Lawmakers eye venture funding cap
Some fear shutting off the capital pipeline will send startups elsewhere.
A fund-of-funds investment program created to support an entrepreneurial ecosystem in Michigan is under pressure as legislators seek to cash out their expense tab early.
A bipartisan group of state representatives introduced two bills Feb. 12 aiming to limit future expenses the state will be liable for to outside investors for their upfront investment in the Venture Michigan Fund investment program.
In a memorandum issued to the House Appropriations Committee Jan. 21, the House Fiscal Agency indicated the anticipated loss of revenue for the state could reach $140 million over the next three years as the first installment of a $50 million repayment to Deutsche Bank begins in the 2014-15 fiscal year.
With an undetermined amount of debt obligation by the state related to the second lending round, legislators are seeking to either cap expenses or close the fund completely with the introduction of House Bills No. 4195 and 4196.
Introduced by a group of more than 45 representatives, HB 4195 seeks to prevent the Michigan Early Stage Venture Investment Corp. from entering into any new agreements with investors or creating any new investment in a venture capital company or qualified business after Dec. 31, 2014, according to the bill.
The second bill, No. 4196, was introduced by a 15-member group proposing to move up the fund expiration date to Jan. 1, 2018, instead of closing the investment program in 2054.
Al Pscholka, chairman of the House Appropriations Committee and one of the bill sponsors, said while the VMF program is working as it was intended, the framework might not have been the best policy.
“This fund was enacted with good intentions, but the reality of using Michiganders’ money to buy economic investments just isn’t sound policy or good government,” said Pscholka, R-Stevensville, in a written statement.
Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association, said a portion of funds already have been invested in startup businesses and to suddenly pull funding in Michigan-based companies doesn’t serve the state well in attracting new entrepreneurial ventures.
“Our hope is legislators take a real serious look at moving forward with these two bills,” said Brosnan. “Venture capital in Michigan has really grown significantly, and it is a big part of why Michigan has a great comeback story to tell.”
Founded in 2012, Ann Arbor-based MVCA strives to grow and sustain a venture capital community in Michigan and has grown to roughly 250 individual and firm members.
A number of member organizations have received initial funding through the VMF before moving forward to raise additional money, according to Brosnan.
“Venture Capital in Michigan is bigger than it has ever been. We have seen exceptional growth in the last five years,” said Brosnan. “We are 21st in the nation in terms of our ranking in venture capital investments and we just see ourselves moving very quickly higher and higher up in the venture capital arena. It is an exciting time. We would hope the legislature would embrace that excitement, as well.”
The VMF program was established under the Michigan Early Stage Venture Investment Act of 2003 with a goal of promoting economic development across the state by facilitating job creation and attracting new businesses to Michigan through venture capital investment. Through the Act, the Michigan Department of Treasury agreed to provide tax vouchers to raise approximately $450 million of capital to outside investors.
A seven-member board that includes the state treasurer, CEO of the Michigan Economic Development Corp. and five additional appointed members, hired GCM Grosvenor Private Markets to manage the VMF. Roughly $200 million in tax vouchers were given as collateral to Deutsche Bank and Credit Suisse in exchange for investment capital in 2006 as part of VMF I, and approximately $250 million were collateralized with Stanton, an affiliate of Credit Suisse, in 2010 as part of VMF II.
A total of $95 million in capital was invested in Michigan-based startup companies between 2007 and 2010, allocated by 11 different fund managers, while nine fund managers began to invest a total of $120 million from 2011 to December 2013. Currently, roughly $150 million is invested in 41 startup companies, according to the House Fiscal Agency memorandum. The remaining $300 million was set aside for interest and other operational-related expenses.
The 11 venture capitalists who received funding during the VMF I are: Arboretums Ventures II, Arboretums Ventures III, Arsenal Venture Partners II, Crysalis Ventures III, Early Stage Partners II, Fletcher Spaght Ventures II, North Coast Technology Investors III, Nth Power Fund IV, RPM Ventures II, TGap Venture Capital Fund II, and Venture Investors Early Stage Fund IV.
VMF II fund managers are Arboretum Ventures II, Cultivian Sandbox Food & Agriculture Fund II, Draper Triangle Ventures III, Flagship Venture Fund IV, Mercury Fund Ventures III, MK Capital II, Plymouth Ventures Partners II, Plymouth Ventures Partners III, and Venture Investors Early Stage Fund IV.
Jennifer Owens, president of Lakeshore Advantage, said the fund-of-funds program is one of many tools that exist to support startup ventures.
“I think at the state level, there are limited funds, and the state has to make an investment where they think there is a return on their investment,” said Owens. “We are seeing locally more of a need in the early-stage space. Venture capitalists are looking at companies who are at revenue stage.”
Lakeshore Advantage, a regional economic development organization based in Zeeland, provides business services for companies and entrepreneurs that include assistance with talent solutions, capital investment and other operational resources.
Although having a robust venture capital industry and foundation is important, Owens said financial support at that business stage takes a long-term commitment.
“I would like to see more investment in early-stage capital,” said Owens. “We haven’t felt the significant investment in venture capital funding and we haven’t seen an equally large jump in the companies locally who have been able to be invested in.”