State faces venture capital shortage
Report shows every $1 invested by a Michigan VC firm is topped by $3.83 from out of state.
A new report shows the state’s 134 venture-backed startups will require $627 million to fund their growth in the next two years — far more than Michigan-based VC funds have available.
The 2018 Michigan Venture Capital Association (MVCA) investment report, released April 18, shows the 21 Michigan-based VC firms had a total of $445 million available for new investment in 2017.
Those same firms had $2.2 billion under management in 2017, a decrease of 10 percent over 2016.
Funds under management include capital already invested, capital reserved for follow-on financings and capital available for new investments, according to the report.
Total capital under management among all firms operating in Michigan — including eight based out of state with a Michigan office — decreased 3 percent from $4 billion in 2016 to $3.9 billion in 2017.
Of the total $3.9 billion under management in Michigan, 73 percent is invested, 11 percent is reserved, and 16 percent is available.
David Brophy is director of the University of Michigan’s Center for Venture Capital and Private Equity Finance and founder of the Michigan Growth Capital Symposium, which helps connect Midwest entrepreneurs with VC funding.
He said the lack of sufficient capital from in-state investors to meet demand from startups poses a challenge.
“If a company takes money from out of state and can’t make the next round because we don’t have the money here, they’ll go out of state to follow the money,” he said.
Venture funding changes from year to year everywhere, according to Kim Pasquino, investment director at Wakestream Ventures, one of the firms surveyed for the MVCA report.
“I would say in general, we have an ebb and flow in our industry, and it’s why we’re looking at a five-year trend, so we understand it,” she said.
Many factors can affect a state’s investment trends, she said, including “seasons of acquisitions,” retirements and changes to firms’ investment strategies.
Wakestream is not geographically bound with its investments and is “industry agnostic,” Pasquino said, so she often travels to cities such as New York, Los Angeles, Boston and Chicago to evaluate deals. There’s something to be said for the home state, she said.
“We are seeing better and better deals in Michigan. We still don’t have enough capital under management to invest in everyone we see, and I think that is true across the state,” she said.
Brophy works on the east side of the state, a region traditionally dominated by the automotive and health care sectors, but with an emerging technology industry.
“The biggest positive coming out of the rapid decline of the auto industry is the heightened sense of entrepreneurship in general,” he said. “We turned a corner when we realized working for a big car company and having your union take care of you was fading. When that disappeared, Michigan showed its mettle by becoming entrepreneurial.
“If we could just find a way to match growth capital and venture capital with that growth culture, we’d be in good shape.”
He said he believes the strongest VC funds are endowments at universities, economic development-related entities and family offices. The latter is particularly strong in Grand Rapids.
Wakestream, led by Rick DeVos, is wholly funded by private assets from the DeVos family. But Pasquino said she knows other firms are “actively raising capital” to meet the demand from startups.
Pasquino said she thinks it is a good thing this region is an attractive place for outside investors.
“Our strongest value proposition is being on the west side of the state,” she said. “We stack up alongside any founder in New York or (Silicon) Valley. We see quality companies and founders here.”
Brophy noted Michigan’s affordable cost of living is one factor pulling in money.
“We have a big advantage now we should be (using),” he said. “Many of the traditional hotspots like Silicon Valley, like Route 128 in Boston, are getting crowded, and it’s not a nice or easy place to start a company or raise a family.
“Because of that, and the economics of building a company in places like that, entrepreneurs and investors are not unhappy to do it in Michigan or Ohio or Indiana — in places where the schools are good, rents are low and riots are few.”
Pasquino said the dip in available capital is not abnormal in the U.S. right now.
“When I go to New York, they are quite similar to us, as far as amount of capital available … but I think it’s just a climate, frankly,” she said. “I don’t feel like we are outside the norm.”
Pasquino said having previously worked for two startups before coming to Wakestream gives her a well-rounded perspective on VC funding.
“We’ve seen significant interest, more excitement over time between east and West Michigan. We’ve seen stronger collaboration and insight sharing,” she said. “I’m within it and can see the positive change, and these numbers and five-year trends make sense to me.
“I think it’s a healthy community of investors and company founders.”
As to raising more capital for Michigan’s own funds, she said, “as data is distributed through articles like this, my point of view is it will come.”
Other highlights from the report:
68 startups received $179 million of venture capital investment in 2017, a 100 percent increase in startups over the last five years.
$11.4 million was invested in eight Michigan startup companies led by a diverse CEO.
472 venture firms from outside of Michigan have invested in Michigan-based startups, a 376 percent increase over the past five years.
Michigan has a total of 87 venture capital professionals and 797 angel investors.
Angel investors issued $41 million to 70 Michigan startups in 2017.