Arctaris Capital Partners Ventures Into Detroit

Why would Waltham, MA-based Arctaris Capital Partners, a venture capital firm seeking new approaches to investment in a post-recession market, choose to open an office in the city that, in the media at least, often serves as the poster child for the carnage wrought by the shrinking American economy?

“We started in Detroit 18 months ago because we decided Detroit was a very underbanked, underserved community with some great companies,” says Michael Walsh, the man running Arctaris’ Detroit office. “And those companies just needed some fuel, both monetarily and intellectually.”

Arctaris utilizes an innovative securities structure based on royalties pegged to future revenue growth instead of stock or warrants. The firm, which operates out of an office in the New Center area, is investing up to $7 million per company, offering a five-year amoritized loan at up to 14 percent interest, plus a royalty loan payable over 10 years.

“We lend, but we don’t take ownership,” Walsh says. “We don’t ask for stocks; we don’t ask for a seat on the board. What we do is take an active role in sales and marketing. We’re good for asset-light companies that can’t get bank loans.”

Arctaris plans to announce two major investments in a few weeks, including an aviation-industry incubator that will operate in Detroit and Seattle, and five other cities. Walsh says both investments will benefit the region in addition to helping out the specific companies who are receiving loans.

The investments are part of the the firm’s broader ethos of scrapping the old ways of doing business when they no longer fit into the new economic reality. Walsh says some of the cliquey aspects of venture capitalism have fallen by the wayside as the recession and resulting credit crunch have forced new strategies for success.

“Instead of being so provincial, it seems everyone is working together,” Walsh says. “There’s a really neat sense that people are opening up their networks of financial buddies to one another.”

Walsh, who was born and raised in metro Detroit but has worked on Wall Street and in Seattle, says utilizing past networks is a key to Arctaris’ plans for Detroit.

“It’s really important for us to reach out and update [past networks] on what’s happening in Detroit, so they can take advantage of the opportunities here,” Walsh says. “There are so many good companies, and all this engineering talent. All the necessary parts that make a city viable are coming together, positioning Detroit for global competition.”

Before you’re tempted to think Walsh is indulging in a bit of hometown boosterism, he quickly veers closer to Gordon Gekko as he describes his role with investors.

“I’m the guy in the middle convincing the old guys with money to invest in the young guys with great ideas,” he says. “Other places are so competitive for the same few deals. Here, [Governor Rick] Snyder, [State Treasurer Andy] Dillon, and [the Michigan Economic Development Corporation’s Vice President of Capital Markets] Paul Brown are rolling out the red carpet. We don’t get that in New York or Boston.”

Sarah Schmid Stevenson is the editor of Xconomy Detroit/Ann Arbor. You can reach her at 313-570-9823 or sschmid@xconomy.com. Follow @XconomyDET_AA

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