The State of Michigan, corporations, private investors & Innovative Ventures capitalized the Michigan Product Development Fund with US$4.3 million.
Innovative Ventures established the fund, structured investments as a royalty (in perpetuity) on sales to generate early and equity-like cash returns for the Fund and our investors. In year 2, we updated fund design to structure transactions with the right to sell our royalty investment for equity; investments made in early stage SMEs with high growth and liquidity potential, and those with limited divestiture such as medium growth and family owned firms.
Investments included:
- Applied Intelligent Systems Inc. Ann Arbor, MI: $700k investment in this supplier of machine vision solutions to automotive and semiconductor industries + $200k follow-on investment
- Neogen Corp., Lansing, MI: $700k investment in this innovator of agtech products + $200k follow-on
- Personal Bibliographic Systems Inc., Ann Arbor, MI: $200k investment into this producer and seller of bibliographic & database retrieval software
- Face Technologies, Ann Arbor, MI: $330K investment into producer of PC boards
- Gateway Systems, East Lansing, MI: $700K invested + follow-on $200K investment in this database and enterprise software company, multiple industries
Three portfolio highlights below:
Applied Intelligent Systems, Inc. (AISI) designs and manufactures advanced-imaging processing computers for the vision, image processing and artificial intelligence markets. The US$700,000 investment financed the completion of AISI’s 3rd product line, and its global marketing introduction to customers in the US, Europe and Asia. In 1998, AISI was acquired by Electro-Scientific Industries to complement its line of products used in the manufacturing of semiconductors, passive components, and IC and PCB packaging. This early stage transaction returned US$500,000 in cash and 10x equity gains just three years after investment.
Personal Bibliographic Software, Inc. (PBS) develops and markets specialized computer programs for accessing and managing bibliographic data from on-line databases. Corporate researchers, librarians, teachers and students use these products to simplify search efforts and reduce cost. The US$200,000 investment financed the conversion of Pro-Search from the IBM to the Apple platform, and the sales launch of its products to US & European customers with royalties structured in perpetuity. PBS was acquired by the Institute of Scientific Information, a division of Clarivate, a subsidiary of the Thomson (Reuters) company.
Neogen develops and markets immunoassay diagnostic kits and electronic instruments for the animal and plant health care industries. The Fund participated in a US$2.8MM financing to finance product enhancements and working capital needs. Neogen went public on NASDAQ™ fifteen months after investment and yielded a valuation increase from US$10MM to US$22MM. Fast forward and at the end of 2019, Neogen has grown from 40 to over 1,600 employees, offices/operations in the USA, Mexico, Brazil, China, Australia, Canada & India with sales increasing from US$7MM to US$414MM, profits rose from an operating loss to a net income of $60MM and a market cap of >$3.5Bl. For decades, Neogen is named to Fortune Magazine’s Fortune Small Business list of the 100 fastest growing, publicly held small companies in the USA.
Comments
The key to successful investing is a shared interest with management in seeing the company and its products prosper. It’s Innovative Ventures’ belief that superior investments involve strong management teams with constructive investors rather than weak managers controlled by investors.
“The investment helped PBS in a variety of ways other than providing just capital. Fund managers provided PBS with management assistance and advice in the market positioning of our products, refined our market definition and counseled us in accounting and financial reporting. PBS benefits from this coaching as it grows from a small to a medium size business. Managing rapid growth is often the most difficult part of business development, and the Fund’s expertise was invaluable to us in maintaining a sense of balance in the growth process.”
Victor Rosenberg, Ph.D., President, Personal Bibliographic Software, Inc.
“In addition to providing counsel to AISI at the Board level, Innovative Ventures helped us access new customers for our products and technologies and ensured that key decision makers were present during our sales presentations. On other occasions they attended sales calls with key accounts and communicated its reason for investing in AISI. This provided the company with a greater measure of creditability and staying power than could be attained by our own words or actions.”
James Anderson, President, Applied Intelligent Systems, Inc.
“Product development financing can be particularly helpful to technology-based companies. I was particularly impressed with their thorough and constructive approach to one company on whose board I serve.”
Robert Pavey, General Partner, Morgenthaler Ventures
A true test of a fund manager’s skill is the financial results that it achieves in fund management and the development impact by its investees in the local economy. Innovative Ventures accomplish both objectives thru the use/application of alternative structures to generate early cash returns to our LP investors, invest in SME segments ignored by VC, better manage risk/return of investment portfolios and selectively, generate VC IRR/ROI equity-like cash-on-cash returns.
“Consider Innovative Ventures as your investment advisor and partner in planning and executing quasi-equity schemes. We can help you avoid the learning curve costs that even skilled investors inadvertently incur when executing new investment programs.”