High-Net-Worth Michiganders: Time to “Get Off the Dime,” Brophy Says

When the Michigan Venture Capital Association (MVCA) unveiled the findings in its 2017 annual report at a public event in April, there was a lot to celebrate: a 48 percent increase in venture-backed startups over the past five years; every dollar invested by a Michigan firm attracting $4.61 in out-of-state capital; and a total of $4 billion ($2.4 billion of which is from Michigan VCs) in venture funds currently under management in the state.

The number of VCs living or working in Michigan has increased by 41 percent in the past five years, and the amount of venture activity continues to rise in the state even as it slows nationally—growth indicators no matter how you slice them.

But the report also revealed a couple of potential trouble spots on the horizon, most having to do with sustainability, confidence, and funding gaps for tech startups. (More on that in a minute.)

At the springtime event unveiling the annual report, the MVCA’s associate director, Emily Heintz, didn’t mince words. “What’s slightly concerning is that the earliest rounds [of a startup’s venture funding] are heavily weighted with out-of-state money,” she told the crowd. “From an economic development standpoint, companies will leave Michigan if that continues.”

Later, MVCA director Maureen Miller Brosnan told the audience that 383 different VC firms had invested in Michigan companies out of a nationwide total of 898, meaning just under half of U.S. VCs have invested in the state. “VCs remain committed to the idea that Michigan is a great state to be operating in,” she reassured the crowd.

Michigan, like some other Midwestern states, relied on state-supported investment funds to jump-start its venture community in the early aughts. Early last decade, the legislature passed measures establishing those funds with one-time settlement money from the national tobacco lawsuit. The state’s three major fund-of-funds—the 21st Century Investment Fund and Venture Michigan Funds I and II, representing more than $300 million in capital—have been fully deployed, leaving open the question of where follow-on investments for portfolio companies will come from in the future.

At the MVCA event, some of Michigan’s VCs seemed anxious that the community they’ve worked so hard to build over the past decade is at risk of a contraction, although some, including Brosnan, say what’s happening is mostly the result of normal market maturation. We talked to a variety of local investors, including David Brophy, the founder of the annual Michigan Growth Capital Symposium, for their takes on the report and what the numbers indicate.

First, let’s look at the MVCA report’s other bright spots:

—Michigan has 93 venture professionals working at 33 firms, and is home to 141 venture-backed startups, representing a 48 percent increase in the last five years.

—According to the MVCA, $222 million was invested in 54 Michigan startups in 2016.

—Ninety-four percent of the state’s venture investors believe things are the same as or better than three years ago.

—Total venture capital under management in Michigan has increased by 34 percent since 2011.

Now for the numbers that spark a bit of angst:

—Michigan’s 141 venture-backed startups are projected to require $504 million in follow-on funding. There is currently $424 million in VC reserved for existing portfolio companies, leaving a potential $80 million gap.

—Although there is $4 billion in total VC under management in Michigan, that represents a 24 percent decrease over the previous year.

—Eighty-five percent of VC firms here currently raising money or planning to raise money by 2019 are confident they will be successful—but 44 percent are less than confident they’ll be able to raise that money from Michigan investors.

—Seventy-one percent of VCs are less than confident they can attract top-tier talent to their portfolio companies in the state.

—Of the $222 million invested in Michigan companies by VCs in 2016, only $16.9 million went to a company led by a “diverse CEO”—a paltry 7 percent. … 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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