The team at Arboretum Ventures has done the improbable: raised an oversubscribed fund during one of the worst venture capital fundraising periods ever. Their firm’s new $140 million fund, Arboretum III, will continue to focus on companies developing innovative healthcare products that not only improve patient care but also reduce the cost of healthcare delivery. We asked Jan Garfinkle and Tim Petersen, Arboretum’s managing directors, about their firm’s fundraising success, what’s behind the investor appetite, and why they’re “100% certain” Arboretum Ventures will still be in Michigan in 2021.
MVCA: You found success on the fundraising trail when so many other firms have struggled. What qualities in your offering do you think investors found most attractive?
Arboretum Ventures: The main driver for investor interest was our returns, frankly. We’ve sold five companies, three of which were major exits (HealthMedia, HandyLab, and Accuri Cytometers). We’ve already returned all of our first fund and a good portion of our second fund, with returns in the top decile of performance for our vintage year, so we think that made a huge impression.
MVCA: Did you have strong support from your existing investor base?
Arboretum: We’re so fortunate to have a very strong high-level group of existing investors that are Midwest- based. All of the investors in Arboretum II committed to the first close of our third fund, which was great. Then we were able to bring in new investors from not just the Midwest but nationally because of our track record.
MVCA: You invest in mainly Midwest companies. Does being located in Michigan give you a competitive advantage or disadvantage when competing for deals in the healthcare space?
Arboretum: We really believe being in Michigan is a competitive advantage. The major exits we’ve had have all been Michigan companies, so we know we can find great companies locally that funds on the coasts might miss. And a big part of the reason our exits were so successful is because our CEOs did a great job of being capital efficient. This is part of the “secret sauce” for Midwest companies—low costs of living and doing business means that invested capital goes further. It’s up to 30% cheaper to run a business here than in San Jose, for example, so that makes a huge difference because companies in our sector are usually acquired for a price in the range of $100mm to $300 mm. It’s a real advantage for us investing here in the Midwest.
MVCA: What is your vision for where your firm and our industry as a whole in Michigan will be in five or 10 years?
Arboretum: For us, we are always striving to be one of the top healthcare venture funds not just in Midwest but in the U.S. But we’re 100% certain we’ll still be located in Michigan in ten years, it’s one of our core competitive advantages.
Our hope for venture capital in Michigan is that we have multiple funds north of $100 million that are able to provide investment and support to companies that are in the Midwest in all of the various industries. The venture funds on the coasts are all fighting for the same deals in their area, but there’s not as many of us so we have a great opportunity to get good prices and efficient use of capital. In healthcare at least, and specifically in diagnostics, we’re reaching critical mass here in Michigan. Management teams from successful companies like HandyLab, Accuri and HealthMedia can now stay in our area and find another company to grow and lead. Fifty to 100 healthcare companies headquartered in Michigan in 2021 would be a wonderful thing.