Michigan has pulled ahead of other states in the race to find a cure for cancer, develop autonomous vehicles and commercialize countless high-tech innovations. However, additional local venture capital investment is sorely needed to provide the follow-on funding to attract, retain and accelerate the growth and profitability of high-potential entrepreneurial companies throughout the state.
“We have portfolios of venture investment deals in place that don’t have access to later-round capital here in Michigan,” says David Brophy, professor of finance and director of the University of Michigan Center for Venture Capital and Private Equity Finance. “When late-stage investment demand arises [for a startup] and can only be satisfied by out-of-state investors, one of the preconditions of the funding is that the company move its headquarters to California, New York, Massachusetts or wherever. This [relocation of venture-backed startups out of Michigan] is a fact of life, and we’ve seen it happen already.”
According to the Michigan Venture Capital Association, Michigan startups currently receive, on average, $4.31 of investment from out-of-state venture capitalists for every $1 invested by in-state VCs. Furthermore, the MVCA estimates $661 million will be needed over the next two years to meet the demand for follow-on investment for existing Michigan-based portfolio companies. Yet, only $387 million is cash-reserved for such funding, reflecting the need for additional investment to help Michigan’s venture-backed companies succeed.
This is a wake-up call, according to Brophy. “Our VC funds are taking the highest risk investment position by nurturing these startup companies, and maybe getting to an A round of financing, and then facing difficulty raising a B, C or D round,” he says. “This is where geographic relocation for capital poses a threat to our ecosystem. We’re sitting on cash [in pension funds, retirement programs and philanthropic foundations] in this state, and we’ve got to put it to work right here in our own back yard.”
A current proposal in the Michigan legislature would create a third venture capital fund-of-funds to provide the pool of investment capital to fill the later-round funding gap for venture-backed companies in the state. The pending legislation, which is backed by the MVCA, calls for establishing a $100 million public-private partnership that would draw the bulk of its money from private sources, such as institutional investors. The capital would be invested in existing Michigan-based venture capital funds to help meet the demand for B, C and D round financing in already-minted investment deals.
“I hope the private sector will get involved,” Brophy says. “We’ve seen great strides made through the Renaissance Venture Capital Fund by engaging private companies as limited partners in the fund, and we need to emulate this process in greater volume.” Renaissance was created by some of Michigan’s leading business organizations to invest profitably in the state’s innovation and to serve as a connector between cutting-edge start-up companies and strong, well-established businesses. The fund is the largest privately funded organization of its kind in the U.S.
“Our accomplishments with venture capital have contributed to the economic transformation of Michigan, and there has been a sea change in the whole attitude of our state’s population toward entrepreneurship and starting and building your own business,” Brophy says. “This [later-round capital] is the need of the moment, and we should be busting our pick to satisfy it.”