Michigan VCs Slammed — Possibly Unfairly — for Handing EcoSystems Investment to Vinod Khosla and Bill Gates

EcoMotors International in suburban Detroit has a pedigree that might have most investors reaching for their checkbooks. The uniquely designed internal combustion engine at the heart of its business is the creation of EcoMotors’s CTO and chair Peter Hofbauer, the former head of powertrain development at Volkswagen AG.

Until 2005, EcoMotors’s CEO Don Runkle was vice chairman and CTO of Delphi Corp, a global automotive supplier that Runkle helped take public, after spinning it out of General Motors, where he served 31 years, including as VP of advanced engineering and VP of Engineering Operations for North America.

Indeed, reading a nicely detailed story in Crain’s Detroit Business about EcoMotors’s fundraising tribulations, one might wonder why local investors who met with EcoMotors let the company slip through their hands and into those of billionaires Bill Gates and Vinod Khosla, who wrote the company a check for $23.5 million last week.

Yet one potential reason inexplicably left out of the story is that EcoMotors was already backed by Khosla Ventures, which provided it with $5.25 million in Series A funding in 2008.

Here’s part of the piece, which highlights that Runkle approached Michigan VCs first:

[Runkle] thought he and his partners had a track record they’d like.

They also had a green-engine technology that investors might want a piece of. The EcoMotors engine is called an “opposed piston opposed cylinder” engine, or OPOC. The trademarked engine features two horizontally opposed cylinders powering a crankshaft in the center. The unique design eliminates traditional valves and cylinder heads, reducing weight, boosting efficiency and requiring fewer parts.

Runkle was wrong.

“I’ve been raising this round a long time. I thought, ‘Geez, I’ve got three engine guys here who have been around a long time. We’ve won Engine of the Year, we’ve won Car of the Year.’ I called on VC firms in Michigan and they listened to us, and they came out. But at the end of the day, things didn’t work out,” said Runkle, CEO of EcoMotors.

So, he had to go farther afield. He went all the way to the West Coast.

That it wasn’t Runkle’s first time in Khosla’s offices would have made the story far less dramatic. Beyond that, my question is whether the Michigan VCs were thinking too conservatively, as Runkle suggests, or if they better understand the auto industry than even great thinkers like Gates and Khosla, who now collectively own 62 percent of the company. (Khosla owns 47 percent; Gates owns 15 percent.)

“Getting state money wouldn’t have got the same headlines as getting Bill Gates, but it would have been a nice endorsement,” says Runkle to the paper.

But Jim Adox, managing director in the Ann Arbor office of Wisconsin-based Venture Investors, makes some good points of his own, including that the auto industry doesn’t have the best record when it comes to buying disruptive technologies, and that few venture investors anywhere can afford to back a company whose prototype might take 10 years or more to tranform into a mass-produced commodity.

The story, available only to subscribers, is available here.