Michigan, Brophy said.
Venture capital investing was combined with business assistance from what eventually became the quasi-public Michigan Economic Development Corp.
Brophy also was a key player in creating various U of M initiatives to invest university endowment money and transfer university research into new businesses, a process he likened to “turning the Queen Mary with a canoe paddle.”
“All of that was related,” he said. “We moved the bar.”
Michigan’s startup business ecosystem has developed to the point where out-of-state venture capital firms are more comfortable in putting their money in businesses hundreds of miles away.
“The old story by VCs is, ‘Have the company move here and we’ll look at them,’ ” Brophy said. “They don’t do that anymore. They’d rather you stay where the cost of living is low. And we have the talent. All of this augurs well” for Michigan.
There are exceptions, of course. Rivian, a startup electric truck manufacturer that has raised $2.85 billion in capital from Amazon, Ford Motor Co. and others, said this week it is moving much of its engineering and product development staff to California.
Brophy said Michigan’s challenge is to continue to build innovative companies that will attract financing from venture capital firms and institutional investors, such as pension funds. Michigan startups shouldn’t expect to win financing from Michigan-based investors just because they’re local.
“It’s unfair to ask them to invest locally just out of patriotism,” he said.
Brophy said he thinks Michigan has a potential to develop more businesses in information technology and life sciences, two industry sectors that are merging in some ways.
“If you can draw a blueprint of a [car] quarter panel and stamp it out, you can do the same with medical devices,” he said.
That was proven by Ford and General Motors, two automakers that quickly converted several plants to build hospital ventilators during the pandemic.
Brophy said he’s also encouraged by the growing number of university students he sees that are interested in technology and entrepreneurship.
“Students are mad for it,” he said.
So are other states and countries. An annual tech investment conference in Finland called “Slush,” modeled after Brophy’s Midwest Growth Capital Symposium, last year drew 2,000 investors and 3,500 startups looking for financing.
Finland is a country of 5.5 million people, a little more than half of Michigan’s population.
“They have it in the dark — in November — in Helsinki, Finland,” Brophy said. “We don’t have a monopoly on anything.”