Report: Venture capital in Michigan faces $1.3B gap

Lauren Abdel-Razzaq
The Detroit News

The Michigan Venture Capital Association touted the continued success of venture backing in the state in a new report, but also warned of gaps in available capital down the line as companies continue to develop and have funding needs.

There are 129 venture-backed companies in Michigan, a 70 percent increase over five years ago, according to the report. In addition, Michigan venture firms are actively supporting these startups, with local investors involved in 97 percent of all startup funding rounds in 2014.

At the same time, the number of venture capital professionals living, working and investing in Michigan has doubled and the number of investors in angel groups has grown by 45 percent, all positive signs for the health of the current venture capital field, said Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association.

"I think the key here is we've spent more than a decade in Michigan building a venture capital community and we're starting to see it pay off," said Brosnan.

But all that development has left funding demands for these companies as they continue into secondary financing rounds and work toward becoming profitable public companies or entities that other companies want to buy.

The association report says there will be an estimated $1.3 billion gap in the next few years between the funding startups need and what is available.

"The purpose of taking that number into account is to see what startups will need in the future in order to grow," said Brosnan. "We're trying to project what the opportunities are."

The nonprofit trade organization is designed to bring together venture capital industry experts in the state of Michigan.

The forecasted gap in funding comes when members of the Michigan Legislature have proposed phasing out Venture Michigan, a venture capital fund investment program formed under the Michigan Early Stage Venture Investment Act of 2003.

'It's a gamble'

House Bills 4195 and 4196, introduced by state Reps. Al Pscholka, R-Stevensville, and Mike McCready, R-Bloomfield Hills, in February, would amend the existing act to curtail funds in the coming years.

"I didn't feel the state should be in the venture capital business; it's more of a private program," said McCready. "It's a gamble and as a state we're not in the business of gambling with taxpayer money."

McCready says he recognizes that the funds have played a part in the economic recovery of the state, but he also says the amount raised by the fund, $450 million, is smaller than what larger firms specializing in venture capital and angel investing are able to come up with.

"As the government of Michigan, we shouldn't even be in that space," he said. "What we should be doing is working through a talent organization and work at it from an incentives and tax credit side of things."

Although she said she understands, Brosnan added that ending Venture Michigan might send the wrong message.

"These house bills send a message that Michigan is backing up on its commitment to venture capital and, most importantly, entrepreneurs," she said. "We have research, talent and ideas here in Michigan, and it would be a shame to not continue to support those three elements that make us unique."

David Brophy, founder of the Michigan Capital Growth Symposium, also says cutting off Venture Michigan now is unwise. The workforce has changed drastically since the recession, and many people have become entrepreneurs in the new economy, he said.

Cultivating from within

"The idea of working for a big car company and having the UAW bargain for you has receded in significance. Now more people are out starting these companies to make a living," said Brophy, who is also a professor of finance and the director of the Center for Venture Capital and Private Equity Finance out of the Ross School of Business at the University of Michigan.

"This is a tough time to be cutting back on a promise or fund that was put in place to get this activity going. You're trading off the immediate for the future."

But Brophy and other investors say different measures must be taken to address the funding gap.

Carolyn Cassin, a co-founder and partner of the all-woman angel investing firm Belle Michigan, says one way of improving conditions for venture capital is to cultivate from within.

"You could find other very wealthy people who have never looked at Michigan and bring them to Michigan. You could find big money, big corporate investors to come here and invest in Michigan," sad Cassin. "We say there are people right here in Michigan who, if pooled together, could make a significant impact. There's money here."

Brophy said angel investors and venture capitalists need to do a better job of getting the startups to "harvest time," meaning a point where they are ready to be sold, go public or become profitable. He says money is out there, it just needs to be recruited.

"We have to make sure we're doing a better job marketing to institutional funds: pension funds, endowments and foundations," he said. "We should be trying to prove to them and pitch to them the value of these funds being in Michigan. As we do that, more people will be encouraged to start their companies."

lrazzaq@detroitnews.com

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@laurenarazzaq