quintupled; the amount of venture capital invested in Michigan startups by Michigan VC firms nearly doubled; and the number of deals nearly tripled.
The report found that the state’s ability to attract and grow investment activity was helped significantly by the 21st Century Jobs Fund’s legitimizing effect. The state manages several major “fund of funds” that invest in VC firms with the stipulation that they, in turn, invest in Michigan-based companies. As of 2014, 21st Century Jobs Fund investments in risk-capital financial programs totaled $204.7 million, which attracted an additional $621.3 million in follow-on private risk-capital investments, a ratio of 3 to 1. Michigan VCs say there are enough startups in need of funding to justify the creation of a third fund of funds, a suggestion the report also calls for.
However, despite the growth achieved, Michigan’s venture capital climate is still fragile and potentially susceptible to disruption. The report found that “even with the sizable growth in the level of risk capital investments, Michigan still falls below the national average of venture capital investments … It is a widely held belief that the national venture capital funds are monitoring Michigan’s risk capital landscape, and, if investors think the state is not committed to supporting entrepreneurial development, then they will disengage and invest their funds’ resources in regions that are committed to building an entrepreneurial culture.”
The TEConomy report cautioned that there need to be stronger ties between Michigan’s research universities and industry in order to commercialize homegrown innovations, and warned that the rapid evolution of programs supporting technology transfer have led to concern that the programs have been underfunded or, in some cases, successful aspects of unsuccessful programs have been abandoned instead of retooled.
The bottom line, the report said, is that Michigan’s economy is at a crossroads: “Its ability to reshape itself through innovation and entrepreneurship is predicated on its ability to stay the course and continue to make significant investments to improve the entrepreneurial climate of the state. Michigan must not turn back. The time is now to seize this economic development opportunity.”
“We have something exciting going on here that people outside of the state are interested in being a part of,” the MVCA’s Brosnan said. “VC firms are importers of capital for entrepreneurs. Having the state take its foot off the gas now would be a mistake. We’re asking that the state remain committed to funding venture capital at the same level and also remain an investor in entrepreneurialism.”
When VCs go out to raise their third or fourth fund, she pointed out, they will go back to previous investors, and the first thing those investors will ask is if their fellow investors from earlier rounds are still participating. If those investors hear that the state is the only entity not ponying up for a new fund, they will pull back, she said.
“They’ll start asking why the state isn’t as enthusiastic, and those pauses will take money out of Michigan,” Brosnan said. “The money will go back to other regions and we’ll lose it.”
ELab Ventures’ Doug Neal, an MVCA member who oversees the organization’s talent committee and helps determine the direction its programs will take, said one of his top takeaways from the report is that Michigan’s economic troubles pre-dated the recession.
“We needed artificial stimulation of the economy, and those initiatives have paid off,” he said. Neal has seen firsthand the way the MEDC’s support of executive-in-residence programs has been “instrumental” in getting qualified job candidates back to Michigan from out of state.
“It becomes self-fulfilling once it gets rolling,” he said. “It’s a lot better than it was a decade ago, but it’s a really interesting moment in time in Michigan. The talent, growth, and strength of our universities make it a great place to build companies. In California, the cost of living is unsustainable, and that’s a huge advantage Michigan has nationally. It’s a great time to double down on investments already being made.”
The TEConomy report outlined 11 recommendations to “foster the robust development of the innovation development chain” in the coming decade. Among the suggestions: streamline entrepreneurial service providers, who still struggle with silos and duplicative efforts; create a third, restructured fund-of-funds with ties to institutional investors and Michigan’s pension fund; make more pre-seed funding available; develop a reporting system based around a customer relationship management tool; and establish new proof-of-concept and sector-specific matching grant programs.
Fred Molnar, the MEDC’s vice president of entrepreneurship and innovation, said the
