ID Ventures, created by the nonprofit Invest Detroit in 2009 to promote growth for entrepreneurs, has issued a new report showing Michigan is lagging when it comes to providing early-stage, pre-seed funding to entrepreneurs.
Four Michigan-based nonprofit early-stage funds — ID Ventures in Detroit, Ann Arbor SPARK, the University of Michigan’s Accelerate Blue Fund, Western Michigan University’s Biosciences Research Commercialization, and the Michigan Venture Capital Association, are asking for the creation of the Michigan Startup Evergreen Fund.
This program would be designed to provide long-term investments for Michigan’s startup companies. The coalition is asking the state to provide a one-time investment of $126 million for four early stage, pre-seed evergreen funds.
“We applaud the ongoing efforts the state is making to invest in job creators and grow Michigan’s economy,” says Dave Blaszkiewicz, president and CEO at Invest Detroit. “That said, we can’t continue to overlook the importance of helping grow all areas of our economy, especially Michigan entrepreneurs and the impact they can have on future jobs and economic growth.
“Michigan has an opportunity right now to ensure organizations like ours can expand our work investing and growing new startup companies and prevent these same companies from being forced to go elsewhere for the capital they need.”
The report quotes a study from Public Policy Associates that reports Michigan is losing significant jobs, talent, and investment opportunities due to the lack of early-stage investment capital. New early stage, pre-seed investment capital in Michigan has decreased by more than 40 percent in the last five years.
Most investment institutions in the state do not have the capacity to develop high-growth potential companies from pre-seed through Series A, which is considered the most challenging stage of growth.
“We have been an early-stage investor in Michigan since 2007, investing in over 200 Michigan-based startups, and know the economic impact these companies can have,” says Paul Krutko, president and CEO at Ann Arbor SPARK.
“Early stage capital is critical for getting startups to the next stage and becoming future growth engines for the state. But we’ve reached a 10-year low in the availability of startup funding in Michigan. And as a result, we’ve been losing some of our best companies to other states.”
Overall, Michigan suffers one of the largest disparities between academic research expenditures and invested venture capital. For example, for every $149 of academic research expenditures in Michigan, there is $1 of venture capital funding. In California, the ratio is $7 of academic research expenditures for $1 of venture capital funding.
“At the University of Michigan, we know all too well what it’s like to watch high potential startups leave Michigan for other states who can provide the essential early-stage capital needed to grow their companies,” says Kelly Sexton, associate vice president for research and innovation partnerships at U-M. “Other states are looking ahead and recognizing the return that investments like this bring. By acting now, we might ensure that the next ‘unicorn’ is founded, grows, and stays in Michigan.”
Other states in the region, including Ohio, Indiana, Illinois, and Missouri, have taken steps to address the early-stage funding gap. Ohio, for example, has developed a model that Michigan could emulate. Since 2016, the Ohio Department of Development’s Third Frontier initiative has invested $221 million and plans to do even more by designating a portion of its $182-million State Small Business Credit Initiative (SSBCI) allocation to go toward its pre-seed fund partners.
The report finds strong returns on investments for these funds, that then recycle dollars back into the community to support new startups. Under the proposed plan Michigan, $126 million in funding would be awarded to nonprofit and university-backed funds with proven track records and all investment returns will be recycled back into the respective funds for future investment in Michigan companies.
“We realize $126 million is a large funding ask but if we want to create and support evergreen funds that have tremendous economic impact, the state needs to make a significant investment soon, says Patti Glaza, managing partner at ID Ventures,
“But most importantly, we are asking the state and legislature to create a program in the annual budget that provides specific programming and funding that’s flexible and supports our evergreen fund goals. Having the state reinstate investing in our state’s entrepreneur ecosystem would be a big step forward.”
To learn more about startup opportunities in Michigan, visit DBusiness’ Hustle and Muscle, a free program that connects entrepreneurs seeking funding for innovative products or services with venture capital and private equity firms, family funds, angel groups, and more, at https://www.dbusiness.com/hustle-and-muscle/.
