Study Supports MEDC, Says “Time Is Now” for Michigan Entrepreneurship

Last year, when we covered the legislative fight over the state’s budget and how much funding would be allocated to the Michigan Economic Development Corporation (MEDC), the organization had commissioned an independent report from TEConomy Partners (a division spun out of Battelle) that would study the impact of its programs supporting entrepreneurs, startups, and the capital continuum.

The report, initially expected last fall, was finally released in July. Much to the relief of the MEDC as well as its partners and stakeholders, the report found that, for the most part, the programs are working—and said it’s critical that the state continue to fund them in order to preserve the momentum of Michigan’s burgeoning startup ecosystem.

“In general, the reaction has been, ‘So glad it confirms everything our instincts were telling us,’” said Maureen Miller Brosnan, executive director of the Michigan Venture Capital Association, which provided a significant chunk of the data TEConomy examined as part of assembling the report. “We really think the MEDC is doing it right. They put effective programs in place to diversify the economy at a time when it was crucial. We’re very grateful the report reflected everything we believe to be true.”

Last year was a tumultuous one for the MEDC. The organization has long been the subject of a political tug-of-war, as conservative lawmakers questioned the need for the myriad economic development programs it oversees in the face of a budget crisis. In the face of budget shortfalls, legislators were proposing to pull money from its budget to fund road repairs. That legislation ultimately died quietly in committee, but the MEDC did get a 27 percent cut to its operating budget, which resulted in layoffs last October.

This was not happy news for Michigan’s tech startup community. The ongoing budgetary uncertainty  has continued to loom over the state’s startup activities, even as the data seems to indicate the programs have largely accomplished what they set out to do. The question now is, what will legislators do with the report’s suggestions? Will the positive data allay their fears that the MEDC is in the business of picking winners and losers based more on political alliances than true merit? And in a state strapped for cash with such expensive problems to solve—in addition to the crumbling infrastructure, Michigan also needs to fix the drinking water in Flint and the public schools in Detroit—can the government afford to keep investing in programs that diversify its economy?

Michigan’s economic developers first created the programs in 2005, as the state continued limping along in an economic slump that had begun early in the decade. It passed legislation that allocated $1 billion from Michigan’s share of the national 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 Michigan Translational Research and Commercialization program, which helps propel university research and technology into the marketplace; and the Michigan Pre-Seed Fund, which supports the state’s venture capital continuum as well as early-stage startups.State-suppored venture fundsare often the first to invest in a company, helping to de-risk it for other potential investors.

The TEConomy report affirmed that the 21st Century Jobs Fund has been a significant driver of economic growth in Michigan. Since the fund was created, the report found, $261.6 million has been invested in innovation and entrepreneurship efforts across Michigan, assisting nearly 1,400 companies and new entrepreneurial startups, either directly or through service providers. Of those, 1,073 companies were actively operating in Michigan in 2014. Together, these companies directly employed more than 11,000 workers in 2014. The report also found that every dollar in cumulative 21st Century Jobs Fund investment “leverages additional private sector innovation, operations, and capacity, resulting in $21 of total economic output for the state.”

Where the 21st Century Jobs Fund has arguably had the most impact is in the state’s venture capital community. Prior to 2005, Michigan startups attracted almost no outside capital from out-of-state venture investors, and not much from in-state investors. Today, the report finds, “there has been significant growth in the level of indigenous funds available (with significant emphasis in pre-seed funding and a growing level of interest in angel funding) and an increase in national funds with a regular presence in the state.”

Between 2006 and 2014, the report says, the number of VC firms in Michigan doubled; the amount of venture capital under management by Michigan firms nearly … 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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