Michigan Budget Battle Pits Startups Against Road Infrastructure

On Oct. 7, the entire staff of the Michigan Economic Development Corporation (MEDC), the state office in charge of tourism and economic development, gathered for the first time in months. Big changes are coming to the department—it recently announced layoffs as well as a 27 percent cut in its overall operating budget—and its leadership wanted to meet with staff to outline some of what lies ahead.

The all-hands meeting capped a tumultuous year for the organization, one that saw lawmakers introduce bills that would pull money from the MEDC’s budget in order to fund desperately needed fixes to Michigan’s crumbling infrastructure of roads and bridges. The MEDC has been the subject of a political tug-of-war for years, as conservative lawmakers questioned the need for the myriad economic development programs it oversees. The threat of the department’s demise seems to bubble up whenever tough budget choices need to be made, but by this spring, the threat had turned into actual legislation wending its way through the committee process.

This was not happy news for Michigan’s tech startup community. Angst over the potential elimination or drastic reduction of the MEDC started to come up regularly over the summer when I would talk with sources from Michigan’s entrepreneurial ecosystem, even when our conversation was about something else entirely. (Disclosure: I worked in the MEDC’s communications department from 2008-2011, and MEDC has, in the past, been an underwriter of Xconomy.)

The organization was formed in 1999 and was spun out of the Michigan Jobs Commission. Its current $351.8 million annual budget comes from the state’s general fund, casino revenues, and settlement money from a national tobacco lawsuit. In 2005, as Michigan continued limping along in an economic slump that had begun early in the decade, the government under Governor Jennifer Granholm passed legislation that allocated $1 billion from Michigan’s share of the tobacco settlement to establish the 21st Century Jobs Fund, a 10-year initiative to diversify the state’s manufacturing-dominated economy. As a provision of the Jobs Fund, the $109 million 21st Century Investment Fund was also created to get capital flowing to early-stage Michigan startups and jumpstart the state’s entrepreneurial ecosystem.

The MEDC utilizes these funds to support many key programs that help early-stage startups in the state get off the ground, including the First Customer Program; the Michigan Translational Research and Commercialization program, which helps propel university research and technology into the marketplace; the Michigan Pre-Seed Fund, which supports the state’s venture capital continuum as well as early-stage startups; and the Michigan Emerging Technologies Fund, which matches federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants, often for life science startups. Venture funds supported by the MEDC often are the first to invest in a company, helping to de-risk it for other potential investors.

Though MEDC officials were hopeful the programs would succeed, what they probably didn’t anticipate was the startup boom that has begun to reshape cities across Michigan, sometimes to a remarkable degree—as anyone who has been to the Motor City lately can attest. If the programs were to go away or shrink beyond recognition, many sources say, it would have a chilling effect on Michigan’s growing entrepreneurial and venture capital ecosystems.

Governor Rick Snyder, a Republican, is well aware of the impact the MEDC’s programs have had on diversifying the state’s economy. Before entering politics in 2010, he served as chair of the board at Gateway, the Irvine, CA, computer company that was acquired by Acer in 2007, and co-founder of Ardesta, a now-defunct Ann Arbor-based VC firm. Yet his silence on the MEDC budget issue is troubling to many observers in the community, especially as Snyder continues to tout Michigan as a haven for young tech talent in trade missions both in the U.S. and overseas. (Numerous messages requesting comment from the governor’s office and state legislators were not returned.)

Adrian Fortino is one of those young tech talents who decided to stay in Michigan because of what was happening in the entrepreneurial community. After graduating from the University of Michigan, Fortino co-founded Shepherd Intelligent Systems, the company responsible for “Magic Bus” fleet management technology. He eventually co-founded SideCar, a ride-sharing service that matches drivers with people in need of transportation, and he spent a few years flying back and forth to San Francisco getting the company off the ground.

Today, Fortino is the Texas-based Mercury Fund’s man on the ground in Michigan; previously, he helped run the First Step Fund and Invest Detroit—venture funds that support early-stage tech startups—and throughout his career, he’s worked extensively with MEDC-supported programs. One of the Michigan-based companies he co-founded, Flocktag, received pre-seed microloan funding and a $250,000 matching grant from MEDC-supported initiatives, he said.

“Flocktag would have never gotten anywhere near where it is now without support from the MEDC,” Fortino said. “They come in before anyone else. It’s an incredible value. Here’s the issue: If a bunch of these programs are cut, you won’t see the rug pulled out instantly. But the poison seeds will be planted, and then, in a matter of months or a year, you’ll start seeing an exodus and we’ll be back to where we were a few years ago. A lot of these early-stage programs keep talented people in Michigan.”

Data on the results of the MEDC-supported programs have started to trickle in. Michigan’s ranking in the national startup scene has improved; according to the Michigan Venture Capital Association’s 2015 report, there has been a 70 percent increase in the number of venture-backed companies in Michigan over the past five years. In 2007, the MVCA counted 40 venture investment professionals in the state; in 2014, it identified 115. Nationally, Michigan ranks 21st in venture capital invested, and according to Kauffman Foundation figures, it’s third in the Midwest, after Illinois and Ohio, in terms of startup activity.

Investors from out of state are putting their money into Michigan companies at a rate previously unseen—the MVCA report says 65 percent of the capital invested in Michigan startups comes from out-of-state investors. Cities like Detroit and Grand Rapids have embraced their place in the emerging startup landscape, which in turn attracts young talent. According to these numbers and recent interviews with entrepreneurs and venture capitalists, the programs largely did what they were intended to do: help diversify and strengthen Michigan’s economy. … Next Page »

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Sarah Schmid Stevenson is the editor of Xconomy Detroit/Ann Arbor. You can reach her at 313-570-9823 or sschmid@xconomy.com. Follow @XconomyDET_AA

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