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Long VC shortage continues
Despite a record-breaking $385M injected into Michigan-based startups in 2018, much more is needed.
An annual analysis of venture investment activity in Michigan shows the growing number of Mitten State startups will need far more capital than the state’s VC firms can offer in the next two years.
The Michigan Venture Capital Association (MVCA) — a nonprofit trade association focused on increasing the amount of capital and talent for Michigan’s entrepreneurial and investment community — on April 16 released the 2019 MVCA Research Report, a comprehensive analysis of investment activity in the state, including venture capital and private equity firms, university and economic development-related endowments, and angel investors.
The report showed Michigan had a record-breaking year in 2018 with 61 startups in the state receiving $385 million from Michigan venture capital firms.
But much more capital is needed to support the growth of local startup companies. According to the report, an estimated $964 million of additional venture capital is needed to support the growth of Michigan startups in the next two years.
“To position Michigan at the forefront of innovation, we need high-growth, high-tech startup companies to build a robust economy in the state,” said Ara Topouzian, MVCA executive director. “We have the critical components to build a strong entrepreneurial and investment community — talent, research, capital and community — but as these companies reach their next stages of growth, we need additional capital to sustain it.”
David Brophy — founding director of the Midwest Growth Capital Symposium and director of the Center for Venture Capital and Private Equity Capital at Stephen M. Ross School of Business’s Zell Lurie Institute at the University of Michigan — said it’s a good sign that more companies are surviving “with good traction” past the seed stage and thus needing Series A, B and possibly C rounds of funding.
It’s also a good sign that, in some cases, Michigan startups are now able to secure Series B funding — which is usually a greater amount than Series A — from homegrown VC funds. In the past, startups would have had no choice but to go to East Coast or West Coast investors.
But the amount and the growth rate of Michigan venture capital still is not where it needs to be and has not been adequate for the past 40 years, Brophy said.
“When we talk about (the $964 million needed for the next two years) — there was a Series B of a company, in the last couple of months on the West Coast, that was $940 million. That’s one round. … So, as we develop and as we grow, you just can’t live without it. You need private venture capital to support these companies as they grow, as they find customers that have to be served and as they need to go to market.”
The report found total funds under management of university and economic development-related funds in Michigan in 2018 were $46.8 million, an increase of 19 percent from the prior year.
Additionally, 84 startups raised over $52 million from angel investors.
“The MVCA Annual Research Report underscores the importance of university, economic development fund and angel investors in creating a strong investment pipeline that attracts and retains businesses in Michigan,” Topouzian said.
“While this has been an incredible year of successes for Michigan’s entrepreneurial and investment community, we must ensure that we support entrepreneurs with the capital they need to hit critical milestones.”
Brophy said he can think of two possible solutions to the shortage: for outside investors to focus more capital in Michigan and for institutional investors — such as the state retirement system, the public universities and family offices — to “develop an appetite” for investing in local startups rather than sending all their money out of state.
He said he believes Michigan startups need to do more to compete for those investors’ money.
“We’re in a big race, whether it’s the Boston Marathon you want to use as an example or Indianapolis 500, we’re in a race with a lot of other runners and cars, and it doesn’t stand still,” Brophy said. “Everybody in this world is recognizing that the future of everything we do is somehow connected to innovation and technology, and they’re investing in it. What we need to do is produce more of that and invest in it.”
Key findings from the report
There are 140 venture-backed startups in Michigan, an increase of 37% over the past five years.
61 Michigan-based startups received $385 million from Michigan venture capital firms.
There are currently 18 startup companies in Michigan led by a CEO who is a racial minority, a 125% increase over the last five years.
Every dollar invested in a Michigan startup by a Michigan venture capital firm attracts $7.85 of investment from outside of Michigan.
There are 27 venture capital firms headquartered or with an office in Michigan.
Total venture capital under management in Michigan is $3.7 billion.
533 venture firms from outside of Michigan have invested in Michigan-based startups.
In Michigan, 84 startups raised over $52 million from angel investors.
Source: The 2019 MVCA Research Report, bit.ly/MVCAreport19.