Jim Tenzillo is the Director at Invest Michigan, an early-stage venture fund that invests in Michigan-based technology companies. Before joining Invest Michigan, Jim spent time as the VP of Operations at a Chicago-based FinTech company, helping medical professionals consolidate and refinance student loan debt. Jim holds a bachelor’s degree in Finance from University of Illinois Urbana-Champaign and an MBA from the University of Chicago.
Most recently, Invest Michigan made a third investment in Ripple Science, a HIPAA-compliant clinical research software company, alongside investors including Dundee Venture Capital, Revolution Ventures, M25, and others.
You can find Jim on LinkedIn here.
KEY THEMES:
Breaking into venture
A kick-ass deal memo can help you stand out when trying to break into venture capital. This helps you form your own personal investment thesis.
The Michigan startup ecosystem
Michigan ranks top 10 in the U.S. for R&D expenditure, but only in the top 20 for venture investments (by dollar amount). When calculating the ratio of R&D expenditure to venture dollars, Michigan ranks 43rd in the country.
Michigan has the economy and the infrastructure to become a major player in the automotive and mobility space.
Renaissance Venture Capital is a fund of funds that has successfully attracted capital to Michigan by requiring portfolio firms to look at companies in the state.
Important lessons
At the seed stage, it rarely just takes one round of financing to make it to the Series A.
Connecting with local representatives and making your voice heard is one of the best ways to garner support (monetary, regulatory, etc.) for a startup ecosystem from the state government.
Convertible debt agreements pose a risk to early-stage investors. Valuation caps, discounts, or other terms might be waived by the lead investor of the next equity raise.
Evergreen fund strategy has allowed Invest Michigan to take on more risk investing in companies that aren’t traditionally “venture-backable.”
Advice to founders
It is important for first time founders to build a diverse network of trusted advisors that can help both the company and the founder grow.
“The best advisors are the ones that will answer your call at 2 in the morning and talk you through a problem.”
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How did you get involved in venture investing?
Like everyone else in this industry, I didn’t take a direct path into venture. I actually started my career in corporate finance at CNA Insurance, not really knowing what I wanted to do with my career. After about four or five years, I started to become disenchanted with the large corporate environment. So, after exploring a bunch of different avenues, I quit my full-time job and went to business school at the University of Chicago. I knew I wanted to do something entrepreneurial, but I wasn’t quite sure what that was. While in school, I started learning about venture capital, which seemed to merge my two interests: entrepreneurship and investing.
I quickly realized that was the path I wanted to pursue. So, I started networking, taking on projects, consulting for a few startups, and doing work on the side while also attending class. After graduating from Business School, I joined a Chicago-based FinTech start-up and worked there for about 10 months while networking throughout Michigan and Chicago. Through those efforts, I eventually got in touch with a recruiter in Michigan that was looking for someone to join as an Associate at Invest Michigan. So, I applied and the rest is history.
Did you have any opportunities to work in venture during your time at Business School?
Yeah. I took on a few projects for a broker/dealer that facilitated secondary transactions of privately-held stock. So, I would scrape together those opportunities to get greater exposure to the entrepreneurial ecosystem and venture investing. I also took courses on investing and venture capital while in Business School. So that was, you know, the hard-knock way I got industry experience without actually working in the industry full-time.
One of the things they don’t often tell you when you’re applying to roles in venture is that you can’t just send your resume. You need more than that to get a firm’s attention. If you really want to stand out, you need something like a kick-ass deal memo. During my search to get into VC, I would assess deals, write investment memos, and send them out to VCs. And it really helped me to build that ability to analyze a company, while also providing an opportunity to network with investors. Statistically, you have a better chance of being a semi-professional baseball player than you do of breaking into venture, so that networking element was crucial for me.
What makes Michigan’s startup ecosystem unique? How does it compare to other startup ecosystems throughout the Midwest?
There are two important stats that accurately summarize the story of Michigan. The first is that Michigan ranks in the top 10 states for R&D expenditures. The second is that Michigan only ranks in the top 20s for venture dollars. If you calculate the ratio of R&D expenditures to VC dollars, we’re actually ranked 43rd in the country. So what does this tell us? It means that there is a lot of R&D and innovation going on, despite a severe lack of investment. To me, that spread means that there are a lot of diamonds in the rough here in Michigan and opportunities to build companies from commercially- or federally-funded innovation.
As far as entrepreneurial talent is concerned, we haven't had the same level of success as a place like Silicon Valley. And I think you could probably say this about most other Midwestern ecosystems as well. With that being said, we are starting to see a couple companies experience highly-successful exits. And, as the employees of those companies start and grow their own ventures, we’ll start to see that talent gap close. Also, one thing the pandemic has taught us is that geography is no longer a barrier to talent. I think that as this becomes increasingly a part of a company’s reality, talent won’t be limited to one specific geographic region.
Do you believe those larger exits act as a catalyst for further growth within Michigan’s startup community?
I don’t think there’s one thing that can guarantee the growth of a startup community. But, one of the major catalysts is certainly when entrepreneurs build up their companies and hire employees locally. It’s not just the founders of a company that go off and start a new venture after a successful exit. It’s also many of the employees that take their experience and roll-up-your-sleeves mentality to new ventures of their own. After all, these employees were able to work for a startup and contribute to the successful commercialization of a product or service. Which resulted in an exit. Then, they’re able to start their own companies with a great group of mentors to support them and an even better network of operators, investors, and entrepreneurs. So, when a startup experiences a successful exit, it helps raise the profile of the ecosystem while also attracting more capital to the region.
Invest Michigan used to be financed entirely by the state of Michigan. How did the state’s expectations differ from those of traditional LPs?
The goals of the Michigan Economic Development Corporation (MEDC)—which was our original funder—are multifaceted. Their goals within the entrepreneurship division are to create new jobs in the state of Michigan, encourage entrepreneurship, and fund innovation in order to diversify our economy. Additionally, their funding looks to increase the amount of capital invested in local, early-stage start-ups. There are only about 30 institutional investors in the state of Michigan, and they mostly invest from late-seed/Series A onwards. The MEDC found that there was this gap in financing between Friends and Family rounds and Series A rounds. So that leaves a big void. Granted, there are a number of angel groups that do a nice job of investing in those early rounds across the state, but outside of those groups, there wasn’t much there. One of their goals was to fill that gap of Pre-Seed to Seed financing with institutional money. The original goal of Invest Michigan’s funds was to help those early-stage companies develop to the point that they can raise an institutional round later.
Some of the metrics that the MEDC actively monitored were jobs created and dollars leveraged (for every dollar we put into a company, how many additional dollars were they able to raise over the life of the company). And, over time, we saw those numbers move in a positive direction. Over 5 years, our companies were able to raise over $250M. Additionally, (although this was never a metric that the MEDC tracked) 45% of our portfolio happens to consist of companies that are captained by female or minority founders. So that’s something we’re very proud of.
To answer the second part of your question, our previous fund was not entirely profit focused. Traditionally, LPs invested in for-profit funds want to make an outsized return. And, while we weren’t necessarily optimizing for it, one of our most important long-term goals was to ultimately become self sustaining. All the money we get back from a liquidity event goes back into the fund for operations and future investments. So while our original funds were not purely profit focused, we weren’t profit-agnostic either.
Do you think that allowed you to broaden your investment scope?
Yes.
I think that was by design. The MEDC wanted us to have the ability to take the earlier risks that many for-profit investors wouldn't be willing to take because of the risk-reward dynamics at that stage.
Are there any major differences between a government-financed venture fund and a private one? How does this change timeline, definition of success, everyday operations, etc.?
At the most basic level, a government-financed venture fund has certain reporting requirements that other institutional funds don't have. From an operational standpoint, there are definitely some strategic differences. With our previous fund, we were able to take risks on companies that weren’t necessarily going to be unicorns. With the evergreen fund strategy, we were able to take more calculated risks and invest in solid businesses that weren’t necessarily venture-backable, but were still great businesses.
So when you consider how we looked at deals, it differed slightly from how institutional funds typically operate. However, one of our biggest goals was to help as many companies as possible reach their Series A round of financing. As a result, we would also have to observe deals from the perspective of a Series A investor. For instance, we might ask ourselves, “Is this company's market so niche that, even if they hit it out of the park, it’s not large enough to attract venture investors?” Because, even at the Series A stage, a company’s market can be so small that an investor won’t be able to generate a large enough return.
So we did have to take some of those things into consideration when analyzing a deal. But, our last fund allowed us to be one of the few venture firms, locally, that was able to take those smaller bets on promising companies at the earliest stages.
Can you tell me about your follow-on strategy?
We always want to make sure that we have plenty of follow-on capital reserved for our portfolio companies. Our goal is never to invest just once. So by making an initial investment, it really allows us to get to know those companies much better over time.
As we start to learn about the company and watch it operate, we get a sense of which ones are high performers and which ones aren’t. So, we enter an investment with the mindset that we're going to support this company until they prove us otherwise. And, there are unfortunately instances where we've had to cut off our support after a certain point. However, our goal is to make sure that we have enough dry powder to help these companies reach their Series A round of financing. From there, we make sure that we participate in the Series A.
That said, we write checks of up to $1 million per company, and our individual check size is usually between $50K and $500K. Which leaves quite a bit of room for follow on. We’ve found that, even at the seed stage, it rarely takes just one round of funding to get a company to a large institutional round. So we’re there to support founders during bridge rounds, Seed 2, Seed 3, or whatever that may be. We like to continue to support them, especially if they’re performing well.
As an early-stage fund, you have a strict preference towards one funding type over another?
I wouldn't say that we have a preference. We've done well with both types of investments. If I had to choose, I’d say I prefer equity. In the past, we’ve seen deals where some terms in the note get waived. As the first investor, you think you're signing onto one set of terms. But then, further down the line, a VC might come in and waive a discount or a valuation cap on the convertible debt. So we prefer equity to get those terms locked in.
With that being said, we’re also open to alternative types of investments outside of equity and convertible debt. Venture debt is one type that we've been exploring. Given the flexibility and freedom we have going forward, we can underwrite risk a little bit differently. So, we’ve dabbled in venture debt in the past and it’s something we want to explore a little bit further in the future.
Is there an industry in Michigan that you consider to be “world class”?
There’s recently been a big push to support mobility companies in Michigan. Interestingly, though, I haven't seen a lot of mobility companies in Michigan that are strong players. The biggest competitors in the space tend to be in Silicon Valley and Tel Aviv. Those are the two hot spots for mobility companies, specifically.
But, there are efforts locally to attract those startups here because it just makes sense. We have the big three American automakers headquartered in Michigan, as well as several tier one, tier two, and tier three suppliers. So I would say it’s an industry that has great potential to thrive here.
And then I think there are industries in Michigan that are closer to thriving. We have some promising FinTech companies here, including Autobooks and HT Mobile Apps. There are also some promising Healthcare IT companies. Just in our portfolio, we have two companies that work in advanced manufacturing. So, that certainly aligns with Michigan’s history as a major manufacturing center.
Historically, however, Michigan has been strong in drug discovery and medical device spaces. Pfizer used to be headquartered in Ann Arbor. When the company moved out of Michigan, there were quite a few employees that stuck around. So, by combining that specialized talent pool with the R&D occurring at the University of Michigan, we’re going to see some interesting advancements in the healthcare sector over the next several years.
Can you tell me more about Invest Michigan’s relationship with Renaissance Venture Capital?
The Renaissance Fund is a fund of funds. The idea is that Renaissance Venture Capital is creating a sort of index fund for venture firms across the country. Renaissance has invested in venture firms both inside and outside of Michigan. However, their main goal is really to increase the number of investment dollars deployed in the state of Michigan.
For instance, Revolution is one of the funds they’ve invested in. And one of the requirements of all Renaissance portfolio funds is that they look at deals in the state of Michigan. So you don’t necessarily have to do a deal there, but you have to look there. And that model has proven out very well, particularly in the last year and a half.
We have a portfolio of 52 companies that we've invested in. And, in the last two years, seven of them have been funded at the Series A stage or later by one of Renaissance’s portfolio funds. Of those seven, five of them were funds from outside of Michigan.
Annually, they hold their own “Un-Demo Day” where they invite VCs from across the country to showcase Michigan’s startups. It’s definitely the must-attend event for Michigan investors and entrepreneurs.
What are you excited about at the moment?
Despite all of what's gone on, we still had four successful exits this year. So that has me excited about our portfolio. We’ve got a great set of companies with really strong entrepreneurs and CEOs. And I’m confident they’ll be able to weather this crisis over the next year and reach an exit in the future.
How has the economic instability over the last 6 months affected Invest Michigan’s portfolio?
We’ve had a lot of tough conversations over the last several months. It has affected all of our companies differently. Some have seen an uptick in business, while others have seen their sales completely shut off. First and foremost, we’re trying to figure out how we can get our companies 12-18 months of runway. Whether that be by way of debt, a bridge round, or another equity raise. For example, we had one company that was in the process of raising a Series A round when everything happened. As a result, that raise has been put on hold for the foreseeable future. That company was doing well before COVID hit, so now we’re working to put together a bridge round to keep the momentum going.
And unfortunately, some of our portfolio companies have had to lay off employees and cut salaries in order to survive. So it has been difficult to have those conversations, but it’s crucial that we have them.
One of the things I’ve consistently heard from VCs across the country is that everything has been put on pause for new companies. At least until we see some economic stability. By that time, there’s going to be a backlog of companies raising in Q3 and Q4 when they were supposed to raise in Q1 and Q2. I think investors are going to have their pick of the litter because of this pent up demand for capital.
Do you have a single piece of advice you tend to give first time founders?
If you’re a first time founder, it’s important to build a network of advisors that you trust, and understand how they can add value. Whether that’s adding value on the operational front or simply by making themselves and their knowledge available to you. The best advisors are the ones that will answer your call at 2 in the morning and talk you through a problem.
We’re seeing a lot of first-time founders making simple mistakes because they don’t have that network of trustworthy, knowledgeable advisors. When it’s your first time doing something, you’re not going to have all the answers. But when you have someone reliable to fall back on for advice, it can make a huge difference.
How does an involved state government make a difference in a startup ecosystem?
The state can play an important role in the ecosystem. It’s no secret that small business drive a majority of the job growth, so it’s in their best interests to see these companies thrive. Locally, the MEDC has played a role in supporting innovation through grants, incubators and funding.
There are 21 SmartZones in Michigan that provide mentors, resources, and funding to entrepreneurs who have an idea and a business plan. The goal of these SmartZones is to help entrepreneurs go from idea to minimum viable product to market as quickly as possible. Additionally, as these early companies progress, they are often awarded non-dilutive grant funding that can take a company quite a ways.
So support from those organizations, as well as the state government, has been hugely beneficial to the ecosystem here in Michigan.
What's your advice to someone who wants to get their local/state government engaged in their own startup ecosystem?
I think one of the best things you can do is establish a relationship with your Congressperson at the state level and make your asks known. There are plenty of statistics out there that show that small businesses have contributed to the vast majority of American economic growth for decades. These statistics stand to support entrepreneurship and innovation. Sometimes I think it’s just a matter of educating the people that have the means to help you make lasting change.
Now that Invest Michigan is a completely independent fund, what’s next?
We have been lucky enough to have 12 exits that returned capital despite the fact that the fund has only been around for about six years. These exits have led to us reaching self-sustainability faster than we thought we would. I believe there is no shortage of good opportunities at the early stage in Michigan, so going forward, we will continue to support Michigan start-ups across all industries and continue to invest as returns continue to come back to the fund.